Long-awaited guidance from the U.S. Department of Labor arrived today in the form of a proposed rule that wouldremove barriers to plan fiduciaries’ ability to consider climate change and other environmental, social and governance (ESG) factors when they select investments and exercise shareholder rights.
The proposed rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” follows Executive Order 14030, signed by President Biden on May 20, 2021. A statement from the DOL said the order directs the federal government to implement policies to help safeguard the financial security of America’s families, businesses and workers from climate-related financial risk that may threaten the life savings and pensions of U.S. workers and families.
The Biden Administration’s announcement today effectively proposes to reverse the Trump-era rule on this issue and provides legal certainty to ERISA plans that choose to consider ESG factors in their investment decisions or offer ESG investment options to plan participants.
“We were quite concerned that the outcome of the Trump Administration’s rules was actually going to lead to less retirement security because fiduciaries would feel like they need to stay on the sidelines, and not incorporate these kind of factors into their decision-making”
EBSA’s Ali Khawar
“The proposed rule announced today will bolster the resilience of workers’ retirement savings and pensions by removing the artificial impediments—and chilling effect on environmental, social and governance investments—caused by the prior administration’s rules,” said Acting Assistant Secretary for the Employee Benefits Security Administration Ali Khawar. “A principal idea underlying the proposal is that climate change and other ESG factors can be financially material and when they are, considering them will inevitably lead to better long-term risk-adjusted returns, protecting the retirement savings of America’s workers.”
Khawar discussed the proposed rule in a Wednesday press briefing, where he emphasized that fiduciaries have to make good decisions and they have to be loyal to the plan.
“When you boil it down, they need to have a sole focus on what is going to lead to the financially best outcome for the workers who are tomorrow’s retirees. That central premise underpins all of this work.”
Khawar said today’s proposed rule is the culmination of a “fairly intense and long period” of engagement, outreach and thinking, which began fairly early in the administration.
“We were quite concerned that the outcome of the Trump Administration’s rules was actually going to lead to less retirement security because fiduciaries would feel like they need to stay on the sidelines, and not incorporate these kind of factors into their decision-making,” Khawar said. “Having that hand tied behind their back, we were concerned would ultimately lead to worse financial outcomes.”
In engaging with stakeholders including consumer advocates, investment managers, large financial institutions, labor unions and plan sponsor representatives, Khawar said EBSA heard some very consistent themes around the two rules that were issued during the Trump Administration: the “financial factors rule” and the proxy voting rule.
“Both had the same impact, which was a chilling effect, and it led to a real reluctance on the part of plan fiduciaries to take these kinds of factors into account when they were making investment decisions—even when they were doing things that may technically have been allowed by the final rule, or that would have been financially advantageous to participants and beneficiaries,” Khawar said. “So it was really troubling and that’s what led to our decision to issue that non-enforcement policy (back in March).”
Proxy voting
The proposal also would reverse a Trump-era rule that the Biden Administration says undermines the ability of fiduciaries to use proxy voting to advance the interests of their clients.
“The bias that the previous administration’s rules created was to really favor not voting and not taking action,” Khawar said. “These are assets that are owned by the 401k participants and beneficiaries, and the obligation that fiduciaries have in other contexts don’t stop when you’re talking about proxy voting.”
Back on Dec. 16, 2020, the Trump Administration’s DOL published a final rule on “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” which also adopted amendments to the Investment Duties regulation to address obligations of plan fiduciaries under ERISA when voting proxies and exercising other shareholder rights in connection with plan investments in shares of stock.
The rule was intended to protect the interests of participants and beneficiaries by:
• Confirming that proxy voting decisions and other exercises of shareholder rights must be solely in the interest of, and for the exclusive purpose of, providing plan benefits to participants and beneficiaries considering the impact of any costs involved.
• Ensuring that plan fiduciaries not subordinate the interests of participants and beneficiaries in their retirement income or financial benefits under the plan to any non-pecuniary objective or promote non-pecuniary benefits or goals.
• Improving fiduciary practices relating to the selection and monitoring of proxy advisory firms.
In March, the Biden Administration’s DOL announced it would not enforce the rule, a decision which drew the ire of Senate Republicans Richard Burr (R-NC), Mike Crapo (R-ID) and Pat Toomey (R-PA), who penned a March 18 letter to Al Stewart, who was Acting Secretary of the DOL before Marty Walsh was confirmed.
“DOL should immediately reverse its ill-considered decision to not enforce these rules. DOL has a legal responsibility to enforce ERISA and the rules issued thereunder. The final rules are based on the common-sense, unobjectionable principle that fiduciaries of retirement plans must put the financial interests of plan participants and beneficiaries first,” the Senators wrote in the letter.
What’s next
The public comment period for the proposed rule begins Thursday, Oct. 14, once it is published in the Federal Register. The comment period will close on Dec. 13.
