The Department of Labor delivered a final rule on considering environmental, social and governance funds in retirement plan investing choices. The department’s controversial rule suggests that ESG investing comes into conflict with the fiduciary responsibilities of plan sponsors, and it’s feared that the ruling could chill their use in employee retirement plans.

While the rule, issued Friday, doesn’t prohibit ESG investments in retirement plans altogether, plan sponsors are facing down a litigious environment and there’s a lot at stake if they are perceived to be running afoul of their fiduciary obligations. That might give them more reason to steer clear of ESG investments, which advocates say are important vehicles for investors wanting to fight things like climate change and racial injustice. Impact investors further argue that unsustainable business practices will lead to unsustainable companies, and that ESG investing therefore has greater long-term financial benefits, a view that has become so widely accepted that even trillion-dollar blockbuster companies like BlackRock and State Street have vocally backed them.

Snubbing those concerns, the DOL said in its final rule, “when making decisions on investments and investment courses of action, plan fiduciaries must be focused solely on the plan’s financial returns, and the interests of plan participants and beneficiaries in their benefits must be paramount.” According to the department, the Supreme Court’s definition of fiduciary under the ERISA law, means showing “complete and undivided loyalty to the beneficiaries.” ESG investing, doesn’t do that, the department says, because it goes beyond the financial and seeks out “nonpecuniary” benefits.

The department went on to say that providing a secure retirement is a paramount and worthy “social” goal of ERISA plans all by itself, and environmental or social pursuits shouldn’t be pursued “at the expense of ERISA’s fundamental purpose,” which is to give participants a secure retirement.

While the department noted the growing marketplace for ESG products, it also noted ESG critics who have decried “a lack of precision and consistency in the marketplace with respect to defining ESG investments and strategies, as well as shortcomings in the rigor of the prudence and loyalty analysis by some participating in the ESG investment marketplace.”

What’s left for ESG funds is a “tie-breaker” status—plan sponsors can indeed consider them if they match up favorably against other funds, and thus a fund’s pursuit of the greater social good makes it an attractive choice, all else being equal.

The backlash to the DOL’s rule was swift and angry when it was proposed in June. Impact investors not only piled on to what they called the department’s shortsighted rules about performance, but also the short comment period.

“In an analysis of more than 8,700 comments submitted in response to the proposal, 95% of commenters opposed the proposal and 94% of comments from investment professionals opposed it,” said US SIF: The Forum for Sustainable and Responsible Investment. 

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