Proposed ESG Regulation

June 30, 2020

Author: Peter T. Scott, JD, MMA Retirement Services

In late June 2020, the DOL released a proposed regulation outlining fiduciary responsibilities as pertaining to retirement plan environmental, social and governance (ESG) investing.  The proposed regulation would make clear that fiduciaries are to select investments based solely on financial considerations, and that prior DOL guidance permitting the consideration of ESG factors as a “tie-breaker” was inconsistent with ERISA’s duties of prudence and loyalty.

The proposed regulation provides that ERISA requires a fiduciary to evaluate investments and investment courses of action “based solely on pecuniary factors that have a material effect on the return and risk of an investment based on appropriate investment horizons and the plan’s articulated funding and investment objectives.”

Further, fiduciaries would not be allowed to “subordinate the interests of the participants and beneficiaries in their retirement income … to unrelated objectives, or sacrifice investment return or take on additional investment risk to promote goals unrelated to those financial interests of the plan’s participants and beneficiaries.”

The fundamental principle is that an ERISA fiduciary’s evaluation of plan investments must be focused solely on economic considerations that have a material effect on the risk and return of an investment.

The proposed regulation provides that fiduciaries are “not permitted to sacrifice investment return or take on additional investment risk to promote non-pecuniary benefits or any other non-pecuniary goals. Environmental, social, corporate governance, or other similarly oriented considerations are 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.”

The DOL has issued guidance on fiduciary considerations applicable to ESG investments on several occasions beginning in 1994.  The proposal acknowledged a “steady upward trend in use of the term ESG among institutional asset managers, an increase in the array of ESG-focused investment vehicles available, a proliferation of ESG metrics, services, and ratings offered by third-party service providers, and an increase in asset flows into ESG funds.”

The DOL acknowledged that the proposed regulation may impact retirement plan current plan investments - “Companies offering ESG-themed mutual funds would have fewer customers since ERISA plans that currently offer ESG-themed mutual funds in their DC plans would no longer be able to offer them under the proposed rule.” 

The proposed regulation will have a 30 day comment period.

Find a local MMA office near you.


ESG Proposed Rule

Securities offered through MMA Securities LLC (MMA Securities), member FINRA / SIPC, and a federally registered investment advisor. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Variable insurance products distributed by MMA Securities LLC, CA OK 81142. MMA and MMA Securities are affiliates owned by Marsh & McLennan Companies.