Joseph Lifsics is an associate at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Mr. Lifsics and Lennine Occhino. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here).
On October 30, 2020, the U.S. Department of Labor (“DOL”) released its final regulation (“Final Rule”) relating to a fiduciary’s consideration of environmental, social and governance (“ESG”) factors when making investment decisions for plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). In response to the proposed rule (the “Proposal”), the DOL received several thousand comments, the vast majority of which opposed the new rule. Many plan sponsors and investment professionals voiced objection to the Proposal’s antipathy towards the consideration of ESG factors. In the Final Rule, the DOL generally softened its stance toward the consideration of economic ESG factors, but retained its opposition to the consideration of non-pecuniary ESG or other non-pecuniary factors.
Comparing Investment Options
The Proposal modified the longstanding “investment duties” ERISA regulations describing a fiduciary’s duties of prudence and loyalty under Section 404 of ERISA by adding that the fiduciary must specifically compare how the relevant investment compares to other similar investments. Some comments to the Proposal wondered whether fiduciaries would be required to “scour the market” and analyze each comparable investment option. Other comments objected on the basis that some investment opportunities may be so unique or time-sensitive that comparing the opportunity against alternatives would not be possible or practical. In response, the Final Rule requires that a fiduciary must compare an investment opportunity with the opportunity for gain associated with reasonably available investment alternatives with similar risks.