US DOL Defends ESG Rule as Litigation Looms

A new rule stating that US retirement plans can consider ESG factors has come into force, but Republicans are already pushing back with a legal challenge and legislation in the works. 

The US Department of Labor (DOL) has defended its new rule that confirms evaluating ESG factors in investment selection is consistent with fiduciary duty, after a coalition of 25 Republican attorneys moved to sue Labor Secretary Marty Walsh and the DOL over the move.  

The rule, which came into effect on 30 January 2023, amends a Trump-era DOL rule considered to have a “chilling” effect on ESG investing, said Assistant Labor Secretary Lisa Gomez yesterday on a webinar organised by Boston-based investor network Ceres.  

In late 2020, the DOL finalised a rule that, while not expressly prohibiting ESG consideration by US retirement plans subject to the Employment Retirement Income Security Act (ERISA) , was felt by market participants to discourage the practice. 

Pecuniary factors  

The rule said an ERISA fiduciary investor must focus solely on the plan’s “pecuniary factors”, in other words financial returns, in its investment decision-making process and prohibited adding or retaining a default option that reflected non-pecuniary objectives. 

Gomez said that the DOL had now removed terminology around pecuniary factors as it caused confusion among fiduciaries.  

Gomez noted that the terminology was not in ERISA rules before and had no long-standing place in employee benefits law.  

“The final rule […] makes it clear that fiduciaries determination with respect to investments has to be based on factors that the fiduciary reasonably determines are relevant to the risk and return analysis, and that such factors may include economic effects of climate change and other ESG factors,” she added.

“The removal of the pecuniary factors alone gives the fiduciary a little bit more flexibility in determining what’s best for the plan participants.” Also speaking on the webinar, Secretary Walsh said the Trump-era rule had effectively prevented fiduciaries from looking at relevant information about environment, social and governance factors when making investment choices.  

“It’s well established that ESG factors can impact investments. So, if investors can’t take these factors into account, it’s a problem.”  

The new rule, he said, allowed retirement plans to take into account ESG factors when appropriate. 

Litigation looms  

But the rule change is already facing challenge, noted Gomez, with litigation filed against the DOL and Secretary Walsh, claiming it violates the Administrative Procedure Act and ERISA and should not be enforced. 

The complaint, filed 26 January, calls the ESG rule “arbitrary and capricious”.  

The complaint added: “By formally injecting ESG concepts into the ERISA prudent duty regulations, DOL has ventured into territory that Congress explicitly rejected when it drafted ERISA.”  

As well as the 25 Republican attorneys, the plaintiffs include oil company Liberty Energy; the Western Energy Alliance and James R. Copland, a participant in a retirement plan subject to ERISA and senior fellow at Conservative think tank the Manhattan Institute.  

The rule is also facing challenge from lawmakers with Indiana Senator Mike Braun saying he will introduce legislation to block it with support from all 48 other Republican Senators and Democrat Senator Joe Manchin.  

While not explicitly addressing these challenges, Gomez said there was a lot of misunderstanding and misconceptions about the rule. She said that the rule did not force people into choosing certain types of investments. She also said it did not allow fiduciaries to sacrifice risk and return in favour of consideration of these factors. 

Speaking during the webinar, Allison Wielobob, General Counsel, American Retirement Association, said the DOL would have to spend some time remediating “inflammatory” misinformation. She called the new guidance the “most neutral” in decades, saying it should work well for plan participants.  


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