New DOL Proposed Regulation Addresses Socially-Responsible Investing:

On June 30, 2020, the DOL published a proposed regulation amending its existing ‘‘investment duties” regulation. That “investment duties” regulation deals with duties imposed upon ERISA plan fiduciaries in connection with their investment of plan assets.  

The proposed regulation specifically addresses the growing practice of selecting plan assets because of the non-pecuniary benefits they may further, such as those relating to environmental and social policy considerations. Various terms have been used to describe this practice, such as socially-responsible investing and environmental, social, and corporate governance (“ESG”) investing. In the proposed regulation’s preamble, the DOL notes its concerns that: (1) “the growing emphasis on ESG investing may be prompting ERISA plan fiduciaries to make investment decisions for purposes distinct from providing benefits to participants;” and (2) “some investment products may be marketed to ERISA fiduciaries on the basis of purported benefits and goals unrelated to financial performance.”

Overall, the DOL intends the proposed regulation to make clear that ERISA plan fiduciaries cannot invest in ESG vehicles when they understand that an underlying investment strategy of the vehicle is to “subordinate return or increase risk for the purpose of nonpecuniary objectives.”

Under this new guidance, fiduciaries satisfy their ERISA investment duties if they perform all of the following acts:

  • Give appropriate consideration to facts and circumstances that the fiduciary knows or should know are relevant to the particular investment.
  • Evaluate investments based solely on pecuniary factors that have a material effect on the return and risk of an investment. Environmental, social, corporate governance, or other similar considerations are pecuniary factors only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations. Also, the weight given to those factors should appropriately reflect a prudent assessment of their impact on an investment’s risk and return. 
  • Do not subordinate participants’ interests to unrelated objectives, or sacrifice investment returns or take on additional investment risk to promote goals unrelated to participants’ financial interests.

This guidance will not become effective until finalized. A future edition of my newsletter will summarize the final regulation promptly after it is issued.