DOL issues proposed regulations on ESG investing

BY Brian Kopp

The U.S. Department of Labor has issued proposed regulations on the factors fiduciaries may consider when investing ERISA plan assets. ERISA is a federal law that governs employee benefit plans, such as retirement and welfare benefit plans. Under the proposed regulations, when investing ERISA plan assets or considering investment options for an ERISA plan, fiduciaries may only consider financial factors that have a material effect on the return and risk of the investment. Generally, non-financial factors that do not impact the risk or return of an investment cannot be considered.

ERISA imposes a duty of loyalty and prudence on fiduciaries. Under the duty of loyalty, fiduciaries must discharge their duties solely in the interests of the participants and for the exclusive purpose of providing benefits to participants. Under the duty of prudence, fiduciaries must act with the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use.

The DOL has expressed a concern that some ERISA fiduciaries may be violating these duties by selecting investments, in part, for the purpose of furthering certain social goals instead of solely focusing on the financial interests of plan participants. Under the proposed regulations, it would be inappropriate for fiduciaries to make investment decisions taking into account environmental, social, or corporate governance factors unless those factors affect the risk or return of the investment. For example, it would be inappropriate for a fiduciary to select an investment because it will help reduce global warming. These principles need to be considered when fiduciaries select funds to include in an employer’s defined contribution plan, such as a 403(b) plan.

Financial companies have increasingly promoted investments that further certain environmental, social, or corporate governance goals, and the proposed regulations are controversial, having attracted more than 1500 comments. Nonetheless, in the current litigious environment, it will be important that ERISA fiduciaries document the basis for their investment decisions and ensure those decisions comply with ERISA’s fiduciary principles.

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Brian Kopp


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