The Department of Labor's new rule permitting retirement plan fiduciaries to consider climate change and other environmental, social and governance factors when selecting investments and exercising shareholder rights is a regulatory return to normal and takes more of a neutral approach than the proposal on which it was based, industry experts said.
"I think the DOL was looking to place ESG factors within the broader pantheon of investment considerations that fiduciary decision-makers consider all the time," said Julie K. Stapel, Chicago-based partner with Morgan, Lewis & Bockius LLP.
The Labor Department on Nov. 22 finalized its rule — Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights — after unveiling the proposal in October 2021.
The new rule, which will go into effect Jan. 30, is a reversal of two rules promulgated late in the Trump administration that said retirement plan fiduciaries could not invest in "non-pecuniary" vehicles that sacrifice investment returns or take on additional risk and outlined a process a fiduciary must undertake when making decisions on casting a proxy vote.
Lisa M. Gomez, assistant secretary for employee benefits security at the DOL, said in a call with reporters Nov. 22 that the Trump-era ESG rule had a "chilling effect on the integration of ESG factors into the investment selection and asset management process."
The final rule comes after years of stakeholder outreach on the subject and follows an executive order by President Joe Biden in May 2021 directing federal agencies to assess and mitigate financial risks related to climate change.
Will Hansen, Arlington, Va.-based executive director of the Plan Sponsor Council of America and chief government affairs officer at the American Retirement Association, is pleased with the final rule's neutral stance.
"We've had almost 50 years now of ERISA in which the DOL has not stated specifically what types of asset classes should or should not be in a retirement plan investment fund lineup, and it's worked," he said. "So we're happy this (final rule's) neutral approach kind of keeps with that tradition."
The final rule is seen as more neutral because, unlike the October 2021 proposal, it does not include examples of specific ESG factors that fiduciaries could consider and removed language that a prudent fiduciary process "may often require" the consideration of ESG factors.
"The DOL has never taken a position that any other particular investment factor consideration is required, so to say that there could be occasions when ESG is required would have been a deviation from how they've approached it," Ms. Stapel said.
On proxy voting, the final rule eliminates a provision in the Trump-era rule that "the fiduciary duty to manage shareholder rights appurtenant to shares of stock does not require the voting of every proxy or the exercise of every shareholder right."
The final rule eliminates that provision because it may be "misread as suggesting that plan fiduciaries should be indifferent to the exercise of their rights as shareholders, even if the cost is minimal," the Labor Department said in a fact sheet.
Pamela L. Marcogliese, New York-based head of U.S. corporate advisory and governance at Freshfields Bruckhaus Deringer LLP, said the final rule is a reset for both public companies and investors when it comes to proxy voting.
"If you think something is valuable from an ESG perspective, you don't have to twist yourself in a knot to say, 'Oh my gosh this also ties to the bottom line,'" she said.