ESG factors remain relevant to ERISA fiduciaries after Biden vetoes resolution targeting ERISA investing rule

On March 20, 2023, President Biden vetoed Congress's resolution to overturn a Department of Labor (DOL) final rule regarding fiduciary responsibilities in selecting retirement plan investments under the Employee Retirement Income Security Act of 1974, as amended (ERISA).

The veto protected the Biden Administration's final rule, published December 1, 2022, and titled "Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights" (the 2022 rule).

The 2022 rule permits plan fiduciaries to consider relevant economic effects of climate change and other environmental, social and governance (ESG) factors when selecting retirement plan investments.

This 2022 rule replaced a 2020 rule issued by the Trump administration, which was interpreted to restrain ERISA fiduciaries' ability to weigh ESG factors when choosing retirement plan investments. The 2020 rule provided that a fiduciary should base investment decisions on "pecuniary factors" and should "not sacrifice investment return or take on additional investment risk to promote non-pecuniary benefits or goals." 29 C.F.R. § 2550.404a-1(c)(1) (2020). In the preamble to the 2020 rule the DOL stated that confusion regarding ESG investing "stems from the fact that, from its beginning, the ESG investing movement has had multiple goals, both pecuniary and non-pecuniary." Financial Factors in Selecting Plan Investments, 85 Fed. Reg. 72846, 72847-48 (Nov. 13, 2020).

The Biden administration's 2022 rule removes the terms "pecuniary" and "non-pecuniary" from the 2020 rule's language, and requires a fiduciary to base investment decisions and courses of action on "factors that the fiduciary reasonably determines are relevant to a risk and return analysis. . . ." 29 C.F.R. § 2550.404a-1(b)(4) (2022). The 2022 rule states that the economic effects of ESG factors may be considered as part of that risk and return analysis. 

Most commentators speculate that Congress will not override President Biden's veto, given that the resolution passed Congress by a narrow margin. However, the future of the 2022 rule is still uncertain. On January 26, 2023, attorneys general from 25 states filed a lawsuit in the Northern District of Texas challenging the 2022 rule. This litigation is ongoing.

The political and legal battles regarding the extent to which plan fiduciaries may consider ESG factors are part of a broader discussion on ESG. Those who support increased ESG disclosure and analysis claim that ESG factors are relevant to stakeholders because they relate to reputational, legal, and financial risk. Others have taken the position that ESG factors are non-pecuniary, vague, or anti-competitive. Some commentators have framed this discussion as a battle between the "ESG movement" and the "anti-ESG movement," although those titles oversimplify the issues and ignore a multitude of nuanced perspectives. Regardless of the motivations on any side of the ESG debate, laws and regulations related to ESG have legal ramifications for businesses, and the 2022 rule is no exception.