Legal Considerations
in Responsible Investment

On October 13, 2021, the U.S. Department of Labor announced a proposed rule titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” (the “Proposed ESG Rule”). The Proposed ESG Rule would allow fiduciaries to consider climate change and other ESG factors when they select investments and exercise shareholder rights. If adopted, the Proposed ESG Rule would apply specifically to investments included in 401(k) and other defined contribution plans, as well as to defined benefit pension plans, making it possible for financial professionals to consider whether profitable investments also, for example, promote racial justice or address climate change. In short, the Proposed ESG Rule deems ESG factors to be material.

Other notable features of the Proposed ESG Rule include that it explicitly allows ESG factors to serve as a tiebreaker when a fiduciary is choosing between economically indistinguishable investment options. Further, it allows employers to treat investments promoting or adhering to ESG considerations as a default position, rather than an exception. This serves to align the fiduciary duties of investment professionals with the increasing preferences of investors and pension plan beneficiaries to include ESG factors in their investment decisions, and to place their capital in the hands of companies that support and further ESG goals. Ultimately, the Proposed ESG Rule removes the barriers imposed by the prior administration’s rules that had a chilling effect on ESG investments.

By treating ESG factors as financially material, the Proposed ESG Rule helps protect the retirement savings and financial security of America’s families. Since financial security includes planning for the future, it becomes essential that fiduciaries be allowed to consider the sustainability of their investments, a bedrock of ESG investing strategies. Ultimately, this rule can help build a more just, diverse, sustainable, and financially secure future for workers and families.

Some have posited that the Proposed ESG Rule even requires fiduciaries to consider the economic effects of climate change and other ESG factors because it states in part: “The projected return of the portfolio relative to the funding objectives of the plan, which may often require an evaluation of the economic effects of climate change and other environmental, social or governance factors on the particular investment or investment cause of action.” This italicized language could be read not just to allow consideration of ESG factors, but to require it “often.” Regardless, it is a notable step forward in the promotion of ESG investing. Importantly, these rules are considered when evaluating compliance with fiduciary duties beyond the ERISA plan context.

Under administrative law principles, the public is afforded a chance to comment on new rules suggested by independent agencies of the U.S. Government such as the Department of Labor. The so-called “notice of proposed rulemaking” comment period runs for 60 days, beginning on October 14, 2021. The DOL may take into consideration any comments submitted during this period, and may incorporate them into what will ultimately become the “final rule.” They may also choose to re-open or extend the comment period if it believes this is warranted. According to the Federal Register, in the end, the DOL must “base its reasoning and conclusions on the rulemaking record, consisting of the comments, scientific data, expert opinions, and facts accumulated during the pre-rule and proposed rule stages.” Ultimately, the DOL must conclude that the rule furthers its objectives. We will monitor the development of the Proposed ESG Rule.