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Regulatory scrutiny of ESG investment: Are plan sponsors in the crosshairs?

ESG and Sustainability|Financial, Executive and Professional Risks (FINEX)

By John M. Orr | August 19, 2020

We explore ESG risk from the perspective of assessing the impact of recent rulings and the potential to change ESG-themed investment behavior.

The popularity of socially conscientious investment practices known as “Environmental, Social, and Governance” investing, or “ESG,” is unmistakable. To some, ESG practices conform to admirable, even essential, investment objectives. Others warn that fiduciary obligations under ERISA require employee benefit plan sponsors and other fiduciaries to maintain focus on investment performance above all else, and not to prioritize broader social or political concerns in making investment option decisions.

Enter the U.S. Department of Labor (“DOL”).

On June 30, 2020, the DOL published a proposed rule that, as detailed below, would create limitations around inclusion of ESG-themed funds as investment options in defined contribution retirement plans. In the weeks leading up to the proposed rule, the Employee Benefits Security Administration (“EBSA”), the DOL division that enforces laws governing 401(k) plans, also began issuing letters to selected sponsors who include ESG funds among their investment options, requesting detailed information on how they selected the funds and the extent to which they monitor fund performance.

In a previous Willis Towers Watson Insights publication, “Misrepresentations in the Age of Sustainable Investing,”1 we considered downside risks and misrepresentation issues associated with ESG investing. Here, we evaluate ESG risk from a different perspective: assessing the impact of the DOL’s proposal and letter on plans and plan fiduciaries, which has the potential not just to change ESG-themed investment behavior, but also to heighten liability risk.

Proposed rule conveys unambiguous message: fund performance supersedes social goals

The proposed rule2 follows a 2018 DOL Field Assistance Bulletin that admonished retirement plan fiduciaries not to give undue influence on broader social or political objectives of investments when selecting funds for benefit plan menus. Specifically, the proposal provides that ERISA plan fiduciaries shall not sacrifice investment returns, assume added investment risk, or pay higher fees to promote goals unrelated to the financial interests of plan participants and beneficiaries.3

In an editorial penned at the time the DOL announced the proposed rule, Labor Secretary Eugene Scalia reinforced the DOL’s emphasis on performance over non-pecuniary goals, stating the proposal “reminds plan providers that it is unlawful to sacrifice returns, or accept additional risk, through investments intended to promote a social or political end.”4

If enacted, the real-world impact of the proposal itself may be tenuous. Less than 3% of 401(k) plans include ESG-themed options in their menus.5 As for performance, more than half of ESG funds over the past decade reported returns superior to similar conventional funds.6 These results are consistent with fund performance outside the U.S. In a study of the long-term performance of 745 Europe-based ESG funds, Morningstar concluded, “[A] majority of sustainable funds have outperformed their traditional peers over multiple time horizons.”7

Letter to plan sponsors may signal pressure to modify ESG investment behavior

Perhaps a greater impact on plans and plan fiduciaries may come from the EBSA’s correspondence to plan sponsors. Shortly before announcement of the proposed rule, the EBSA began sending its correspondence, seeking numerous categories of information regarding ESG fund selection and performance monitoring practices, leading to speculation the DOL is gathering information to aid in the shaping of the rule.8

Viewed more holistically, the weight of regulatory scrutiny driven by the letter, in combination with the proposed rule, may lead fiduciaries to shy away from broader swaths of ESG options in plan menus. Even if fiduciaries see themselves as credibly complying with ERISA mandates by choosing proven, higher performing ESG funds, the possibility of deepening agency scrutiny could lead them to a more risk-averse position, gravitating toward more conventional, non-ESG-themed products. In some cases, however, they may defer these types of decisions until after the presidential election in November, as changes in administrations could give rise to changes in DOL policy toward ESG investing in employer plans.

