The previous DOL’s 2020 Rule attempted to clarify various guidance that the DOL has provided to fiduciaries going back almost 30 years. At the time, it was suggested that the 2020 Rule was needed given the increased use and prominence of ESG factors in making investment decisions. However, after receiving input during the rulemaking process, the DOL removed any mention of ESG in the 2020 final text of the Rule to depoliticize it. In turn, it required fiduciaries to only focus on “pecuniary” issues which were defined as those that have a “material effect on the risk and/or return of an investment based on appropriate investment time horizons” consistent with the plan.  

In 2021 President Biden issued executive orders for his Administration to look at climate-related and ESG issues. Responding to President Biden’s executive orders, the DOL proposed and finalized its 2022 Amendments to the 2020 Rule. The 2022 Amendments removed the terms “material” and “pecuniary” from the 2020 Rule and instead required that fiduciaries should focus on “relevant risk and return factors” that may include the economic effects of climate change and ESG. It also held that a fiduciary’s duty requires that they “not subordinate the interests of participants and beneficiaries (such as by sacrificing investment returns or taking on additional investment risk) to objectives unrelated” to the plan. 

Is there a difference or is this just all political? Unfortunately, the Congressional resolution and the President’s rationale for vetoing it just added to the misinformation about the actual 2020 Rule and 2022 Amendments. The Congressional resolution indicated that under the 2022 Amendments climate change and other ESG factors could be considered in making investment decisions and exercising shareholder rights, as if the resolution, on the contrary, would have prevented its use. However, under the 2020 Rule those factors could also be considered. And in vetoing the resolution, President Biden indicated that the resolution would “force retirement managers to ignore relevant risk factors” and “prevent retirement plan fiduciaries from taking into account factors, such as the physical risks of climate change and poor corporate governance.”

Much like the Congressional resolution, this is objectively false given that if the Congressional resolution had not been vetoed, the 2020 Rule would be reinstated which clearly allowed for the aforementioned factors to be considered. So, the politics continues, but what are the real differences between the 2020 Rule and the 2020 Amendments?