The Department of Labor's final regulation (https://www.federalregister.gov/documents/2020/06/30/2020-13705/financial-factors-in-selecting-plan-investments) makes it clear that ERISA plan fiduciaries may not invest in environmental, social, and corporate governance (ESG) vehicles when they understand an underlying investment strategy of the vehicle is to subordinate return or increase risk for the purpose of non-pecuniary objectives. The duty of loyalty—a core principle of ERISA, which evolved from the common law of trusts—requires those serving as fiduciaries to act without their own interests in mind but with a required focus on the interests of the beneficiaries.
Furthermore the duty of prudence prevents a fiduciary from choosing an investment alternative that is financially less beneficial than an available alternative. These fiduciary standards are the same no matter the investment vehicle or category.
As the Department stated in prior guidance, there may be instances where factors that sometimes are considered without regard to their pecuniary measure. Thus, environmental considerations could present an economic business risk or opportunity that corporate officers, directors, and qualified investment professionals would appropriately treat as material economic considerations under generally accepted investment theories. For example, a company's improper disposal of hazardous waste would likely implicate business risks and opportunities, litigation exposure, and regulatory obligations. These would be appropriate economic considerations that qualified investment professionals would treat as material under generally accepted investment theories. Dysfunctional corporate governance can likewise present pecuniary risk that a qualified investment professional would appropriately consider on a fact-specific basis.
For those that wish to invest in ESG vehicles, the DOL just made it a bit more difficult to do so in your ERISA qualified retirement plans. If you are a fiduciary that feels strongly about ESG investing, please call us and we can help you navigate the new fiduciary waters.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.