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ESG Investing After the DOL Rule on “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights”

ESG Investing After the DOL Rule on “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights”
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Posted by Max M. Schanzenbach (Northwestern Pritzker School of Law), and Robert H. Sitkoff (Harvard Law School), on Thursday, February 2, 2023

Editor’s Note:

Robert H. Sitkoff is Austin Wakeman Scott Professor of Law and John L. Gray Professor of Law at Harvard Law School, and Max M. Schanzenbach is Seigle Family Professor of Law at Northwestern Pritzker School of Law. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver D. Hart and Luigi Zingales; and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee (discussed on the Forum here) by Robert H. Sitkoff and Max M. Schanzenbach.

Summary of the Rule

In late 2022, the Department of Labor under President Biden promulgated a new rule on “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” superseding the Department’s 2020 rule promulgated under President Trump. Numerous media reports suggested that the 2022 Biden Rule permits or even encourages ESG investing, in contrast to the 2020 Trump Rule, which was reported to be hostile to ESG investing. These reports are wrong. This summary aims clarify the effect of the Biden Rule and what has changed from the Trump Rule.

In brief, the 2022 Biden Rule largely reaffirms the Department of Labor’s longstanding position, compelled by binding Supreme Court precedent, that an ERISA fiduciary may use ESG investing to improve risk-adjusted returns but not to obtain collateral benefits. Subject to a few nuanced changes of limited practical import, the Biden Rule is largely consistent with the 2020 Trump Rule and earlier regulatory guidance.

See also

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This content was originally published here.