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As part of the Biden Administration’s whole government approach to addressing climate change, the Department of Labor (DOL) published proposed rules on selecting plan investments that are far more favorable to environmental, social, and governance (ESG) focused investments than final rules adopted by the Trump Administration’s DOL. These proposed rules are a significant departure from past rules and may warrant an adjustment in approach on this topic.
What should retirement plans do about ESG investing? The Employee Retirement Income Security Act (ERISA), which governs most retirement plan investment decisions, requires that plans make investment decisions solely in the financial interests of plan participants, and with sufficient care, skill, and prudence. While the current DOL appears to believe ESG-focused investing in retirement plans can be prudent, it is important to remember that the DOL’s latest guidance does not change the fundamental duty to prioritize participants’ investment returns.
Plans investment fiduciaries should consider carefully whether and how to implement any ESG-focused investment strategies. Below are a few questions plans might ask when considering an ESG-focused investment:
While the DOL’s guidance on ESG investing has shifted several times in recent years (and might shift again in the future), ERISA’s basic requirement that plan investment decisions be made prudently and solely in the financial interests of participants has not changed. Plan administrators should ensure that their plan fiduciaries are continuing to follow a prudent process to ensure that any plan investment (ESG or otherwise) serves that goal.