On April 10, the White House released an executive order signed by President Donald Trump titled "Executive Order on Promoting Energy Infrastructure and Economic Growth." Its title does not immediately bring to mind the fiduciary duties under the U.S. Employee Retirement Income Security Act of 1974, the statute that governs privately sponsored retirement plans.
The president, however, directed Secretary of Labor Alexander Acosta to, in pertinent part, "complete a review of existing Department of Labor guidance on the fiduciary responsibilities for proxy voting to determine whether any such guidance should be rescinded, replaced or modified to ensure consistency with current law and policies that promote long-term growth and maximize return on ERISA plan assets." The DOL has 180 days to complete its review. The executive order being energy-related, and proxy voting being a method fiduciaries use to take into account environmental, social and/or governance risks, immediately set off alarms that the executive order would effectively hamper ERISA fiduciaries from taking into account ESG factors as part of their investment decision-making. Is there cause for concern?
The DOL could decline to issue any new guidance, and instead point to last year's Field Assistance Bulletin 2018-01, as its current position on proxy voting. There, the DOL appeared to reaffirm that fiduciaries should engage in proxy voting and other forms of shareholder engagement as part of their prudent management of plan assets, provided the fiduciary "concludes there is a reasonable expectation that such activities (by the plan alone or together with other shareholders) are likely to enhance the economic value of the plan's investment in that corporation after taking into account the costs involved."
On one side of the ledger, the bulletin reiterated that the plans themselves rarely incur significant expenditures for these activities because they are most often undertaken by large institutional investment managers on behalf of many investors, often with the aid of proxy adviser firms, which keep costs down. The DOL, however, cautioned against an "individual plan investor ... routinely incur(ing) significant expenses to engage in direct negotiations with the board or management of publicly held companies with respect to which the plan is just one of many investors." The DOL also warned fiduciaries against routinely incurring significant expenses to "fund advocacy, press, or mailing campaigns on shareholder resolutions, call special shareholder meetings, or initiate or actively sponsor proxy fights on environmental or social issues relating to such companies." The field assistance bulletin indicated that "a documented analysis of the cost of the shareholder activity compared to the expected economic benefit (gain) over an appropriate investment horizon" would be in order if a plan fiduciary were to consider "a routine or substantial expenditure of plan assets to actively engage with management on environmental or social factors, either directly or through the plan's investment manager."
On the other side of the ledger, the bulletin also reiterated that "there may be circumstances, for example, involving significantly indexed portfolios and important corporate governance reform issues, or other environmental or social issues that present significant operational risks and costs to business, and that are clearly connected to long-term value creation for shareholders with respect to which reasonable expenditure of plan assets to more actively engage with company management may be a prudent approach to protecting the value of a plan's investment." Here, though, the DOL expressed concern that fiduciaries would too readily claim that shareholder engagement was "clearly connected to" investment performance, as it had earlier in the bulletin when it was discussing the purchase and sale of securities by fiduciaries on the basis of ESG risks that were deemed material to investment performance.
From this, it is possible the DOL could adhere to the executive order by issuing new guidance that raises the perceived costs of proxy voting and other forms of shareholder engagement and/or demands a more rigorous analysis on the part of fiduciaries that such engagement is "clearly connected to" shareholder value. Any new test could not be so onerous as to make divestment preferable to engagement, as that would seem to undermine the executive order's very purpose. In any event, fiduciaries presumably would be allowed to use whatever studies and data they were relying upon to link the ESG risk with investment performance as a justification for the engagement.
It is also worth mentioning that the executive order directs the DOL's focus solely to proxy voting. Even assuming the DOL reconsiders its guidance on proxy voting and other forms of shareholder engagement, fiduciaries have many other avenues to address ESG risks. Some fiduciaries, for example, consider one or more ESG risks if they are material to investment performance. This approach was first expressly recognized in Interpretive Bulletin 2015-01 by the DOL under the Obama administration; it was expressly reaffirmed in Field Assistance Bulletin 2018-01 by the DOL under the Trump administration (provided the fiduciary carefully documents the studies or data that support such materiality assertion). There is no reason to believe, based on the terms of the executive order, that the DOL will reconsider its recent guidance on this popular ESG approach. Other ESG strategies seemingly outside the executive order's ambit are divestment, positive and negative screens, socially responsible investment, sustainable investment and responsible investment. Granted, proxy voting and other forms of shareholder engagement are one of the most popular ESG methods utilized; however, fiduciaries have many other tools to take ESG risks into account in accordance with their responsibilities under ERISA.
Finally, there is undoubtedly more and more disclosure of ESG risks by companies. These disclosures are often voluntarily made and pursuant to various frameworks. While standardization and uniformity would be ideal, more and more information on ESG risks to a company's bottom line is seeing the naked light. This, as a general matter, is a global trend. It is doubtful that genie can be put back in the bottle.
The executive order may lead to additional and more restrictive DOL guidance on proxy voting or it may not. Even if it does, however, the foregoing should help put any such guidance into perspective.
