DOL Paves the Road Green for Retirement

This blog post was initially published on December 1, 2022. It was last updat­ed April 8, 2024.

On November 22, 2022, the Department of Labor issued its final rule that allows Employee Retirement Income Security Act of 1974 (ERISA)-regulated fiduciaries to consider climate change—and other environmental, social, and governance factors—while making investment decisions on retirement plans.¹ The Department of Labor had proposed these changes in October 2021.²

This rule amends the Investment Duties regulation under Title I of ERISA, and offers clarity to the application of ERISA’s fiduciary duties of prudence and loyalty to selecting investments and investment courses of action, including selecting qualified default investment alternatives, exercising shareholder rights (such as proxy voting), and the use of written proxy voting policies and guidelines. The amendments reverse and modify certain amendments to the Investment Duties regulation that had been adopted in 2020. There are four key points to take away from the 2022 final rule.

Overall, the final rule provides clear guidance for fiduciaries to adhere to, and advances the financial interests of investors who participate in ERISA-covered retirement plans.

California Attorney General Rob Bonta had led a multistate coalition—joined by Connecticut, Delaware, District of Columbia, Maryland, Massachusetts, Minnesota, New Mexico, New York, North Carolina, Oregon, and Vermont – in comments in support of the 2021 proposal.³ The AGs recognized that: (1) states and the federal government have adopted (and continue to adopt) ambitious policies to reduce greenhouse gas emissions, advance clean energy, and increase climate resilience and justice; (2) a substantial percentage of their states’ residents have ERISA-covered plans (which make up the bulk of retirement savings) and are an important income source after retirement; (3) climate and ESG factors are often material to ERISA fiduciaries’ prudent investment decisions; and (4) the proposed rule provides clarity and guidance to fiduciaries so that investors’ financial and ESG interests can both be advanced where appropriate, but never in ways that would prioritize ESG concerns over financial well-being.

Utah Attorney General Sean Reyes led a separate multistate coalition opposing the Department of Labor proposal.⁴ These comments argued that the rule would allow fiduciaries to “invest employee retirement savings in a way that benefits social causes and corporate goals even if it adversely affects the return to the employee.” They positioned that “social and political issues should not be considered by fiduciaries in employee retirement savings investment decisions.” However, as explained above, the final rule does not require—or even allow—fiduciaries to disregard the financial interests of retirement plan participants, and solely consider climate, ESG, or other “social or political issues,” when making investment decisions. The final rule instead permits fiduciaries to consider climate and ESG factors if they are relevant to the investment and if they do not “subordinate the interests of participants and beneficiaries in their retirement income or financial benefits.” All comments on the proposal are available in the docket.⁵

Update (November 6, 2023)

On January 26, 2023, a coalition of 25 state attorney generals (AGs) led by Utah filed a complaint challenging the Department of Labor’s Final Rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights in the Northern District of Texas, Utah et al. v. Walsh, Docket No. 2:23-cv-00016-Z. On September 21, 2023, Judge Kacsmaryk rejected their claims. On October 26, 2023, the plaintiffs filed a notice of appeal in the U.S. Court of Appeals for the Fifth Circuit.

Update (April 8, 2023)

On January 18, 2024, a coalition of 25 state AGs led by Utah filed their opening brief, where they argued that the rule is arbitrary and capricious, and that its tiebreaker provision violates ERISA. On March 21, the Department of Labor filed its brief. On March 28, a coalition of 20 state AGs led by New York Attorney General Letitia James filed an amicus brief in support of the Department of Labor. In their brief, the amici states explained that fiduciaries managing ERISA plans should consider all factors that minimize risk and maximize return. The states argued that ignoring ESG factors does a disservice to ERISA plan participants because it could leave resources for their retirement on the table and may even constitute a violation of a fiduciary’s duties, as ESG factors are often relevant to risk and return.