ESG & Retirement Funds: Considering Non-Pecuniary Factors by ERISA Plan Fiduciaries


In late 2022, the Department of Labor (“DOL”) lifted the prohibition against the consideration of non-pecuniary factors by retirement plan fiduciaries when making investment and proxy voting decisions for certain pensions and employee contribution plans under the Employee Retirement Income Security Act (“ERISA”).[1] Shortly thereafter, the 2022 rule gave rise to litigation that was led by 25 Republican attorney generals.[2] In announcing the lawsuit, Texas Attorney General Ken Paxton stated that the new rule “prioritizes woke Environmental, Social and Governance investing over protecting the retirement savings of approximately two-thirds of the U.S. population.”[3] Plaintiffs fear the rule will cause ERISA plan fiduciaries to prioritize collateral benefits over the maximization of shareholder value.[4] However, a recent bipartisan congressional effort may cut the new rule’s life short.

ERISA covers almost 750,000 retirement plans, impacting more than 150 million workers, who collectively hold some $12 trillion in assets.[5] The statute requires plan fiduciaries act “solely in the interest of” and “for the exclusive purpose of . . . providing benefits to participants[,]”[6] and mandates plan assets are to be “held [in trust]for the exclusive purposes of providing benefits to participants.”[7] In 2014, the Supreme Court held in Fifth Third Bancorp v. Dudenhoeffer that ERISA’s “benefits” language “must be understood to refer to . . . financial benefits (such as retirement income) . . . [and]does not cover nonpecuniary benefits.”[8] The statute’s plain text lacks any duties or benefits owed to outside stakeholders.[9] Fiduciaries managing plans under ERISA hold “the highest known [duty]to the law,” derived from the common law of trusts, which—under ERISA—requires the fiduciary act solely for the financial benefit of participants.[10] A fiduciary’s duty is to maximize financial return for beneficiaries.[11] In maximizing the beneficiary’s financial return, trustees are prohibited from using their position to advance their own personal or political views.[12]

Development of the “Pecuniary Benefits” Language

The DOL’s 2008 interpretation of ERISA—that the statute’s plain text does not permit fiduciaries to consider non-economic factors when formulating investment plans—foreshadowed much of the Supreme Court’s 2014 Dudenhoeffer decision.[13] Fiduciaries were also instructed not to weigh nonpecuniary factors when casting proxy votes on behalf of plan beneficiaries.[14] The DOL argued that the exercise of fiduciary authority in furtherance of a political, personal, or social agenda through the proxy or investment process would violate the statute’s “exclusive purpose” rule.[15]Fiduciaries began questioning whether they may consider economically relevant environmental, social, and governance factors, and in 2015 the DOL seemingly backtracked on its 2008 guidance when it encouraged fiduciaries to consider EIT and ESG factors when appropriate.[16] EIT and ESG investing, as used in the 2015 bulletin, refers broadly to investments targets at collateral benefits apart from the beneficiary’s financial return.[17] The DOL further argued in 2016 that the 2008 bulletin’s language discouraged fiduciaries from participating in non-economic, yet beneficial, proxy votes.[18]

The DOL’s Codification of ESG Investing in ERISA Plans

Echoing its 2008 guidance, the DOL’s 2020 final rule explicitly restricted ERISA plan fiduciaries by allowing them to consider only pecuniary factors.[19] Pecuniary factors include any information that may “have a material effect on the risk or return of an investment.”[20] The DOL feared fiduciaries would invest to achieve collateral benefits unrelated to financial return, such as ESG initiatives.[21] While individuals may be driven by more than just financial return, the single interest shared by all investors and plan participants is maximizing their return.[22] Fiduciaries arguably have a duty to protect participants from “concerned citizens” with interests other than financial return.[23]Under the 2020 rule, fiduciaries may only consider non-pecuniary factors as a ‘tie-breaker’ when two investment opportunities are indistinguishable.[24] Fiduciaries were required to document why pecuniary factors were insufficient, how the two investments compare, and enumerate how the non-pecuniary considerations are consistent with ERISA’s purpose to maximize the financial return.[25]

