On October 14, 2020, the US Department of Labor submitted its final rule addressing environmental, social and governance (ESG) factors in selecting plan investments entitled “Financial Factors in Selecting Plan Investments,” to the Office of Management and Budget for review.
The proposed rule was released on June 2, 2020 by the DOL over concerns about the rapid acceptance and growth of ESG investing. This final rule has been on an accelerated process and follows a truncated 30-day comment window that ended July 30, 2020. The typical comment period can be up to 90 days. There were over 8,000 comment letters, mostly objecting to the new proposed restrictions intended to limit ESG investments. The effort to stall ESG investments has been promoted by Secretary of Labor Eugene Scalia, son of the late Supreme Court Justice Antonin Scalia.
The OMB generally has up to 90 days to vet the final rule and either approve it for release or send it back for modifications. This expedited pace of implementing this rule is highly unusual and may be released in November, 2020.
Prior to this proposed rule, there have been Interpretive Bulletins (IBs) (in 1994, 2008 and 2016) and, more recently, a 2018 Field Assistance Bulletin (FAB) on the subject of ESG investments.
The rule establishes that ESG-oriented funds or funds that include some ESG elements are prohibited and not eligible as the retirement plan’s QDIA such as target-date funds, custom asset allocation (managed accounts) and balanced funds. This is a dramatic shift from previous DOL pronouncements under previous administrations.
The rule adds new regulatory hurdles and ERISA requirements for plan fiduciaries by requiring more stringent evaluations, specifically of ESG investments including new investment analysis and documentation requirements.
Despite the DOL’s proposed rule, interest in ESG remains high among institutional investors and retirement plan participants.
When the rule is finalized, it may be challenged under the Administrative Procedures Act (APA) and the Congressional Review Act (CRA) depending on the outcome of the Presidential election. A Biden administration would seek to overturn any newly finalized rule by the DOL as the Obama administration had encouraged ESG investments.
The APA governs the process by which federal agencies propose and establish new regulations and lays out the process for judicial review of rules in federal court. The CRA establishes a process for congressional review of new regulations issued by federal agencies. In general, the CRA provides Congress with the ability to reject any newly issued regulation if completed within a certain timeframe. In this case, the likelihood of using the CRA process would be highly dependent on the outcome of the elections.