Blog FinReg + Policy Watch March 15, 2021

DOL Will Not Enforce Its Own ESG Rule, But Fiduciaries Should Not Ignore It

The Department of Labor (DOL) recently announced that it will not enforce its own rule on investment duties under ERISA.  The rule makes it more difficult for investment fiduciaries to consider environmental, social, governance and similar (“ESG”) issues in their decision-making.  The ESG rule was finalized under the Trump administration last fall in rocket speed—DOL took a mere 4 months to breeze through 8,000+ comments submitted on its proposal to finalize a rule that would affect defined benefit plan and 401(k) fiduciaries managing more than $10 trillion in investible assets.  The rule also cast a long shadow over ESG-themed private funds and other products that Congress never intended to be within DOL’s jurisdiction, as long as they were marketed to ERISA plans.

Most expected the Biden administration to reverse course—it has.  ERISA fiduciaries now need not worry about being investigated by the DOL for violating the Trump-era ESG rule. But as long as the rule is on the books, ERISA fiduciaries’ conduct will be measured against it in any lawsuit by plan participants and beneficiaries.  That is a significant litigation risk, particularly since the ESG rule is untested in the courts and significantly departs from the long-standing principles-based approach of ERISA.  The DOL could undertake a new notice-and-comment rulemaking under the APA to implement a well-reasoned alternative rule, but that would take time.  Congress also could act, but the likelihood for any movement on this front is unclear.  The rule also could be challenged in courts, not unlike the Obama-era’s fiduciary rule package, but the outcome of such a challenge would be uncertain.  So, for the time being, ERISA fiduciaries should tread carefully when it comes to ESG or ESG-themed investing.

See Goodwin’s client alert here for more.

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