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Call it a Comeback: The Likely Return of ESG Investing in ERISA Accounts

Environmental, social, and governance (“ESG”) investing has experienced quite the regulatory roller coaster in recent years.  In the most recent turn, Democratic Senators Patty Murray (D-Wash.) and Tina Smith (D-Minn.), along with Representative Suzan DelBene (D-Wash.), have introduced a bill that would expressly allow ESG investing in retirement accounts, a 180-degree turn from the policies enacted related to ESG investing towards the end of the Trump administration.  If enacted, the proposed law would effectively give ESG criteria equal status for investment decision makers in the market and allow ESG investments to be included in default retirement investment funds.

The Bill

The Financial Factors in Selecting Retirement Plan Investment Act (so-named after the Trump-era rule it effectively negates) was introduced in late May 2021.  This proposed law would amend the Employee Retirement Income Security Act of 1974 (“ERISA”) to allow retirement plan fiduciaries to consider ESG criteria when selecting investments, as well as to consider such criteria as the tie-breaking factor when deciding between potential investments that have equal likely returns and risks.  The bill’s sponsors point to the growing interest in ESG investing and the need for Congress to provide legal certainty as to retirement plan fiduciaries’ ability to invest in ESG funds.

A Change of Course

This bill, if enacted, would reverse the Trump administration’s Department of Labor (“DOL”) controversial rule that severely limited investors’ ability to consider ESG criteria in most retirement investing and thus effectively prevented ESG investments from being included in such portfolios.  That rule, which was pushed through the notice and comment period at a striking pace, made several significant changes to ERISA.  Despite receiving very sparse support and, in fact, overwhelming opposition in that brief rulemaking period, the rule was made final in November 2020.

However, the DOL’s Employee Benefits Security Administration (“EBSA”) indicated earlier this year that it would not enforce the Trump administration’s final rules.  Upon taking office, the Biden administration indicated that it would promptly tackle the Trump-era rule and, in March, EBSA indicated that plan managers could once again consider ESG criteria in selecting investments for retirement plans without fear of enforcement of the Trump administration’s rules.  Nevertheless, the lack of clear guidance has left some ambiguity that the Financial Factors in Selecting Retirement Plan Investment Act will hopefully serve to clarify, allowing plan managers to freely consider ESG factors in investment decisions.

A Path to Some Certainty?

The propriety and encouragement of ESG investing has widely varied from administration to administration.  Because this area of investing has been legally uncertain for so long, ESG investing has not always been placed front and center in ERISA accounts.  The proposed bill, however, would effect a much swifter and more decisive policy change with respect to ESG investing, allowing not only for ESG criteria to be considered by plan fiduciaries and used as tie-breakers, but also allowing ESG criteria to be considered for qualified default investment alternatives.

However, the road to passage will not be easy.  Republican senators, many of whom were supportive of the Trump-era DOL rule, are likely to oppose the bill and make its road to enactment extremely rocky.  Supporters of the bill, however, have consistently argued that ESG-related criteria are relevant to the performance of companies and investments, and that those that manage well material risks arising out of ESG concerns will perform the best.  As such, supporters of the bill argue that a prudent investor should consider ESG criteria in investing, as climate change and other significant threats can have a severe impact on the long-term performance of a fund.  What is clear at this point is that the passage of the Financial Factors in Selecting Retirement Plan Investment Act would make such consideration much easier for ERISA plan fiduciaries and therefore promote ESG investing generally, which continues to be on the rise each year.

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Pete S. Michaels

Member / Co-Chair, Financial Services Practice

Pete S. Michaels is a Mintz attorney who focuses his practice on securities litigation, regulatory proceedings involving financial service companies and products, and compliance matters. He represents financial services firms and insurance companies and their employees, directors, and officers.

Alyssa C. Scruggs