Department of Labor Issues Final ESG Rule (Without Using the Term ESG)

Earlier this year, the Department of Labor (DOL) issued a proposed rule related to the use of Environmental, Social and Governance (ESG) investment options within ERISA-covered retirement plans. In its proposed form, that rule could have restricted the use of ESG funds in retirement plans. The DOL seemed to take the stance that an investment option using ESG considerations will underperform compared to an investment that does not use these considerations. That is not necessarily the case. For example, it could be argued that Company A, with a strong governance structure, is the preferred long-term investment as compared to Company B which has a less stringent governance structure. This could be true even if Company B is currently outperforming Company A.

Following significant negative feedback on the proposed rule, the DOL made changes that focused on the factors that must be considered in selecting plan investments rather than focusing strictly on ESG investing. In fact, the final rule does not even mention ESG investing as the DOL felt there was no generally accepted definition that could be applied.

The goal of the rule is to provide plan sponsors a clear regulatory structure for considering investments to be included in ERISA plans. The DOL states that plan fiduciaries are required “to select investments and investment courses of action based on pecuniary factors.” This would include any factor that would be expected to have a material effect on the risk or return of the investment.

The DOL seeks to ensure that the financial interests of plan participants are never sacrificed when making investment decisions for a plan. As a result, the rule suggests that fiduciaries shall not select investments that take on additional risk or cost based on non-pecuniary factors. To the extent that fiduciaries believe ESG factors are relevant to the financial analysis of an investment, they could still be taken into consideration.

The final rule also softened the proposed prohibition of using investments with ESG considerations as the plan’s Qualified Default Investment Alternative (QDIA). The rule now prohibits QDIA investments that include one or more non-pecuniary factors. The prohibition is still strong enough that a plan using ESG investments for the QDIA will want to closely review their option and possibly consider alternatives.

ESG investments that are not part of a QDIA may likely continue to be offered to plan participants. However, plan sponsors will want to ensure that these investments are selected and monitored with the same pecuniary factors used for other investments in the plan. To the extent a plan sponsor is currently using primarily non-pecuniary factors in offering ESG investments, they will need to change their evaluation process. For example, if a plan offers ESG based solely on participant requests, then those options would need to be monitored the same as other investments in the plan.

Finally, while the DOL’s rule was finalized, it is likely that the DOL’s view on this issue may change under a new administration. We encourage all clients that are using ESG funds or are interested in using ESG funds, to continue to monitor the DOL for any future guidance on this subject.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.

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