DOL’s New Proposed Rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights

DOL/EBSA has a new proposed rule on ESG and proxy votes. Stay tuned for more information and our formal comment. NOTE: Comments due by December 13, 2021 and we will be up against an avalanche of opposition.

The Department of Labor (Department) in this document proposes amendments to the Investment Duties regulation under Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), to clarify the application of ERISA’s fiduciary duties of prudence and loyalty to selecting investments and investment courses of action, including selecting qualified default investment alternatives, exercising shareholder rights, such as proxy voting, and the use of written proxy voting policies and guidelines.

Federal Register :: Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights


Many stakeholders questioned whether the Department rushed the current regulation unnecessarily and failed to adequately consider and address substantial evidence submitted by public commenters suggesting that the use of climate change and other ESG factors can improve investment value and long-term investment returns for retirement investors. The Department has also heard from stakeholders that the current regulation, and investor confusion about it, including whether climate change and other ESG factors may be treated as “pecuniary” factors under the regulation, has already had a chilling effect on appropriate integration of climate change and other ESG factors in investment decisions, which has continued through the current non-enforcement period, including in circumstances that the current regulation may in fact allow.

While the additional text in paragraph (b)(2)(ii)(C) is new, its substance is not. The Department has long acknowledged the materiality of ESG, including climate-related financial risk, in fiduciaries’ investment decision-making and portfolio construction. In Interpretive Bulletin 2015-01, the Department recognized there could be instances when ESG issues present material business risk or opportunities, stating that “environmental, social, and governance issues may have a direct relationship to the economic value of the plan’s investment. In these instances, such issues are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.” [32In Field Assistance Bulletin 2018-01, the Department stated that IB 2015-01 recognized that ESG issues could present material business risk or opportunities to companies, and that a prudent fiduciary should consider such issues when evaluating the risk and return profiles of investment opportunities.[33As additional evidence on the materiality of climate change in particular has emerged in the intervening years, the Department believes that consideration of the projected return of the portfolio relative to the funding objectives of the plan not only allows but in many instances may require an evaluation of the economic effects of climate change on the particular investment or investment course of action.

For example, climate change is already imposing significant economic consequences on a wide variety of businesses as more extreme weather damages physical assets, disrupts productivity and supply chains, and forces adjustments to operations. Climate change is particularly pertinent to the projected returns of pension plan portfolios that, because of the nature of their obligations to their participants and beneficiaries, typically have long-term investment horizons. The effects of climate change such as sea level rise, changing rainfall patterns, and more severe droughts, wildfires, and flooding are expected to continue to pose a threat  to investments far into the future.

Additionally, imminent or proposed regulations, for example, to reduce greenhouse gas emissions in the power sector, and other policies incentivizing a shift from carbon-intensive investments to low-carbon investments, could significantly lower the value of carbon-intensive investments while raising the value of other investments. This could create a potentially serious risk for plan participants and beneficiaries. Taking climate change into account, such as by assessing the financial risks of investments for which government climate policies will affect performance and account for the risk of companies that are unprepared for the transition, can have a beneficial effect on portfolios by reducing volatility and mitigating the longer-term economic risks to plans’ assets. While it is not always the case, a growing body of evidence suggests a generally positive relationship between the financial performance of investments that address or account for climate change.

Paragraph (b)(4) is a new provision that addresses uncertainty under the current regulation as to whether a fiduciary may consider climate change and other ESG factors in making plan-related decisions under ERISA. This paragraph clarifies and confirms that a fiduciary may consider any factor material to the risk-return analysis, including climate change and other ESG factors. The intent of this new paragraph is to establish that material climate change and other ESG factors are no different than other “traditional” material risk-return factors, and to remove any prejudice to the contrary. 

Also, the proposal continues to include a “tie-breaker” standard, with the proposal more closely aligning with the Department’s original non-regulatory guidance in this area, and eliminates the current regulation’s specific documentation requirements, which singled out and created burdens specifically for investments providing collateral benefits, which many perceived as targeting ESG investing. The proposal makes it clear that the fiduciary is not prohibited from selecting the investment, or investment course of action, based on collateral benefits other than investment returns, so long as the requirements of the proposal are met. These include, in the case of such a collateral benefit for a designated investment alternative for an individual account plan, the prominent display of the collateral-benefit characteristic of the fund in disclosure materials. Further, the fiduciary cannot accept reduced returns or greater risks to secure the collateral-benefit.

The Department continues to believe, as it stated in Interpretive Bulletin 2016-1, that the maintenance by an employee benefit plan of a statement of investment policy designed to further the purposes of the plan and its funding policy is consistent with the fiduciary obligations set forth in section 404(a)(1)(A) and (B) of ERISA, and that since the act of managing plan assets that are shares of corporate stock includes the voting of proxies appurtenant to those shares, a statement of proxy voting policy is an important part of any comprehensive statement of investment policy.

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