ERISA Rule Allows Fiduciaries to Consider ESG Factors

UPDATE: The final rule was published in the Federal Register on December 1, 2022. It takes effect January 30, 2023.

Author: Brightmine Editorial Team

November 28, 2022

Employer-sponsored retirement plan fiduciaries will soon be allowed to consider climate change and other environmental, social and governance (ESG) factors when they select retirement investments and exercise shareholder rights, such as proxy voting.

An Employee Retirement Income Security Act of 1974 (ERISA) regulation requires a fiduciary's duty of prudence to be based on factors that they reasonably determine are relevant to a risk-and-return analysis.

A new rule from the US Department of Labor amends that regulation to clarify that these factors may include the economic effects of climate change and other ESG considerations on a particular investment or investment course of action (such as the selection of an investment fund as a plan investment). Most provisions will take effect 60 days after the rule is published in the Federal Register.

The DOL intends for the new rule to serve as a course correction following a rule issued in 2020 under the Trump administration that generally required plan fiduciaries to select investments and investment courses of action based solely on consideration of "pecuniary factors," which were defined in the regulation.

After the 2020 rule, the DOL said it heard from a variety of stakeholders - including asset managers, corporations and investment advisers - who said the 2020 rule had failed to address evidence about how ESG considerations can improve investment value and long-term investment returns for retirement investors.

Some industry groups expressed relief that retirement plan sponsors are permitted but not required to consider ESG factors when selecting plan investment options under the new rule.

The new rule is "generally consistent with [our] position that ESG factors and investments should be treated no differently than non-ESG factors and investments," Jason Berkowitz, Chief Legal and Regulatory Affairs Officer for the Insured Retirement Institute, said in a statement.