Institutional investors welcomed news earlier this month that the Department of Labor wouldn't be enforcing two high-profile rules promulgated during the Trump administration for ERISA fiduciaries on selecting investments and exercising voting rights, but will want to see more from the Biden administration before changing course, sources said.
"I don't think floodgates are going to open because I think people are still in a wait-and-see mode in regard to what the Biden administration is going to do beyond its non-enforcement policy," said Elizabeth S. Goldberg, a Pittsburgh-based partner with law firm Morgan, Lewis & Bockius LLP.
The non-enforcement policy pertains to two rules — which remain on the books — that went into effect just days before the Biden administration took office. Stakeholders fear the rules would cause a chilling effect on environmental, social and governance investments.
The first, called "Financial Factors in Selecting Plan Investments," stipulates that ERISA plan fiduciaries cannot invest in "non-pecuniary" vehicles that sacrifice investment returns or take on additional risk. It's often referred to as the "ESG rule" because the initial proposal, which was unveiled in June, focused on ESG investment factors, but the final rule walked back the ESG language. It was finalized in November and took effect Jan. 12, but President Joe Biden signed an executive order on his first day in office ordering a review of the rule.
The other rule — "Fiduciary Duties Regarding Proxy Voting and Shareholder Rights" — outlines the process a fiduciary must undertake when making decisions on casting a proxy vote. It underscores that fiduciaries are not required to vote every proxy and notes that they must act solely in accordance with the economic interest of the plan and maintain records on proxy voting activities and other exercises of shareholder rights.
"These rules have created a perception that fiduciaries are at risk if they include any environmental, social and governance factors in the financial evaluation of plan investments, and that they may need to have special justifications for even ordinary exercises of shareholder rights," said Ali Khawar, principal deputy assistant secretary for the Employee Benefits Security Administration, in a news release. "We intend to conduct significantly more stakeholder outreach to determine how to craft rules that better recognize the important role that environmental, social and governance integration can play in the evaluation and management of plan investments, while continuing to uphold fundamental fiduciary obligations."
Until the Biden administration acts further, fiduciaries are unlikely to change their plan lineups, sources said.
"The market is going to want that clarity from the DOL before it continues to move forward," said Sarah Bratton Hughes, New York-based head of sustainability, North America at Schroders PLC, adding that there's "pent-up" participant demand for ESG options. The latest global investor survey from Schroders, which was released in September, found that 47% of individual investors frequently invest in sustainable investment funds rather than those that don't consider sustainability factors, up from 42% in 2018.