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KBRA ESG KNOWLEDGE HUB

DOLs Proposed Rule Sets Limits to ESG Investing Under ERISA

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The U.S. Department of Labor (DOL) recently issued a notice of proposed rulemaking (NPRM) on the scope of fiduciary duties, with implications for integrating environmental, social, and governance (ESG) factors in investment activities. The proposed rule, Financial Factors in Selecting Plan Investments, was developed by DOL’s Employee Benefits Security Administration (EBSA) and aims to clarify regulation around investment duties. However, multiple stakeholders have criticized the proposed rule, commenting on the confusion and unnecessary burden it could create. Kroll Bond Rating Agency (KBRA) has been monitoring DOL’s NPRM ruling to assess its potential ramifications and impact on ESG investments.

Key Amendments

The proposal made additions to the current regulation:[1]

  • Financial returns, not non-pecuniary goals, must drive investment decisions.

  • ESG factors can be considered as pecuniary factors “only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories.”[2]

  • A documentation requirement for when a fiduciary “breaks the tie” between two “economically indistinguishable” investments by relying on a non-pecuniary factor.

  • A requirement for fiduciaries to consider “other available investments” to satisfy prudence and loyalty duties under the Employee Retirement Income Security Act (ERISA).

  • “ESG-themed funds” may not be used as a qualified default investment alternative (QDIA) in an ERISA plan.

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[1] https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/financial-factors-in-selecting-plan-investments

[2] https://www.federalregister.gov/d/2020-13705/p-54

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