The U.S. Department of Labor has recently issued a proposal for meeting fiduciary duties when evaluating retirement plan investments having environmental, social and governance (ESG) factors.
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 ESG investment. Such investments need not be avoided, however, 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.
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. Rather, 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. Once any ESG investment is chosen for a retirement plan, its risk and return factors must continually be monitored, just like any other investment.
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