President Biden recently used his first veto to preserve the Department of Labor rule permitting ERISA retirement plan fiduciaries to consider ESG factors in their clients’ retirement investment portfolios so long as such considerations are relevant to a risk and return analysis. 29 C.F.R. § 2550.404a-1(b)(4) (2022). The Department of Labor’s (DOL) rule, titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” went into effect on January 30, 2023. The rule replaced a 2020 rule issued by the Trump administration, which was seen as limiting the authority of ERISA fiduciaries to consider ESG factors in selecting retirement investment plans by focusing on “pecuniary factors.” 29 C.F.R. § 2550.404a-1(c)(1) (2020).
Under the current version, the rule removes the terms “pecuniary” and “non-pecuniary” and permits ERISA fiduciaries to consider their clients’ preferences to include ESG factors in their investment portfolios “that the fiduciary reasonably determines are relevant to a risk and return analysis. . . .” 29 C.F.R. § 2550.404a-1(b)(4) (2022 . The DOL rule did not change the ERISA fiduciaries’ duty of prudence, as fiduciaries are still required to steer clear of integrating unreasonable investment options into their clients’ portfolios.
Given that the SEC’s mandatory ESG disclosure amendments are yet to be enacted, ERISA fiduciaries lack a uniform method of incorporating the ESG factors into their clients’ portfolios. Until that occurs, fiduciaries should inform their clients about the risks associated with the lack of uniform disclosure and use appropriate disclaimers. Investors, too, should proceed with caution in their ESG investing until the mandatory ESG disclosure framework is enacted.
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