The 2022 rule carries two effects. First, the removal of any reference to “pecuniary” or “non-pecuniary” terminology in the new rule permits fiduciaries to take non-pecuniary factors into consideration when making investment decisions, including “the economic effects of climate change and other [ESG] factors” if the fiduciary reasonably believes these factors are “relevant to a [fund’s] risk and return analysis.”[26] According to the DOL, the prior language left fiduciaries unsure whether they may consider ESG factors relevant to a plan’s risk and return analysis.[27] As commenters to the 2020 rule point out, permitting ESG and pecuniary consideration is equally ambiguous as “[t]here is no consensus about what constitutes a genuine ‘ESG’ investment.”[28] Additionally, rather than requiring fiduciaries prove two alternative investments are economically indistinguishable before considering non-pecuniary factors as a tie-breaker, the new rule sets a lower burden by allowing the fiduciary to consider non-pecuniary factors after concluding that the two investments “equally serve” the plan’s financial interests.[29] The effectiveness of ESG investing is unclear. Studies have returned mixed results ranging from negative to positive correlations between sustainability or ESG initiatives and financial return.[30] One study found that over a 10-year period, investments in existing ESG portfolios yielded a 43.9% smaller return compared to an investment in the S&P 500.[31]

Second, the 2022 rule removes the availability of two safe harbors for fiduciaries who wanted to abstain from proxy voting.[32] One permitted the fiduciary to limit its proxy voting to “proposals that… are expected to have a material effect” on the investment’s value, and the other permitted refraining if the investment represents a small portion of the plan’s portfolio.[33] The DOL argued these policies encouraged abstention by default, which they claim fails to capitalize on the value associated with actively monitoring shareholder rights.[34] One study examining the effect of shareholder activism proxy voting found “a negative relationship between share value and public pension funds’ social-issue shareholder-proposal activism.”[35]

Nationwide Litigation Against the 2022 Rule

In Attorney General Paxton’s complaint against the 2022 rule, the plaintiffs have alleged that the rule permits fiduciaries to trade on factors irrelevant to financial performance, such as “exposure to the physical and transitional risks of climate change,” board composition, and a corporation’s “progress on workforce diversity, inclusion, and other drivers of employee hiring, promotion, and retention.”[36] Plaintiffs are also concerned with the removal of the requirement that competing investment opportunities be indistinguishable before considering non-pecuniary factors and that non-pecuniary factors taken into consideration no longer needs to be documented and justified.[37] Investments that “equally serve the financial interests of the plan” are viewed as a lower bar for incorporating ESG considerations into the investment strategy.[38] Furthermore, plaintiffs believe compelling fiduciaries to vote in proxies unrelated to the plan’s financial interests may encourage fiduciaries to take politically contentious positions at the risk of isolating participants who only seek a comfortable retirement.[39]

Critics also argue that a rule with such broad impact should not be done unilaterally by a regulatory agency.[40] Regulations with “vast economic and political significance” requires a clear delegation from Congress.[41] Fifty years ago Congress rejected three amendments during EIRSA’s original passage that would have explicitly permitted fiduciaries to invest plan funds in “social investments,” including investments for “low-income housing for senior[s].”[42] Congress “did not wish to ‘single out employee pension funds from other investment sources to bear a larger burden of riskier investments and low yields.’”[43]

A similar legal battle is underway over a proposal by the Securities and Exchange Commission. The proposal would require extensive climate change related disclosures under the guise of protecting shareholders’ interest in knowing a company’s sustainability. Critics argue those disclosures are of no concern to the shared interests among profit-seeking investors.[44] In addition, critics argue that the proposed rule is a pretext for a broader political agenda around climate change, which may run afoul of the 1st Amendment as a form of compelled speech.[45]

Congressional Action

Congress recently passed a joint resolution to nullifying the 2022 rule, although President Biden promised to veto the resolution.[46] The Congressional Review Act lets Congress disapprove a final rule that has been in effect for less than 60 legislative days, and, if approved, would prohibit the agency from passing a substantially similar rule for the near future.

[1] Kathryn Mayer, States Sue to Block DOL’s ESG Rule, SHRM (Jan. 31, 2023),,factors%20when%20choosing%20retirement%20investments.

[2] See generally Complaint, Utah v. Walsh, 23-cv-00016 (N.D. Tex. Jan. 26, 2023).

[3] See Mayer, supra note 1.

[4] See Complaint, supra note 2, at 7-8.

[5] See Mayer, supra note 1.

[6] 29 U.S.C. § 1104(a)(1).

[7] 29 U.S.C. § 1103(c)(1).

[8] Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 421 (2014).

[9] § 1104(a)(1); see also § 1103(c)(1).

[10] See Tibble v. Edison Int’l, 843 F.3d 1187, 1197 (9th Cir. 2016).

[11] The Restatement (Third) of Trust § 90 cmt. f.1.

[12] Id. at cmt. c.

[13] Interpretive Bulletin Relating to Investing in Economically Targeted Investments, 73 Fed. Reg. 61,734, 61,735 (Oct. 17, 2008).

