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Note: ERISA Fiduciary Duties and ESG Funds: Creating a Worthy Retirement Future


Environmental, Social, Governance (ESG) funds are investment vehicles that invest in companies that promote one or all three of these goals. ESG funds have been around since the early twentieth century. They gained prominence in the 1970s and have received increased attention since the late 1990s. Today, many investors are interested in ESG funds because of society’s increased focus on climate change, diversity and inclusion, companies’ compliance with regulations, and boards of directors’ composition. However, much controversy surrounds ESG funds as investment options for retirement accounts, which hold a significant portion of U.S. market assets.

Many retirement plan fiduciaries are deterred from providing ESG funds as investment options because of the strict fiduciary standards required by the Employee Retirement Income Security Act of 1974 (ERISA). Under ERISA section 404(a), fiduciaries must act solely in the interest of plan participants and for the exclusive purpose of providing benefits to participants and defraying reasonable administrative expenses (known as the “duty of loyalty”); they must select investments with care, skill, prudence, and diligence, which generally requires a prudent investment analysis (known as the “duty of prudence”); they must diversify investments to minimize risks of accordance with plan documents (known as the “duty to follow plan documents”). Opponents argue that ESG funds provide collateral benefits to third parties instead of financial benefits to plan participants, causing fiduciaries to breach the duty of loyalty. Additionally, opponents argue fiduciaries will breach the duty of prudence because ESG funds either underperform or do not consistently overperform the market. However, advocates argue that ESG funds have evolved from their original exclusionary strategy, and now utilize ESG factors to consider investment risks and returns and strengthen the traditional investment analysis.

This Note argues that Congress should amend the Financial Factors in Selecting Retirement Plan Investments Act to incorporate provisions from the Department of Labor’s proposed rule on ESG funds in retirement plans.