The Department of Labor finalized a rule Tuesday to explicitly permit retirement plan fiduciaries to consider climate change and other environmental, social and governance factors when selecting investments and exercising shareholder rights.
The rule — Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights — was first proposed in October 2021 and is a reversal of two rules promulgated under the Trump administration. The Trump-era rules issued in 2020 said retirement plan fiduciaries cannot 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.
After extensive consultations and feedback from a wide range of stakeholders, the Labor Department concluded that two Trump-era rules "unnecessarily restrained plan fiduciaries' ability to weigh environmental, social and governance factors when choosing investments, even when those factors would benefit plan participants financially," the Labor Department said in a news release.
The department's Employee Benefits Security Administration "believes a final rule is necessary to reverse the 2020 rule's chilling effect on the integration of ESG factors into the investment selection and asset management process," said Lisa M. Gomez, assistant secretary for employee benefits security, in a call with reporters.
"The rule really is a commonsense, basic concept of ERISA," Ms. Gomez added. "Fiduciaries are required to act prudently and for the exclusive purpose of participants and beneficiaries in everything they do, including making investment decisions and proxy voting. This rule simply gives fiduciaries the room they need" to do their jobs.
Ms. Gomez noted that under the rule, fiduciaries can consider ESG factors when making an investment decision but are not required to do so.
The Labor Department's much-anticipated announcement follows an executive order by President Joe Biden in May 2021 directing federal agencies to assess and mitigate financial risks related to climate change. Moreover, on Mr. Biden's first day in office in January 2021, he signed an executive order ordering a review of the Trump-era ESG rule.
"Removing the prior administration's restrictions on plan fiduciaries will help America's workers and their families as they save for a secure retirement," Secretary of Labor Marty Walsh said in a news release.
One of the major changes the final rule makes is reversing a provision in the Trump-era rule that 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.
Under the final rule, standards applied to QDIAs are no different from those applied to other investments, the Labor Department noted in a fact sheet. When selecting a QDIA, "a plan fiduciary must, among other things, focus on relevant risk and return factors and not subordinate the interests of participants and beneficiaries (such as by sacrificing investment returns or taking on additional investment risk) to objectives unrelated to the provision of benefits under the plan," the fact sheet 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.
The rule will take effect 60 days after its publication in the Federal Register except for a delayed applicability until one year after publication for certain proxy-voting provisions to allow fiduciaries and investment managers additional time to prepare.