“When we see those comments, we’ll be making decisions,” Khawar said.
Interested parties may submit written comments, identified by RIN 1210-AC03, to either of the following addresses:
• Federal eRulemaking Portal: www.regulations.gov. Follow the instructions for submitting comments.
• Mail: Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue NW, Washington, DC 20210, Attention: Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.
All submissions received must include the agency name and Regulatory Identifier Number (RIN) for this rulemaking. Persons submitting comments electronically are encouraged not to submit paper copies. Comments will be available to the public, without charge, online at www.regulations.gov and www.dol.gov/agencies/ebsa and at the Public Disclosure Room, Employee Benefits Security Administration, Suite N-1513, 200 Constitution Avenue, NW, Washington, DC 20210.
Reaction to guidance rolling in
Following the new guidance from the DOL, politicians and industry stakeholders were quick to respond. Here are a few of the statements received by mid-day Wednesday:
• U.S. Senator Patty Murray (D-WA), Chair of the Senate Health, Education, Labor, and Pensions (HELP) Committee, and Senator Tina Smith (D-MN), a member of the HELP Committee: “Financial security is about planning for the future, so it’s just common sense that ERISA fiduciaries be allowed to consider the environmental, social, and governance factors that are shaping the future. The Biden Administration’s step to acknowledge this reality is a win for workers, retirees, investors, businesses, communities, the environment—everyone. This new rule will help build a future for families that is more just, diverse, sustainable, and financially secure.”
• Amy O’Brien, Global Head of Responsible Investing at Nuveen: “We applaud the DOL for providing the transparency and clarity the industry has called for in its proposed ESG rule. Incorporating ESG factors into investment portfolios leads to better long-term risk-adjusted returns for Americans who are working to secure the retirements they deserve and today’s proposed rule supports that view. For decades the DOL has stated there is a fiduciary duty to prudently evaluate and select investment offerings that drive performance for plan participants and today’s proposed rule rightfully puts ESG factors on the same playing field as other investment considerations for Americans.
“We look forward to continuing to work with the DOL as they finalize this regulation to ensure plan sponsors have the flexibility to design investment plan menus in a way that leads to best interest and possible outcomes for participants. The ongoing dialogue on this rule has been a positive for ESG. It’s pushed the industry to get more sophisticated on how it looks at ESG factors.”
• Jim Roach, Senior Vice President, Head of Distribution – ESG Target Date Fund at Natixis Investment Managers: “Natixis Investment Managers applauds the Department of Labor (DOL) for listening to the investment community about the role of Environmental, Social and Governance (ESG) in investment portfolios, and for creating a proposed rule that is clear and understandable. Fiduciaries should consider all the risks when evaluating investments for clients, and ESG is not a replacement for the fundamentals of sound investing, rather an extra layer of evaluation. ESG investing is clearly here to stay and we believe this newly proposed DOL rule addresses a demand of increasing importance to investors.”
• Chief Responsibility Officer Michelle Dunstan and Head of Defined Contribution Jennifer DeLong, AllianceBernstein: “We welcome today’s announcement by the U.S. Department of Labor. We believe that environmental, social and governance factors—including the physical and transition risks associated with climate change—are material financial factors that affect companies’ cash flows, valuation, risk and return. It is our fiduciary duty as responsible stewards of our clients’ capital to integrate these factors into our investment process, making us better investors and leading to better risk-adjusted returns. This proposal is a positive step forward in providing clarity for Defined Contribution plan sponsors on including ESG factors in their decision-making process when evaluating the plan’s investment options. We believe this will ultimately provide better outcomes for retirement savers.”
• Lisa Woll, CEO, US SIF: The Forum for Sustainable and Responsible Investment: “Today’s announcement is an important step towards ending the regulatory pendulum that is holding back the inclusion of funds utilizing ESG criteria in retirement plans and complicating proxy voting by plan fiduciaries. The proposal recognizes that the consideration of ESG criteria is part of the investment process and should be treated like any other investment criteria used by plan fiduciaries under the duty of loyalty and care.
“Significantly, the proposal removes the artificial barriers created by the 2020 rules for ESG consideration in default plans, or Qualified Default Investment Alternatives (QDIAs). The proposal also recognizes the proxy vote as an ownership right and removes provisions that may have discouraged fiduciaries from exercising their ownership rights.
“We appreciate the work done by DOL to address the damage done by the previous administration and to ensure that ERISA fiduciaries have new rules for the road. The proposed guidance should help address the gap between the growth of sustainable investment overall and the much more limited growth of sustainable investment in retirement plans. We look forward to working with DOL on a final rule.”
SEE ALSO:
• The End of the Trump-Era ESG Rule
• Does ESG-Based Proxy Voting Matter? Just Ask ExxonMobil
• House Dems Reintroduce Bills to Promote ESG Retirement Investing