ERISA attorneys at Drinker Biddle have laid out what the fiduciary process for selecting environmental, social, and governance factors should look like.
The Department of Labor issued guidance aimed at making it easier for plan sponsors to offer ESG investments within retirement plans, but that doesn't mean the process is a walk in the park.
Although interest among plan participants is growing, the process of incorporating ESG factors while still remaining ERISA compliant can be a challenge—since original DOL guidance said that ESG couldn't be done at the expense of participants' best interests without constituting a breach of fiduciary duty.
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The latest guidance, however, provides for the incorporation of ESG factors as long as the investments being considered are comparable in risk and return profiles to others that do not consider ESG factors.
But that can still get pretty complicated. So, in a newsletter, the law firm provided some guidance on how plan fiduciaries might proceed when considering the incorporation of ESG factors in choosing investments.
The fact that the DOL has come out and said that it "does not believe ERISA prohibits a fiduciary" from considering ESG factors in weighing investments means, said the firm, that "committees may consider these types of issues as primary factors in evaluating investment alternatives, where they are expected to affect an investment's risk/return profile."
In addition, ESG factors can serve as tiebreakers when investment committees are considering "otherwise-equivalent alternatives." The DOL has retracted language that "unduly discouraged fiduciaries" from taking ESG factors into account, and said that the fiduciary standards for evaluating ETIs [economically targeted investments—another term for socially responsible investments] are no different than those for other investments.
Committees should remember, the newsletter said, to consider all the factors they would consider for any other investment—expense ratio, past performance, etc.—and document their decision process, then retain all materials that contributed to their decision.
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