Retirement plan fiduciaries have finally received the green light from the U.S. Department of Labor (DOL) to consider climate, social and governance impact on investments they recommend, as well as in proxy voting they exercise on behalf of retirees.
The decision has been in the making for over two years after the prior administration imposed unnecessary restrictions on the type of investments and proxy recommendations ERISA-plan sponsors can make on behalf of their investors.
ERISA-type retirement plans include employer-sponsored retirement plans such as 401k’s, deferred-compensation plans, profit-sharing plans, other defined-benefit, defined-contribution plans, and pensions.
Last year, the DOL’s Benefits Security Administration already announced that it will not be enforcing the restrictive rules from 2020. Since then, the department has been in extensive consultations with various stakeholders to determine what’s appropriate for the investment management of pension funds.
It concluded that the rules issued by the prior administration “unnecessarily restrained plan fiduciaries’ ability to weigh environmental, social and governance factors when choosing investments, even when those factors would benefit plan participants financially.”
The final rule “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” highlights amendments that reverse and modify prior regulation that was adopted in 2020. It states that ERISA-plan fiduciaries’ primary focus is on the plan’s financial returns and risks to beneficiaries.
It further adds that “ERISA does not preclude fiduciaries from making investment decisions that reflect environmental, social, or governance (“ESG”) considerations, and choosing economically targeted investments (“ETIs”) selected in part for benefits in addition to the impact those considerations could have on investment return.”
It also specifies that this guidance extends to the management of voting and other shareholder rights.
“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,” said the secretary of labor Marty Walsh. “Removing the prior administration’s restrictions on plan fiduciaries will help America’s workers and their families as they save for a secure retirement.”
Morgan Lewis, a major administrator of employer-sponsored retirement plans, noted in a recent reaction to the DOL rule that DOL’s position, “is more supportive of ESG investing. The Final ESG Rule provides fiduciaries with an interpretation of ERISA’s fiduciary standards that could allow for the consideration of ESG factors without violating those duties.”
That said, the DOL has stayed away from making ESG considerations a requirement and instead has chosen, “a more ‘middle of the road’ pro-ESG approach that would make room for ESG considerations where appropriate in connection with a risk/return analysis, without requiring fiduciaries to consider ESG.”
The changes will be applicable 60 days after the rule’s publication in the Federal Register.
“But overall, this rulemaking represents a significant change from the 2020 regulation’s approach that was seen as placing burdens on plan fiduciaries to justify any ESG-based investing,” further stated Morgan Lewis.