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June 24, 2020 at 03:33 PM
The Department of Labor has proposed a new rule for pension plans operating under ERISA that would limit ESG-focused investments.
A notice of the proposed rule notes that “recent trends involving ESG investing … may lead ERISA plan fiduciaries to choose investments or investment courses of action to promote environmental, social, and public policy goals unrelated to the interests of plan participants and beneficiaries in financial benefits from the plan and expose plan participants and beneficiaries to inappropriate investment risks.”
The new proposal is designed in part to to clarify “that ERISA plan fiduciaries may not invest in ESG vehicles when they understand [its] investment strategy … is to subordinate return or increase risk for the purpose of non-financial objectives,” the DOL press release states.
In that same release, DOL Secretary Eugene Scalia said, “Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan” but rather should be focused on “the very important social goal [of] providing for the retirement security of American workers.”
The latest DOL proposal reverses earlier guidance promulgated by the agency during the Obama Administration that allowed retirement plans operating under ERISA to consider the social impact of their investments so long as those investments didn’t compromise fiduciary obligations. It is subject to a 30-day period of public comment.
(Related: DOL Clears Way for Impact Investing in Retirement Plans)
The DOL proposal acknowledges that ESG factors can have a material financial impact on investments but requires plan fiduciaries to document through “proper analysis and evaluation” the inclusion of alternative investment options chosen in part on the basis of a non-monetary factor — the agency uses the term “non-pecuniary factor.”
