On October 14, 2021, the US Department of Labor (DOL) proposed changes to ERISA regulations that would again shift the analysis of consideration of environmental, social, and governance (ESG) factors in retirement plans governed by ERISA. The proposal (2021 Proposal) reacted to the Trump Administration’s 2020 final regulations on ESG (2020 Regulations) by reversing course on key aspects of those regulations and offering several changes that may have been intended to facilitate ESG considerations by plan fiduciaries. The DOL finalized those regulations on November 22, 2021 (the Final Rule).
A Brief Review of ESG under ERISA ERISA requires that fiduciaries must act “solely in the interest of participants and beneficiaries,” and in accordance with a specified standard of prudence and loyalty. All of the past DOL guidance on ESG has reiterated these principles, which remain at the center of fiduciary behavior. The question has been to what extent consideration of ESG factors could be consistent with these standards under ERISA. Successive presidential administrations have attempted to clarify whether and to what extent fiduciaries can or should consider ESG factors in investment decisions. In general, Republican administrations have issued guidance that tended to raise the bar for consideration of ESG factors, while Democratic administrations have issued guidance that allowed somewhat more flexibility in considering ESG. This back-and-forth in sub-regulatory guidance led to the Trump Administration’s attempt to create a permanent rule through issuing regulations in 2020. Those regulations included a number of provisions perceived as limiting the ability of fiduciaries to consider ESG.
The Biden administration dispensed with the notion that putting ESG rules in the form of regulations would end the political back-and-forth. Shortly after the inauguration, in response to an executive order, the DOL issued a non-enforcement policy with regard to the 2020 Regulations. Later in 2021, the DOL issued a new set of proposed regulations that would change key aspects of the 2020 Regulations, in each case removing perceived barriers to consideration of ESG factors.
The Final Rule
The underlying themes of the Final Rule are to remove the perceived barriers of the 2020 Regulations and allow fiduciaries to both protect participants by mitigating investment risks associated with ESG factors and to ensure that participants have access to prudent and attractive investment opportunities. The Final Rule largely follows the 2021 Proposal with some clarifications. The chart below summarizes the most significant changes of the 2021 Proposal and any modifications to these provisions in the Final Rule.