On March 10, 2021 the U.S. Department of Labor (“DOL”) released a policy statement that it will not enforce or otherwise pursue enforcement actions against a fiduciary for failing to comply with the “Financial Factors in Selecting Plan Investments” regulation published on November 13, 2020 (the “ESG Rule”) and the “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights” regulation, published on December 16, 2020 (the “Proxy Voting Rule”). Both regulations were promulgated by the DOL shortly before the Biden administration took office. In the recent policy statement, the DOL stated that certain stakeholders, including asset managers, plan sponsors and consumer groups have expressed concern over whether these rules accurately reflect a fiduciary’s duties under ERISA and appropriately consider the utility of environmental, social and governance (“ESG”) factors in making investment decisions. As a result, the DOL intends to “revisit” each of these rules.
In a press release issued in conjunction with the policy statement, the DOL stated that the rules may have had a “chilling effect” on plan fiduciaries’ inclusion of ESG factors in their financial evaluation of plan investments and the exercise of shareholder rights, even when warranted. As a result, Principal Deputy Assistant Secretary for the Employee Benefits Security Administration, Ali Khawar, stated that the DOL intends “to conduct significantly more stakeholder outreach to determine how to craft rules that better recognize the important role that environmental, social and governance integration can play in the evaluation and management of plan investments, while continuing to uphold fundamental fiduciary obligations.”
This move by the DOL does not come as a surprise. Shortly after President Biden’s inauguration, he included the ESG Rule in a list of regulations that would be targeted for further review. As we have written in more detail, the ESG Rule requires ERISA plan fiduciaries to make decisions based solely on pecuniary factors and disregard all nonpecuniary factors (whether or not such factors relate to ESG concerns). The Proxy Voting Rule requires ERISA fiduciaries to evaluate the costs and benefits of voting plan proxies or exercising the plan’s shareholder rights.
While DOL may not be enforcing the ESG Rule or the Proxy Voting Rule, plan fiduciaries should be cautious about taking too much comfort in the DOL’s non-enforcement policy. The DOL’s non-enforcement policy does not revoke or amend the ESG Rule or Proxy Voting Rule, which are final regulations, and would not preclude a plan participant or beneficiary from pursuing private litigation against a plan fiduciary for failure to adhere to these rules. This would be a particular concern for fiduciaries of defined contribution plans, such as 401(k) plans.