ESG Investing Remains a Political Hot Potato

The Department of Labor (DOL) introduced a final regulation at the end of 2022 allowing fiduciaries to take Environmental, Social and Governance (ESG) factors into consideration when making investment decisions. This rule replaced a previous rule initiated during the Trump Administration that would have only allowed ‘pecuniary’ factors to be considered when making investment decisions. The use of ESG factors in making investment decisions continues to be a political hot potato. This new DOL rule is being challenged on several fronts.

On the legislative front, the House of Representatives passed, largely on party lines, a resolution to overturn the rule. The Senate picked up two democratic votes in passing the resolution as well. President Biden has indicated his intent to veto the resolution. On the legal front, two lawsuits have been filed challenging the rule. These suits claim the rule is outside of the DOL’s authority and that the rule violates ERISA.

What is a plan fiduciary to do as it relates to ESG investing? Many plans already offer ESG-focused investments in their plan and can continue to do so even if the DOL rule is withdrawn. For plan fiduciaries offering or considering offering ESG-focused investments, it is important that they follow the same prudent process for selection and monitoring of these funds as they would for any other investment offered in the plan. However, as this debate continues, two areas a fiduciary may want to avoid are (1) implementing a lineup that is 100% ESG-focused and (2) using ESG-focused investments as the qualified default investment option. There is no rule against a 100% ESG lineup or an ESG QDIA, but those plan designs could be challenged if the pendulum swings the other way.

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. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

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