(Article from Registered Funds Regulatory Update, April 2023)
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President Biden used his first veto to a Congressional resolution that would have nullified the Department of Labor's final rule concerning the consideration of ESG factors in U.S. corporate retirement plans (“ESG Rule”). The ESG Rule requires an ERISA fiduciary’s investment decision to be based on factors that the fiduciary reasonably determines are relevant to the risk/return analysis of an investment, which may include the economic effects of climate change and other ESG factors on the proposed investment. The ESG Rule does not alter the longstanding requirement for fiduciaries to consider all relevant factors in an investment’s risk/return analysis. Additionally, the ESG Rule does not require the incorporation of ESG factors into that analysis where not relevant to the risk/return analysis. The ESG Rule was adopted to overturn a regulation issued in 2020 under the Trump administration, which barred employers from selecting ESG funds for their company 401(k) plans. The ESG Rule also reiterates the DOL’s position that fiduciaries can and should consider any and all factors that are relevant to the risk/return analysis of a potential investment.
Multiple lawsuits seeking to enjoin enforcement of the ESG Rule have been filed. Earlier this year, 25 states sued the DOL in the Northern District of Texas, a jurisdiction that may be favorable to plaintiffs, alleging, among other things, violations of the Administrative Procedures Act and the “major questions” doctrine. These lawsuits underscore the politicized nature of ESG, and the landscape is expected to remain uncertain. ERISA fiduciaries, fund sponsors, and investment managers should consider the ESG Rule’s applicability by revisiting agreements, policies, and procedures, while also considering efforts by various state legislatures related to ESG to ensure continuing compliance with the plan’s laws, rules, and policies.
Joseph R. Biden Jr., Presidential Actions, Message to the House of Representatives — President’s Veto of H.J.
Res 30 (March 20, 2023), available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2023/03/20/message-to-the-house-of-representatives-presidents-veto-of-h-j-res-30.