DOL Finalizes Rule on ESG Investment

The Department of Labor today finalized—with significant revisions—a rule that would confirm Employee Retirement Income Security Act requirements for plan fiduciaries to select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action. The rule takes effect 60 days after publication in the Federal Register.

The final rule—which comes at a time when interest in “environmental, social, or governance” or “sustainable investing” is on the rise—would significantly expand on an existing rule on investment duties that has been in place for more than 40 years, and includes several changes from the original proposal. Specifically, the rule:

  • States that ERISA fiduciaries must evaluate investments and investment courses of action based solely on pecuniary factors.
  • Includes an express regulatory provision stating that compliance with the “exclusive purpose” duty under ERISA prohibits fiduciaries from subordinating the interests of participants to unrelated objectives, and bars them from sacrificing investment return or taking on additional investment risk to promote non-pecuniary goals.
  • Includes a provision that requires fiduciaries to consider reasonably available alternatives to meet their prudence and loyalty duties under ERISA.
  • Sets forth required investment analysis and documentation requirements for those circumstances in which plan fiduciaries use non-pecuniary factors when choosing between or among investments that the fiduciary is unable to distinguish on the basis of pecuniary factors alone.
  • States that the prudence and loyalty standards set forth in ERISA apply to a fiduciary’s selection of designated investment alternatives to be offered to plan participants and beneficiaries in a participant-directed individual account plan.

In previous comments, ABA had called on the DOL to withdraw the rule, warning that it could limit the prudent integration of ESG factors for risk mitigation.