While the RFI's comment period is open, the Labor Department is crafting a final ESG and proxy rule that was first proposed in October.
In 2020, under the Trump administration, the Labor Department finalized two rules — one called "Financial Factors in Selecting Plan Investments," which stipulated that ERISA plan fiduciaries cannot invest in "non-pecuniary" vehicles that sacrifice investment returns or take on additional risk; and the other, "Fiduciary Duties Regarding Proxy Voting and Shareholder Rights," which outlined the process a fiduciary must undertake when making decisions on casting a proxy vote. Both rules drew sharp criticism from the plan sponsor and sustainable investing community and in 2021, the Labor Department under the Biden administration said it would not enforce either of the Trump administration's rules.
The financial factors rule, often referred to as the "ESG rule" because the initial proposal focused on ESG investment factors, excluded a fund from being a qualified default investment alternative if its investment objectives, goals or principal investment strategy include or consider the use of one or more non-pecuniary factors. It was finalized in November 2020 and took effect Jan. 12, 2021, just days before the Biden administration took office. Mr. Biden signed an executive order on his first day in office ordering a review of the rule.
The Labor Department proposal unveiled in October would allow an ESG fund to be considered a QDIA. The proposal was mostly supported by institutions during a comment period that ended in December.
"We're happy with what they proposed, and we're hopeful that the final rule will come out as strong as it can be," said Bryan McGannon, Washington-based director of policy and programs at US SIF: The Forum for Sustainable and Responsible Investment, a non-profit organization whose members represent $5 trillion in assets under management.
Faegre Drinker's Mr. Campbell expects the final rule to be substantially similar to the proposal but include some changes. "My hope is that one of those changes is they make the language a little more neutral so that really the authority to make ESG decisions resides with the fiduciaries as it should and as it does for any other relevant factor," he said.
Elizabeth S. Goldberg, a Pittsburgh-based partner with law firm Morgan, Lewis & Bockius LLP, had a similar thought. If the proposal is finalized as is, "it's a pretty material shift because it's the difference between 'ESG can be relevant' to 'ESG has to be relevant,'" she said. "I think we'll see a little bit of a walking back on that."
PSCA's Mr. Hansen said the proposal may have "gone too far in requiring a plan sponsor to offer an ESG fund, and our hope is that we kind of go back to the pre-Trump rule and that a plan sponsor is not limited in providing an ESG fund or required to offer an ESG fund."