[14] Interpretive Bulletin Relating to Exercise of Shareholder Rights, 73 Fed. Reg. 61731, 61732 (Oct. 17, 2008).

[15] Id. at 61,734.

[16] Interpretive Bulletin Relating to the Fiduciary Standard Under ERISA in Considering Economically Targeted Investments, 80 Fed. Reg. 65135, 65136 (Oct. 26, 2015) (“Fiduciaries need not treat commercially reasonable investments as inherently suspect… merely because they take into consideration [ESG] factors.”).

[17] Id. at 65,135.

[18] Interpretive Bulletin Relating to the Exercise of Shareholder Rights and Written Statements of Investment Policy, Including Proxy Voting Policies or Guidelines, 81 Fed. Reg. 95,879, 95,882 (Dec. 29, 2016).

[19] Financial Factors in Selecting Plan Investments, 85 Fed. Reg. 72,846, 72,854 (Nov. 13, 2020) (formerly codified in 29 C.F.R. 2509 and 29 C.F.R. 2550).

[20] Jospeh Lifsics, The Department of Labor’s ESG-less Final ESG Rule, Harv. L. Sch. F. on Corp. Governance (Nov. 24, 2020),

[21] Supra note 19, at 72,848.

[22] Sean J. Griffith, What’s “Controversial” About ESG? A Theory of Compelled Commercial Speech under the First Amendment, Fordham L. Legal Stud. Rsch. Paper No. 4118755, 6 (2022), (“Concern for the financial return, because is the one interest that investors can be presumed to share, operates as a form of agenda control.”).

[23] Id. at 50.

[24] Supra note 19, at 72,860.

[25] Id. at 72,884 (“[A] fiduciary may not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan to other objectives.”).

[26] Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, 87 Fed. Reg. 73,822 73,837 (Dec. 1, 2022) (to be codified in 29 C.F.R. 2550) (The DOL argues that explicitly prohibiting nonpecuniary considerations caused a “great deal of confusion, and it accounts for a substantial amount of the chilling effect” against ESG investing); Id. at 73,834.

[27] Id.

[28] Supra note 19, at 72,847.

[29] Supra note 26, at 73,827 (“In such cases, the fiduciary is not prohibited from selecting the investment, or investment course of action, based on collateral benefits other than investment returns.”).

[30] See Griffith, supra note 22, at 59 (suggesting that “the presence of high-performing tech stocks in ESG portfolios” during the recent tech bull market could have heavily influenced the data).

[31] Wayne Winegarden, Environmental, Social, and Governance (ESG) Investing: An Evaluation of the Evidence, Pacific Research Institute 5 (2019),

[32] Supra note 26, at 73,827.

[33] Id. (explaining that when the “plan’s holding in a single issuer relative to the plan’s total investment assets is below a quantitative threshold[,]” fiduciaries were not obligated to vote in proxies).

[34] Id. at 73,828.

[35] James R. Copland et al., Proxy Advisory Firms: Empirical Evidence and the Case for Reform 8 (2018),

[36] See Complaint, supra note 2, at 21-22.

[37] Id. at 22 (describing the new standard as “a lower threshold that allows a fiduciary increased flexibility to choose an investment based on a collateral benefit”).

[38] Id.

[39] Id. at 23.

[40] Id. at 28-30 (arguing the DOL’s 2022 rule implicates the Major Questions Doctrine).

[41] Nat’l Fed’n of Indep. Bus. v. Dep’t of Labor, Occupational Safety & Health Admin., 142 S. Ct. 661, 665 (2022); see also Complaint, supra note 33, at 29 (arguing that “29 U.S.C. § 1135’s list of specific exercises of authority (e.g., ‘defin[ing]accounting, technical, and trade terms’) shows that Congress did not intend to hide an elephant in this mousehole”).

[42] James D. Hutchinson & Charles G. Cole, Legal Standards Governing Investment of Pension Assets for Social and Political Goals, 124 U. Pa. L. Rev. 1340, 1365–67 (1980).

[43] Id.

[44] See Griffith, supra note 19, at 49-50.

[45] Id. at 7, 32 (arguing that ESG disclosure requirements compel “controversial” speech, and such regulations may be subject to intermediate scrutiny, if found to be pretextual).

[46] Brian Croce, Senate Sends Resolution Nixing DOL ESG Rule to Biden’s Desk; Veto Expected, Pensions & Invs. (Mar. 1, 2023, 5:08 PM)


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Fordham Journal of Corporate & Financial Law