Key Takeaway: The Department of Labor announced that it will not enforce its “Financial Factors in Selecting Plan Investments” final rule, the so-called “ESG Rule,” which had amended prior rulemaking to require plan fiduciaries to select investments for plans based solely on pecuniary factors, rather than based on environmental, social, and governance (ESG) considerations, and had made further changes to generally-understood interpretations of ERISA’s duty of prudence.
On March 10, 2021, the Department of Labor announced that it would not seek to enforce the ESG Rule, “or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply with” the rule, until the Department issues further guidance. The final ESG Rule was published on November 13, 2020, purportedly to address when and how ESG considerations could factor into fiduciary decision-making. To that end, it had amended the Department’s prior “Investment Duties” regulation to require plan fiduciaries to select investments “based only on pecuniary factors” unless the fiduciary was “unable to distinguish [between investments] on the basis of pecuniary factors alone.” “Pecuniary factors” were defined to be factors that have a “material effect on the risk and/or return of an investment.” The regulation therefore foreclosed fiduciaries from taking into account ESG considerations unless those considerations materially impacted an investment’s risk or return, or as a tie-breaker if the investments had similar so-called non-pecuniary factors. But the ESG Rule had also swept even broader, beyond ESG considerations or ESG investments, to interpret ERISA’s duties of prudence to require fiduciaries to compare all plan investments to “reasonably available alternatives with similar risks.” That portion of the rule was inconsistent with the Department’s prior guidance suggesting that the duty of prudence was a flexible standard, requiring only that fiduciaries give “adequate consideration” to the relevant “facts and circumstances,” and to court decisions that had similarly interpreted the duty of prudence as not requiring any specific conduct.
The Department “intends to revisit the” ESG Rule, and further rulemaking on this issue is therefore likely forthcoming. The Department’s announcement is here. Goodwin’s ERISA counselling practice issued a client alert regarding the Department’s announcement to offer further insights.