Shoring up liability insurance protection

Concerns around increased liability exposures are likely to swirl in the wake of agency oversight into areas as complex as employer plan investing. Steps can be taken to mitigate risk, from securing legal guidance to engaging in heightened due diligence in the selection of funds and monitoring of fund performance. Where risk cannot be mitigated, the transfer of risk to insurance is a critical tool in the organization’s toolbox.

In “Misrepresentations in the Age of Sustainable Investing,” we discussed investment advisor and fund manager D&O and E&O coverage. For fiduciaries of employer plans, however, companies should consider the scope of their fiduciary liability coverage. Policy wording will vary, often significantly, from organization to organization, depending on an insurer’s risk appetite and the insured’s risk profile. As a general statement, however, fiduciary liability policies cover plan fiduciaries for alleged violations of obligations or duties imposed by employee benefit laws, including ERISA. The term “insureds” will often be defined to include plan fiduciaries themselves, the plan, and the sponsor organization. Coverage grants may provide defense and indemnity protection against, not just private party civil proceedings, but also formal regulatory proceedings and, in some cases, fact-finding investigations.

Common policy exclusions include those for claims that arise from deliberate criminal or fraudulent acts, or the willful violation of laws, including employee benefit laws such as ERISA, as triggered by a final adjudication of such conduct. Additional exclusions that pertain to environmental and social issues may be implicated if broadly worded. They include exclusions for Pollution, Bodily Injury and Property Damage, and Employment Practices Liability. We note the exclusions may appear in Fiduciary policies because coverage for these exposures may more appropriately fall to other coverage lines.

We also note that coverage is not likely to be afforded under the company’s D&O policy to directors or officers who may serve as plan fiduciaries, as D&O policies customarily contain exclusions for claims alleging ERISA or other employee benefit law violations.


The emergence of ESG investment options in employee benefit plans has provided investors with a platform to align their investment strategies with their values. And why not? Many investment alternatives that promote broader worldview goals also yield superior returns than comparable conventional funds. Still, plan sponsors and fiduciaries beware: although performance and social ideals are not necessarily conflicting values, regulators caution that a fiduciary’s duty requires weighing performance above all else in selecting investment alternatives.

We urge organizations to monitor these developing agency activities closely. Confer with counsel on their fiduciary obligations to plan participants, and work with their insurance broker to better understand the scope of insurance protection around their exposures. Finally, seize on opportunities, where possible, to negotiate policy enhancements to ensure coverage is as broadly afforded as possible in what has become a challenging marketplace.


1 Anthony Rapa, “Misrepresentations in the Age of Sustainable Investing,” Willis Towers Watson Insights,, January 23, 2020

2 Proposed Rule,, published June 30, 2020

3 Dipa N. Sudra, Jeff Belfiglio, and Richard Birmingham, “It's All About the Money! USDOL Proposed Regulations Impose Burdens on Socially Responsible Investing for ERISA Plans,” Davis Wright Tremaine LLP, July 10, 2020, accessed at

4 Eugene Scalia, “Retirees’ Security Trumps Other Social Goals,” Wall Street Journal, June 23, 2020.

5 Ron Lieber, “How to get socially conscious funds into your 401(k),” The New York Times, January 12, 2020

6 Siobhan Riding, “Majority of ESG funds outperform wider market over 10 years: Study of sustainable funds counters claims that ESG investment comes at the expense of performance,” Financial Times, June 13, 2020

7 Morningstar Manager Research, “How Does European Sustainable Funds' Performance Measure Up?” June 2020, accessed at

8 Mark Schoeff Jr., “Labor Department gathers information on how retirement plans use ESG funds,” InvestmentsNews LLC, June 17, 2020, accessed at


This Willis Towers Watson publication is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. If you would like additional information, please contact us. Some of the information in this publication may be compiled by third party sources, whilst we consider these to be reliable, we do not guarantee and are not responsible for the accuracy of such. The views expressed herein are not necessarily those of Willis Towers Watson. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates, for example: Willis Towers Watson Northeast, Inc. in the United States, Willis Canada Inc., in Canada.


D&O Liability Coverage Leader, FINEX

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