States Sue to Block DOL’s Rule Allowing Fiduciaries to Consider ESG Factors in Choosing Investments

Twenty-five states have filed to block the implementation of a U.S. Department of Labor (DOL) rule that allows fiduciaries to consider environmental, social, and governance (ESG) factors in choosing retirement investments. The states argue that the DOL rule conflicts with the Employee Retirement Income Security Act (ERISA), which requires fiduciaries to consider financial benefits first, not nonfinancial and nonpecuniary ones. They also claim that DOL’s 2020 rule still requires that financial factors take precedence over any other factors in the fiduciary decision-making process.

The DOL finalized the Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights rule in November 2022, and it took effect on January 30, 2023. The so-called ESG rule arose from a May 2021 executive order instructing all federal agencies to consider enacting policies protecting against climate-related financial risks. The ESG rule will affect all employee benefit plans covering 152 million individuals.

When it issued the ESG rule, the DOL concluded that rules issued by the Trump administration in 2020, which the Biden administration later blocked, unnecessarily prevented plan fiduciaries from considering ESG factors. As a result, the new rule allows retirement plan fiduciaries to consider environmental and other ESG factors in selecting investment options and exercising shareholder rights.

The DOL also emphasized that while the rule allows the consideration of ESG factors, it does not mandate that plan fiduciaries consider ESG factors. The final rule also does not give examples of ESG factors that plan fiduciaries may consider, arguably making the rule more neutral than initially drafted.

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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