DOL finalizes ESG investing rule

The Department of Labor today finalized a new rule regarding environmental, social and governance investing and a fiduciary’s proxy voting activity under the Employee Retirement Income Security Act. In removing the current rule’s barriers to ESG investing, today’s final rule clarifies that climate change and other ESG factors may be, but are not required to be, considered as factors in the assessment of investment risks and returns.

Among other things, the final rule applies the same investment standard for qualified default investment alternatives, removing previous restrictions that applied under the current rule; replaces the existing, more strict “tie-breaker” standard with one that permits the fiduciary to choose between competing investments that equally serve the financial interests of the plan, based on collateral benefits other than investment returns; and tightens the current rule’s provisions on proxy voting.

DOL originally issued an ESG investing rule in 2020. However, after warnings from the American Bankers Association and other industry groups that it would have a “chilling” effect on the prudent consideration of ESG factors in investment decisions, DOL said it would not enforce compliance with the 2020 rule and issued a new proposal with substantive changes. The new proposal incorporated an ABA-advocated “principles-based approach” that requires the fiduciary to consider all relevant factors in investments and investment courses of action. DOL also adopted ABA’s recommendation to refrain from specifically enumerating and describing ESG factors in the risk-return analysis, as had been initially proposed. Today’s final rule will take effect 60 days after publication in the Federal Register.