- Long-awaited rule reversal. A new DOL final rule under the Employee Retirement Income Security Act (ERISA) clarifies that fiduciaries may consider climate change and other environmental, social and governance (ESG) factors when they make investment decisions and when they exercise shareholder rights, including voting on shareholder resolutions and board nominations.
- Lifts ESG restrictions. According to the DOL, two rules issued in 2020 unnecessarily restrained plan fiduciaries’ ability to weigh ESG factors when choosing investments, even when the financial benefits to plan participants are clear.
- Expands ability to adapt investment choice. One expert says the rule gives employers the flexibility to establish investment lineups that are best for their specific workforce, and that the rule doesn’t strictly prohibit the consideration of ESG factors, nor does it require it either.
In a change that’s been two years in the making, the U.S. Department of Labor recently announced a final rule that allows plan fiduciaries to consider climate change and other environmental, social and governance (ESG) factors when they select retirement investments and exercise shareholder rights, such as proxy voting. The rule change represents a major reversal from Trump administration policy.
According to a DOL statement, “extensive consultations and feedback from a wide range of stakeholders concluded that two rules issued in 2020 unnecessarily restrained plan fiduciaries’ ability to weigh ESG factors when choosing investments,” even when those factors would financially benefit plan participants.
“Today’s rule clarifies that retirement plan fiduciaries can take into account the potential financial benefits of investing in companies committed to positive environmental, social and governance actions as they help plan participants make the most of their retirement benefits,” Secretary of Labor Marty Walsh said. “Removing the prior administration’s restrictions on plan fiduciaries will help America’s workers and their families as they save for a secure retirement.”
The rule, titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” follows Executive Order 14030, which was signed by President Joe Biden on May 20, 2021. The order directs the federal government to identify and assess policies to protect the life savings and pensions of America’s workers and families from the threats of climate-related financial risk.
A DOL fact sheet notes that the rule will be effective 60 days after its publication in the Federal Register, with one exception: For certain proxy voting provisions, the rule will take effect one year after publication, to allow fiduciaries and investment managers additional time to prepare.
Greater Flexibility Could Spur Participation Rates
The final regulation takes a “principles-based approach,” which creates some room for the plan sponsor to “do what’s right” for its participants when making retirement plan investment choices, according to Steven Grieb, senior compliance counsel with Gallagher.
“The rule gives employers the flexibility to establish investment lineups that are best for their specific workforce,” he said, adding that the rule doesn’t strictly prohibit the consideration of ESG factors, nor does it require them either.
“If an investment fiduciary reasonably concludes that certain ESG-related factors impact the risk or return characteristics of a given investment, this rule makes clear that the DOL won’t challenge that approach,” Grieb said. “We think that flexibility for investment fiduciaries is a win.”
Grieb explains that the new rule expressly allows fiduciaries to consider what steps might increase the participation rate for their specific employees, adding that if certain investments could increase total plan assets through stronger participation or higher deferral rates, the DOL thinks that can be a relevant factor.
“We think that taking a middle-of-the-road approach was the right call for the DOL,” he said. “Rather than requiring or prohibiting ESG factors, the DOL is allowing investment fiduciaries to do the right thing tailored to their workforce and rooted in the duty of prudence. That’s a positive.”
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