As ESG investing continues to accelerate, the Department of Labor (“DOL”) has proposed for public comment rules that would further burden the ability of fiduciaries of private-sector retirement plans to select investments based on ESG factors and would bar 401(k) plans from using a fund with any ESG mandate as the default investment alternative for non-electing participants. The proposal asserts that “ESG investing raises heightened concerns under ERISA,” and, in contrast to the broader investor community’s recognition that ESG is about value and performance, and despite growing evidence that the investment returns of ESG funds can outperform those of non-ESG funds, the proposal reflects the DOL’s continued concern that ESG investment might “subordinate return or increase risk for the purpose of non-pecuniary objectives.” In terms of defining what would be an ESG-themed fund or mandate triggering heightened scrutiny and procedural requirements, the proposed rule casts the net widely to reach those featuring “one or more environmental, social, corporate governance, or similarly oriented assessments or judgments in their investment mandates, or that include these parameters in the fund name.” Such assessments and judgments have, of course, become common and mainstream, with investors, companies and fiduciaries of all kinds bringing their business determinations to bear.

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