The U.S. Department of Labor today announced its final environmental, social and governance (ESG) rule, which senior officials said replaces Trump-era rules that stymied advisors from selecting ESG-related investments in qualified retirement plans and even stopped advisors from voting on ESG-related shareholder proposals for fear of the department’s reprisal.
The new rule is called “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.” According to Lisa M. Gomez, the assistant secretary for the DOL’s Employee Benefits Security Administration, the new rule makes clear “that fiduciaries can, but are not required to consider ESG” in their risk and reward analysis. “It takes the thumb off retirement plan managers,” said Gomez.
At the heart of the new 200-page rule, according to Fred Reish, a fiduciary expert and partner with Faegre Drinker, is language that clarifies that a fiduciary's duty of prudence must be based on factors that he or she reasonably determines are relevant to risk and return analysis and that such factors may include the economic effects of climate change and other ESG considerations.
According to a senior DOL official who spoke on condition of anonymity, the new rule has three foundational principles: “When selecting an investment, ERISA prudence requires fiduciaries to engage in robust risk and return analysis. Secondly, fiduciaries may never subject beneficiaries to objectives not related to retirement income. Third, when a plan owns shares of corporate stock, the shareholder rights are also plan assets and need to be managed prudently and loyally,” the senior official said.
According to Gomez, the rule was “necessary to mitigate the effects of the 2020 rules” that the DOL approved at the tail end of the Trump administration, which required that all fiduciary advice that professionals make to plans must be pecuniary in nature—in other words, putting financial returns first.
“One provision that is not being carried forward from 2020 rules is the pecuniary provision or test … which mandated that fiduciaries’ analysis must be based only on pecuniary matters,” Gomez said.
The agency received 900 written comments and 20,000 petitions in response to its proposal last November to replace the Trump-era rules. “Many commenters confirmed the 2020 rules deterred fiduciaries from taking steps to [enhance] market returns and mitigate risks associated with ESG considerations,” she said.
The new rule also allows fiduciary advisors to use a more traditional tiebreaker test when they are deciding between investments with similar risk and reward profiles, replacing the 2020 rule’s provision requiring that competing investments with similar features had to be “economically indistinguishable” before fiduciaries could turn to collateral factors to break a tie.
“However, the final rule maintains the longstanding principle that the fiduciary may not accept reduced returns or greater risks to secure collateral benefits,” the agency said.
Gomez said this would be “the first of many common-sense improvements” in DOL rules.