In March of this year I wrote two blog articles on how the new Biden administration would not enforce and was likely going to change the Trump administration’s Department of Labor final rule on environmental, social, and govenrnance (ESG) investing in ERISA plans that became effective January 12, 2021. See “New President, New Hope, New ESG Policy. . . Maybe” and “DOL Won’t Enforce Trump Administration’s New ESG Rules.” On October 13, the Biden administration’s Department of Labor issued proposed regulations that would significantly change the Trump final rule with respect to ESG investments. President Biden had issued several Executive Orders directing agencies to review regulations that may be inconsistent with the goals of improving public health, protecting the environment, and bolstering resilience to the impacts of climate change. In May, an Executive Order directed the DOL to review the final ESG rules in light of climate-related financial risk that may threaten retirement savings.
The proposed regulations would add language clarifying that the consideration of climate change and other ESG factors on the investment may be required to meet the fiduciary duty of prudence. The proposed rules eliminate the prohibition of an ESG investment from being a QDIA investment under the Trump rule, instead providing the same standards apply to QDIA’s as any other investment. The proposed rule also re-works the “tie-breaker” rules when comparing investment alternatives. Under the Trump rule the fiduciary must determine that the two alternatives are economically indistinguishable using only pecuniary factors before considering any non-pecuniary factor such as ESG factors. Additionally, the fiduciary must document how it arrived at the decision. Under the proposed rule, the standard would be that the fiduciary conclude prudently that competing investments equally serve the financial interests of the plan over the appropriate time horizon. If so, the fiduciary is not prohibited from selecting the investment based on economic or non-economic benefits other than investment returns.
Finally, the proposed regulations would make significant changes to the shareholder rights and proxy voting provisions of the Trump rule which were thought to chill proxy voting on ESG investments. These changes include removing the statement in the current regulations that a fiduciary is not under a duty to vote every proxy or exercise every shareholder right. It also would remove two safe harbor examples limiting proxy voting. It also removes documentation requirements when exercising shareholder rights.
It’s important to note that these are only proposed changes to the current regulations. The Department of Labor is accepting public comments on the proposed rules for 60 days.