The Biden Labor Department will soon finalize a new rule on environmental, social, and corporate governance (ESG) investments, and one big question remains: When will fiduciaries be permitted to take ESG values into account as they select investment options for 401(k) plans?

The Department of Labor, which has sent its final version of the rule to the White House for approval, has wrestled for more than 30 years with when and how fiduciaries can consider non-economic ESG factors. It issued guidance related to this question in each of the Clinton, Bush, Obama, and Trump administrations.

These administrations have generally agreed that ESG factors can be taken into account if their consideration boosts investment return or reduces investment risk. Where Republicans and Democrats have disagreed is around when ESG factors can be considered if they do not boost investment performance. Republicans have suggested the correct answer is never, unless there is a tie between prospective investment vehicles. Democrats have suggested that ESG should be considered as a factor whenever there is a tie. Both Democrats and Republicans have used the “tie-breaker” phrasing, but the parties have meant different things by it.


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