Department of Labor Revises its Position on the Place of ESG Investing in Retirement Plans

On March 10, 2021, the Department of Labor (the “Department”) released a statement (which can be found here) that two heavily contested ESG-oriented Final Rules from the previous administration will not be enforced:

  • Financial Factors in Selecting Plan Investments, 85 Fed. Reg. 72846 (November 13, 2020)
  • Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, 85 Fed. Reg. 81658 (December 16, 2020)

The Final Rules require plan fiduciaries under the Employee Retirement Security Act of 1974 (ERISA) to limit their considerations, for purposes of investing and proxy voting, to solely “pecuniary factors.”  ERISA is the law that regulates all retirement plans.  In 2019, retirement plans were estimated to own approximately 30% of all U.S. stock.[1]

The Final Rules effectively barred ERISA plan fiduciaries from considering ESG factors when selecting investments and deciding whether to vote by proxy on matters on matters involving investments already held by a plan.

The Department opined that the Final Rules inconsistent with the goals of Executive Order 13990, Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis, which requires federal agencies to review existing regulations adopted by the prior administration, by stating that the Final Rules “already had a chilling effect on appropriate integration of ESG factors in investment decisions, including in circumstances that the rules can be read to explicitly allow.”

The Department’s statement makes clear that the Final Rules will be revisited and new regulations will be released in their place.  Until those new regulations are released, the Final Rules will not be enforced and ERISA fiduciaries can rely on previously applicable guidance.  The anticipated new regulations are likely to encourage ESG considerations in investment and voting.

 

 

 

[1] Steve Rosenthal & Theo Burke, Who’s Left to Tax? US Taxation of Corporations and Their Shareholders, New York University School of Law Urban-Brookings Tax Policy Center (2020).