DOL Flips Script with ESG Proposal

The Department of Labor (DOL) has issued a proposed rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.” This guidance was anticipated pursuant to Executive Order 14030, which recommended agency actions “to protect the life savings and pensions of United States workers and families from the threats of climate-related financial risk,” and to consider publishing new regulations.

Last year, a final rule was issued requiring ERISA fiduciaries to evaluate investments based solely on financial factors. The rule also prohibits fiduciaries from subordinating participant interests to unrelated objectives or taking additional risks to promote “nonpecuniary” goals. In addition, the rule set forth investment analysis and documentation requirements for when plan fiduciaries use nonpecuniary factors as a tiebreaker when choosing an investment and prohibits such investment to be used as a qualified default investment alternative (QDIA).

The new proposed rule would add additional language to investment duties under ERISA, specifying that consideration of the projected return of the portfolio relative to the funding objectives of the plan may often require an evaluation of the economic effects of climate change and other ESG (environmental, social, and governance) factors on the particular investment. The rule would remove documentation requirements when considering other “collateral benefits” than investment returns and remove the prohibition from using such investments as QDIAs. Under the proposal, if fiduciaries select such an investment as a DIA or QDIA, they must ensure that the collateral-benefit characteristic of the fund, product, or model portfolio is prominently displayed in disclosure materials provided to participants and beneficiaries.

Comments on the proposed rule must be submitted on or before December 13, 2021.