In the preamble to the proposed rule, the DOL gives the examples of "a company's improper disposal of hazardous waste" or "dysfunctional corporate governance."

The proposed rule also seeks to codify what has commonly been referred to as the "tie-breaker" or "all things being equal" test: plan fiduciaries are allowed to consider non-pecuniary factors in selecting between "economically indistinguishable" investments (i.e., the non-pecuniary factors may be the tie-breaker).

The DOL specifically requests comments on this portion of the proposed rule, while opining that "the Department expects that true ties rarely, if ever, occur."

If the tie-breaker test is used to select an investment based on a non-pecuniary factor (such as environmental, social or corporate governance considerations), then the proposed rule imposes additional documentation requirements on ERISA plan fiduciaries.

Specifically, plan fiduciaries will be required to document why the investments were determined to be indistinguishable and why the selected investment was chosen.

The proposed rule also imposes additional requirements on defined contribution plans. Plan fiduciaries may offer ESG investments as menu options in self-directed individual account plans only if those ESG investments are selected based on objective risk-return criteria.

And even then, the plan fiduciaries must meet additional documentation requirements and cannot include the ESG investment as part of the plan's qualified default investment alternative.

Overall, the DOL's proposed rule suggests that ESG investing will remain scrutinized by the department and indicates the department's skepticism of the appropriateness of such investments in ERISA plans.

The additional documentation requirements may dissuade plan fiduciaries from seeking to include ESG investments despite growing pressure from plan participants to include such options.

Further, a failure to meet the documentation requirements may expose plan fiduciaries to liability and litigation risks. For all of these reasons, while ESG investing is soaring in popularity, there are significant hurdles for that popularity to carry over to ERISA plans.

Emily Hootkins is an attorney in Alston & Bird's Compensation, Benefits & ERISA Litigation group, where she provides counsel on regulatory compliance issues, dispute resolution, and litigation avoidance strategies.