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EBSA issues new guidance on ESG, shareholder engagement by plan fiduciaries

The Department of Labor's Employee Benefits Security Administration issued new guidance on shareholder engagement and economically targeted investments, warning plan fiduciaries to "avoid too readily treating ESG issues as being economically relevant" to investment choices.

The field assistance bulletin to EBSA offices on Monday — which also points out that the Employee Retirement Income Security Act "does not necessarily require" plans to adopt investment policies with environmental, social and governance factors — "clarifies earlier interpretations" issued in 2015 and 2016 that were aimed at assuring fiduciaries they could consider ESG issues in connection with proxy voting, other shareholder engagements and investment decisions.

Fiona Reynolds, CEO of Principles for Responsible Investment, said in a statement that "it is difficult to understand the reasoning behind (the new bulletin), especially at a time when other markets are in no doubt of the materiality of ESG considerations."

Ms. Reynolds said that despite the "pushback" from previous DOL rulings and the potential for confusion, "we remain confident that U.S. investors will continue to incorporate ESG factors into their decision-making in order to attract international capital, generate long-term growth and better manage portfolio risks."

The 2015 DOL guidance held that fiduciaries may not sacrifice returns or assume greater risks to promote collateral ESG policy goals when making investment decisions. However, it acknowledged the potential financial impact of ESG factors on retirement plan investments, saying those with economic value are "more than just tiebreakers, but rather are proper components of the fiduciary's analysis of the economic and financial merits of competing investment choices."

The 2016 guidance addressed written statements of investment policy, proxy voting and other exercises of shareholder rights by fiduciaries when managing plan assets of corporate stock. That guidance said previous positions "have been misunderstood" and may have worked to discourage ERISA plan fiduciaries from considering ESG factors or engaging in proxy voting.

The new guidance states that ERISA fiduciaries "must always put first the economic interests of the plan in providing retirement benefits," and says plan fiduciaries including investment managers "may not routinely incur significant plan expenses to pay for the costs of shareholder resolutions or special shareholder meetings, or to initiate or actively sponsor proxy fights on environmental or social issues."

Further background from Labor Department officials on what prompted the change was not available. The guidance

is available on the EBSA website.