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Final, ESG-less Rule on Financial Factors in Investing Published

Regulatory Compliance

The Department of Labor’s final rule preventing plan fiduciaries from selecting investments based on non-pecuniary considerations and requiring them to base investment decisions on financial factors was published in the Nov. 13 Federal Register

The final rule—which moved away from the proposed rule’s focus on environmental, social and governance (ESG) factors in investing—is thus effective on Jan. 12, 2021, 60 days following publication.

In finalizing the regulation, the DOL notes that the purpose of the action is to set forth a regulatory structure to assist ERISA fiduciaries in navigating these ESG investment trends and to “separate the legitimate use of risk-return factors from inappropriate investments that sacrifice investment return, increase costs, or assume additional investment risk to promote non-pecuniary benefits or objectives.”

But in asserting the lack of a precise or generally accepted definition of ESG, the final rule removed references to ESG and refers to “pecuniary factors and non-pecuniary factors” in defining the relevant fiduciary investment duties.

The final rule also includes a provision giving plans until April 30, 2022, to make any changes that are necessary to comply with the requirements related to the selection of qualified default investment alternatives (QDIAs). The DOL modified the provision in the proposal on QDIAs to prohibit plans from adding or retaining any investment fund, product, or model portfolio as a QDIA or as a component of such a default investment alternative, if its objectives, goals or principal investment strategies include the use of non-pecuniary factors.

The DOL first proposed the rule on June 23, stating that it was “concerned that some investment products may be marketed to ERISA fiduciaries on the basis of purported benefits and goals unrelated to financial performance” and that “ESG investing raises heightened concerns under ERISA.” The proposal received more than more than 1,100 written comments and more than 7,600 form letter responses.  

While the final rule has now been published and has an effective date, there is a chance it could be reviewed under the Congressional Review Act or possibly revisited in some form by a Joe Biden administration. Click here for more on the CRA. 

The Federal Register text of the final rule is available here, and a DOL fact sheet explaining the rule is here. Also see our previous post on the rule and the results of last week’s NAPA Net reader poll on the impact of the final rule. 


All comments
Gary Duell
2 years 10 months ago
In a rule obviously pushed through by non-ESG companies and funds, the assumption is that current performance measures are both accurate and relevant. Quarterly profits still reign as #1 and is the least relevant of all measures.