DOL proposal reinforces fiduciary role in ESG investing

ERISA plan fiduciaries cannot invest in ESG vehicles that sacrifice investment returns or take on additional risk, according to a proposed rule from the Department of Labor.

"Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan," Labor Secretary Eugene Scalia said in a news release. "Rather, ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers."

The proposed rule, which was published Tuesday night, would add regulatory text that makes clear that ERISA requires plan fiduciaries to select investments "based on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action," according to a Labor Department fact sheet.

Moreover, the proposal would require fiduciaries to consider other available investments to meet their prudence and loyalty duties under ERISA and outlines the requirements for selecting investment alternatives for 401(k) plans that ostensibly pursue one or more ESG-oriented objectives in their investment mandates or that include such parameters in the fund name.

The proposal also "acknowledges that ESG factors can be pecuniary factors," but only if the economic risks or opportunities associated with them are material, according to the fact sheet.

"This proposal ensures that fiduciaries act with a single-minded focus on the interests of beneficiaries," said Jeanne Klinefelter Wilson, acting assistant secretary of labor for the Employee Benefits Security Administration, in the news release. "Providing further clarity on fiduciaries' responsibilities in ESG investing will help safeguard the interests of participants and beneficiaries."

In 2018, the Labor Department published a field assistance bulletin on ESG investing that said environmental, social and governance issues can be material to investment performance in ERISA-governed plans, but it also cautioned fiduciaries not to assume that any ESG consideration is economic.

On a call with reporters Tuesday, a senior Labor Department official said the 2018 guidance reiterated the department's long-standing position that ERISA does not allow plan fiduciaries to sacrifice returns or take on risk to promote "non-pecuniary" goals.

However, "to the extent that a particular ESG factor to financial merits of an investment decision, it is appropriate for an ERISA plan fiduciary to consider that factor," the senior department official said.

The proposal will have a 30-day comment period.

George Michael Gerstein, co-chairman of the fiduciary governance group at Stradley Ronon Stevens & Young, said in an email that the proposal raises "a number of material issues that plan sponsors and other fiduciaries should carefully consider with respect to ESG investing, particularly with respect to QDIAs." Mr. Gerstein said the proposal eliminates the possibility that an ESG fund — themed or not — can be a qualified default investment alternative or even part of a QDIA.