June 26, 2020
The U.S. Department of Labor published proposed rules that would prohibit ERISA plan fiduciaries from investing in ESG funds if the “underlying investment strategy of the vehicle is to subordinate return or increase risk for the purpose of non-financial objectives.”
“Private employer-sponsored retirement plans are not vehicles for furthering social goals,” said Secretary of Labor Eugene Scalia in announcing the proposal.
According to the release on the DOL website, the proposal is designed to clear up confusion from previous sub-regulatory guidance and make it clear that plan managers have a duty to prioritize risk and return over non-financial benefits.
The proposal includes five core additions to the Employee Retirement Income Security Act (ERISA) regulations:
Outlook: The rules are likely to be controversial within the investment management industry. BlackRock, for example, has substantially increased its focus on ESG factors, including voting policies. Overall, the proposed rule is likely to impact the debate on whether ESG issues constitute risks to long-term value. The other consideration will be the 2020 election. The proposed rule likely will not be finalized within the next 60 days, making it vulnerable to immediate repeal by a Democratically-controlled Congress under the Congressional Review Act.
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