ERISA generally requires retirement plan fiduciaries to invest prudently, diversify assets to minimize the risk of large losses, and act solely in the interest of plan participants. These duties have been interpreted as prioritizing the pecuniary interests of plan participants and their beneficiaries. Because investment returns are not to be sacrificed or greater risks assumed to promote collateral social policies, many plan fiduciaries have shied away from environmental, social and governance (ESG) investments.
However, such investments do not need to be avoided if the ERISA fiduciary gives appropriate consideration to the facts and circumstances relevant to a particular investment or course of action, including the role of the investment in the portfolio, and acts accordingly.
In fact, a recent proposal by the U.S. Department of Labor seeks to modify certain prior regulatory guidance that had chilled ESG investments. Appropriate considerations include the risk of loss, opportunity for gain or other return as compared to similar investment alternatives. Diversification, liquidity, projected return are all factors for considering investments in a retirement plan, but investment returns are not to be sacrificed or greater risks assumed to promote collateral social policies. Thus, ESG factors may serve as a “tie breaker” when considering an otherwise appropriate investment. In addition, “appropriate” time horizons must be considered. All things being equal, an ESG option may be chosen as an investment option as long as it does not present greater risks or reduced returns.
As case law has held, however, fiduciaries must continue to monitor the prudence of retaining any investment in a retirement plan. A collection of investment options that includes prudent choices does not erase the breach of fiduciary duty of also offering imprudent investment options, so the risk and returns must continually be monitored. As long as these precautions are taken there is no need to automatically rule out ESG investments for your ERISA portfolio.
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