ARA, Ceres throw support behind DOL ESG rule for 401(k)s

The two nonprofits are urging the Court of Appeals to uphold a lower court decision supporting a 'middle-of-the-road' approach for fiduciaries.

The American Retirement Association and Ceres are taking a legal stand in favor of a DOL rule that allows retirement plan fiduciaries, including those overseeing 401(k) plans, to consider ESG factors in their investment decisions.

In a legal briefing filed at the 5th Circuit Court of Appeals, the two nonprofits called for the continued application of the Department of Labor’s rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.

Introduced in January 2023, the DOL rule guides fiduciaries in including ESG factors in their decision-making processes, aligning with a broader industry trend toward sustainable investing.

The rule met legal opposition in the Northern District of Texas, but that challenge was shot down with a decision in favor of the regulation. That ruling is now under review in the appellate court.

In a joint statement by Ceres and ARA, Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets, spoke out in support of the rule’s “neutral, middle-of-the-road approach” to considering ESG factors.

“Any attempt to limit the risk and return factors that retirement professionals can consider when making investment decisions puts the life savings of millions at risk,” Rothstein said, requesting that the appeals court upholds the lower court ruling.

Brian Graff, CEO of the American Retirement Association, also highlighted the rule’s adherence to the core principles of the Employee Retirement Income Security Act first enshrined over half a century ago.

“For 50 years ERISA has required plan fiduciaries to make investment decisions solely in the best interest of plan participants,” Graff said.

He argued that the DOL’s ESG rule strikes a balance between giving fiduciaries discretion on “which financial factors are relevant to investment decisions, while ensuring that the financial interests of plan participants always remain paramount.”

The rule enjoys clear public support based on comments submitted during the rulemaking process, Ceres said, pointing to a January 2022 analysis it did alongside US SIF and the Environmental Defense Fund.