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On June 23, 2020, the US Department of Labor proposed regulations to prohibit private industry pension plans, governed under the Employee Retirement Income Security Act (ERISA), from investing in ESG investment vehicles if doing so would prioritize non-financial objectives over purely financial ones (i.e., increasing returns for plan beneficiaries).
ESG investment vehicles are typically funds incorporating environmental, societal and governance factor considerations into their investment process. To illustrate the effect of the Department’s proposed regulations, consider the following: if the manager of an ERISA pension plan chose to invest in an ESG fund, and the fund were explicitly inclined to forego lucrative investment opportunities involving fossil fuels when such investments did not align with the fund’s environment-oriented objectives, the plan manager could be found in violation of the law.
ESG investing has become a hot commodity in recent years. New Canadian ESG investment assets total C$740 million so far in 2020, more than tripling 2018’s high-water mark of C$200 million, and far outshining last year’s C$142 million. In the US, 2019’s new ESG investment assets totalled, in US dollars, a record $20.6 billion, almost quadrupling 2018’s then-record $5.5 billion.
To prevent greenwashing and provide investors with ESG guidance, ESG ratings agencies rate asset managers and financial institutions on the extent to which they fulfil ESG investment objectives.
The Department’s proposal is not surprising given the environmentally unfriendly attitude of the Trump administration, as well as general American legal perspectives of fiduciary duty (discussed in my recent post on benefit companies), which generally frown upon fiduciaries weighing non-economic concerns in their decision-making.
Under ERISA, in addition to government enforcement, applicable pension fund participants and beneficiaries have the right to sue fiduciaries for violating their duties under the law. Accordingly, the new regulations, if adopted, would likely increase the potential for lawsuits alleging breach of fiduciary duty on the part of ERISA pension plan managers choosing to invest in ESG vehicles – whether such investments were financially sound or not. The effect of the rules may thus be to scare ERISA pension plan managers away from ESG investing.
As noted, the new rules were only recently proposed; they will now go through the notice and comment process before implementation.
This blog post, and all blog posts published by or in relation to Green Economy Law Professional Corporation, are for educational purposes only and should not be construed as legal or financial advice. To obtain legal or financial advice, please consult a licensed legal professional or financial advisor, as applicable.