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EB Flash: DOL Finalizes ESG Investment Rules

Employee Benefits Alert

The Department of Labor (DOL) today released the text of its highly anticipated final regulation allowing plan fiduciaries to consider climate change and other environmental, social and governance (ESG) factors when selecting retirement investments and exercising certain shareholder rights, such as proxy voting.

"The rule announced today will make workers' retirement savings and pensions more resilient by removing needless barriers, and ending the chilling effect created by the prior administration on considering environmental, social and governance factors in investments," Assistant Secretary for Employee Benefits Security Lisa M. Gomez said in a press release. "Climate change and other environmental, social and governance factors can be useful for plan investors as they make decisions about how to best grow and protect the retirement savings of America's workers."

Today's action amends rules issued by the Trump administration, which DOL concluded unnecessarily restrained plan fiduciaries' ability to weigh ESG factors when choosing investments, even when those factors would benefit plan participants financially. As explained by DOL, today's final rulemaking:

  • Removes the requirement that a fiduciary's evaluation of an investment or investment course of action must be based "only on pecuniary factors," in light of concerns that the "pecuniary only" terminology causes confusion and a chilling effect to financially beneficial choices;
  • Makes it clear that a fiduciary's determination with respect to an investment or investment course of action must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis, and that such factors may include the economic effects of climate change and other environmental, social, or governance factors on the particular investment or investment course of action;
  • Rescinds the current "tiebreaker" test, such that, in certain circumstances, fiduciaries may now use collateral benefits as tiebreakers when choosing between investments that have comparable risks and rates of return. The final rule also removes the current regulation's special regulatory documentation requirements on the use of such factors in favor of ERISA's generally applicable statutory duty to prudently document plan affairs;
  • Adds a new provision clarifying that fiduciaries do not violate their duty of loyalty solely because they take participants' preferences into account when constructing a menu of prudent investment options for participant-directed individual account plans. DOL concluded that accommodating participants' preferences could lead to greater participation and higher deferral rates, which could then lead to greater retirement security and therefore further the purposes of the plan;
  • Eliminates the statement that "the fiduciary duty to manage shareholder rights appurtenant to shares of stock does not require the voting of every proxy or the exercise of every shareholder right";
  • Removes special rules for selecting qualified default investment alternatives (QDIAs), such that, under the final rule, the same standards apply to QDIAs as to investments generally; 
  • Removes two "safe harbor" examples for proxy voting policies that (1) allowed fiduciaries to limit voting resources to proposals that the fiduciary had prudently determined were substantially related to the issuer's business activities or were expected to have a material effect on the value of the investment, and (2) allowed fiduciaries to refrain from voting on proposals when the plan's holding in a single issuer relative to the plan's total investment assets was below a quantitative threshold;
  • Eliminates specific monitoring obligations with respect to the use of investment managers or proxy voting firms; and
  • Eliminates a specific requirement on maintaining records on proxy voting activities and other exercises of shareholder rights. 

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