US Department of Labor Gives a Green Thumbs Up to ESG | Chicago Popular


On November 22, 2022, the United States Department of Labor (DOL) released the Final ESG Rule, which governs the consideration of environmental, social and governance (ESG) factors by employee benefit plan trustees subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA). The final ESG rule, “Prudence and fairness in selecting plan investments and exercising shareholder rights,” also covers proxy voting.

The Final ESG Rule is another effort by DOL to interpret how ERISA plan trustees may consider ESG factors as part of their investment decision-making process on behalf of ERISA regulated retirement plans. It comes almost a year after the DOL published the Proposed ESG Rule. The proposed ESG rule generated more than 2,000 comments during the comment period.

The Final ESG Rule also comes at a time when pension plans and other investors are facing both growing interest in ESG investing and competing threats from an emerging anti-ESG movement. For more information on our analysis of state-level ESG investment regulation, read our recent blog post And item, And view our chart summarizing ESG investment regulations at the state level.

While the DOL has a long history of back-and-forth about the extent to which fiduciaries might consider ESG-type factors, it has been consistent in stating that plan fiduciaries must make investment decisions in accordance with the fiduciary duties of loyalty and prudence of ERISA. Both the Proposed ESG Rule and the Final ESG Rule emphasize this long-standing and fundamental ERISA principle and focus on how consideration of ESG factors can be consistent with the duties of loyalty and prudence and, in particular, what economic impact they can have on determining ESG factors on the risk-return profile of an investment.

Initial impressions

We plan to provide more in-depth analysis in the coming days, but our initial assessment is that the Final ESG Rule drives the ball away from a DOL 2020 regulation in this sector and towards a more favorable position for ESG investments. The Final ESG Rule provides trustees with an interpretation of ERISA’s fiduciary standards that could allow consideration of ESG factors without violating those duties.

In issuing the Final ESG Rule, the DOL said its previous regulation “unnecessarily limited the ability of plan trustees to weigh environmental, social and governance factors in investment choices, even when those factors would benefit financially.” of participants in the plan”. With the Final ESG Rule, the DOL clarifies that “retirement plan trustees can take into account the potential financial benefits of investing in companies committed to positive environmental, social and governance actions.”

But while the DOL appears to have given a (green) thumbs up to ESG factors, its interpretation is more measured, and would appear to be more principled, than the proposal. A key difference between the Proposed ESG Rule and the Final ESG Rule is the extent to which the DOL encourages or mandates ERISA trustees to consider ESG factors or not.

Importantly, the Final ESG Rule removed language from the Proposed ESG Rule that an analysis of an investment’s expected return “may often require” an assessment of ESG factors. This change seems to move the interpretation of DOL away from “ESG factors”. must be considered, in certain circumstances, ‘a’ ESG factors May be considered, under certain circumstances.’

In this respect, the Final ESG Rule could be seen as a more “middle-of-the-road” pro-ESG approach that would allow room for ESG considerations where appropriate in relation to a risk/return analysis, without requiring trustees to consider ESG.

But overall, this regulation represents a significant change from the 2020 regulation approach that was seen as placing a burden on plan trustees to justify any ESG-based investment.

As noted, the Final ESG Rule also makes changes to the provisions of the 2020 Rule that could discourage proxy voting by ERISA plan trustees, instead placing further emphasis on the plan trustees’ responsibility under ERISA to vote proxies .

Next steps

Most changes become “enforceable” 60 days after the rule is published in Federal Register. Certain subsections relating to proxy voting, including that which may result in a plan’s proxy voting policy being treated as a substitute for that of a mutual fund in which the plan invests, will apply one year after publication.

Stay tuned for more in-depth analysis of the Final ESG Rule’s impact on plan trustees and financial services firms.

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Written by Natalia Chi

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