Reflecting a decades-old trend of varying interpretations, guidance, and rulemaking dependent largely upon which party is in control of the White House, the DOL issued a final rule today that effectively unwound the prior administration’s rules on ERISA plan fiduciaries’ use of ESG considerations in retirement investment selection and proxy voting.
The move follows the Department’s March 2021 announcement that it would not enforce two final rules published toward the end of the Trump administration that generally emphasized ERISA plan fiduciaries’ obligations to pursue plan participants’ economic and pecuniary interests in lieu of ESG factors (we reported on here) and its subsequent publication of a proposed rule in October 2021 that expressly permitted (if not promoted) consideration of ESG factors (we reported on here) in investment selection and proxy voting. We previously reported on the two 2020 Trump-era rules: “Financial Factors in Selecting Plan Investments” and “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights” here and here, respectively.
While the new rule expressly allows fiduciaries’ consideration of ESG factors in investment selection that they deem relevant to their risk-return analysis (which may include the economic effects of climate change and other ESG factors), they generally are not permitted to do so at the expense of plan participants’ and beneficiaries’ investment returns or assumption of additional investment risk. The new rule also permits fiduciaries’ consideration of ESG factors in the exercise of shareholder rights, including proxy voting, which is encouraged. Additional noteworthy discussion about how the final rule differs from the Trump-era rules and the DOL’s October 2021 proposal is included in the DOL’s Fact Sheet.
The new rule will be effective 60 days after publication in the Federal Register, subject to a one-year transition period for certain proxy voting provisions to allow fiduciaries and investment managers additional time to review any proxy voting policies and guidelines and make any necessary changes.
See the DOL’s news release; these articles: “US Department of Labor removes ESG investment barrier with final rule” (Responsible Investor), “DOL finalizes rule permitting ESG considerations in retirement plans” (Pensions & Investments), “DOL's Releases Final ESG Rule for ERISA Plans” (Chief Investment Officer), “ESG 401(k) Investing Rule to Make Good on Biden Climate Vow” (Bloomberg Law), “DOL's final ESG rule gives latitude to retirement plans” (Investment News), and “Labor Department Clears Path for 401(k) Plans to Offer ESG Funds” (WSJ); and additional resources on our Financial Advisors page.