DOL Issues Final ESG Investing And Proxy Voting Rules – Employee Rights/ Labour Relations – United States

On November 22, 2022, the U.S. Department of Labor (DOL) issued
Final Rules that allow plan fiduciaries to consider climate change
and other environmental, social and governance (ESG) factors when
they select retirement investments and exercise shareholder rights,
such as proxy voting.

After feedback from a wide range of stakeholders, the DOL
concluded that two rules issued in 2020, during the prior
administration, unnecessarily restrained plan fiduciaries’
ability to weigh ESG factors when choosing investments.

The new rules, “Prudence and Loyalty in Selecting Plan Investments
and Exercising Shareholder Rights
,” follow Executive Order
14030, signed by President Biden in May of 2021.

The Final Rules will be effective 60 days after their
publication (January 30, 2023), except for a delayed applicability
until one year after publication for proxy voting provisions to
allow fiduciaries and investment managers additional time to
prepare (December 1, 2023).


Title I of the Employee Retirement Income Security Act of 1974
(ERISA) establishes standards that govern the operation of
private-sector employee benefit plans, including fiduciary
responsibility rules. ERISA requires that plan fiduciaries act
prudently and diversify plan investments to minimize the risk of
large losses. ERISA also requires fiduciaries to act solely in the
interest of the plan’s participants and beneficiaries, and for
the exclusive purpose of providing benefits to participants and
beneficiaries and defraying reasonable plan expenses.

ERISA dictates that ERISA plan fiduciaries’ focus on a
plan’s financial returns must be paramount. For years, however,
the DOL’s non-regulatory guidance has recognized that ERISA
does not preclude fiduciaries from making investment decisions that
reflect ESG considerations and choosing economically targeted
investments (ETIs). The DOL’s non-regulatory guidance has also
recognized that the fiduciary act of managing employee benefit plan
assets includes the management of voting rights, as well as other
shareholder rights, connected to shares of stock, and that
management of those rights, as well as shareholder engagement
activities, is subject to ERISA’s prudence and loyalty

The DOL’s Investment Duties Regulation was issued forty-five
years ago under ERISA Section 404(a) (Investment Duties


The DOL has longstanding positions that ERISA fiduciaries may
not sacrifice investment returns or assume greater investment risks
to promote collateral social policy goals, under ERISA’s
stringent standards of prudence and that managing plan assets
includes decision-making about exercising shareholder rights. Over
the years the DOL has repeatedly issued non-regulatory guidance to
assist plan fiduciaries in understanding their obligations under
ERISA to apply these principles to ETIs and ESG investing.


In 1994, the DOL issued Interpretive Bulletin 94-1, stating that
ETIs are not inherently incompatible with ERISA’s
fiduciary obligations if the investment has an expected rate of
return at least commensurate to rates of return of available
alternative investments and if the ETI is otherwise appropriate
under ERISA and a plan’s investment policy. This was known as
the “all things being equal” test or the
“tiebreaker” standard, and was the DOL’s unchanged
position for the next three decades.


The DOL first issued non-regulatory guidance on proxy voting and
the exercise of shareholder rights in the 1980s, in which the DOL
took the position that the named fiduciary of a plan has a duty to
monitor decisions made by investment managers regarding proxy
voting. In 1994, the DOL issued its first interpretive bulletin on
proxy voting, Interpretive Bulletin 94-2 (IB 94-2). IB 94-2
recognized that fiduciaries may engage in shareholder activities
intended to monitor or influence corporate management if the
responsible fiduciary concludes that, after considering the costs
involved, there is a reasonable expectation that such shareholder
activities will enhance the value of the plan’s investment.

In October 2008, the DOL replaced IB 94-2 with Interpretive
Bulletin 2008-02 (IB 2008-02) to reflect interpretive positions
issued by the DOL on shareholder engagement and socially directed
proxy voting initiatives. IB 2008-02 stated that fiduciaries’
responsibilities include both deciding to vote or not to vote
proxies, and that fiduciary duties require consideration of only
those factors that relate to the economic value of the plan’s
investments. It explained that if a fiduciary reasonably determines
that the cost of voting (including the cost of research to
determine how to vote) is likely to exceed the expected economic
benefits of voting, the fiduciary has an obligation to refrain from
voting. Finally, it emphasized that any use of plan assets by a
plan fiduciary to further political or social causes “that
have no connection to enhancing the economic value of the
plan’s investment” through proxy voting or shareholder
activism is a violation of ERISA’s exclusive purpose and
prudence requirements.

In 2016, the DOL issued Interpretive Bulletin 2016-01 largely
restating IB 94-2 that “in voting proxies, the responsible
fiduciary [must] consider those factors that may affect the value
of the plan’s investment and not subordinate the interests of
the participants and beneficiaries in their retirement income to
unrelated objectives.” 


The DOL published proposed rules to remove prior non-regulatory
guidance and to amend the Investment Duties Regulation to address
perceived confusion about ESG considerations, ETIs, and the
exercise of shareholder rights. The preamble to the 2020 proposals
expressed concern that ERISA plan fiduciaries might be making
improper investment decisions, and that plan shareholder rights
were being exercised in a manner that subordinated the interests of
plans and their participants and beneficiaries to unrelated

Less than six months later, the DOL published final rules (the
Current Rules) amending the Investment Duties Regulation that
generally requires plan fiduciaries to select investments based
solely on consideration of “pecuniary factors,” including
a prohibition against maintaining any investment fund as a
qualified default investment alternative (QDIA) if the fund
includes even one non-pecuniary consideration in its investment
objectives and established standards for voting proxies or in
exercising other shareholder rights in connection with plan

In March of 2021, pursuant to President Biden’s Executive Order 13990, the DOL announced that
it had begun a reexamination of the Current Rules and that, pending
review, the DOL would not enforce the regulations; then, in May of
2021, President Biden signed Executive Order 14030, setting forth policies
to mitigate climate-related financial risk and directed the DOL to
consider publishing a proposed rule to suspend, revise, or rescind
the Current Rules.


In early 2021, the DOL engaged in informal outreach to hear
views from interested stakeholders on how to craft regulations that
better recognize the important role that climate change and other
ESG factors can play in the management of plan investments. The DOL
heard from a wide variety of stakeholders including asset managers,
labor organizations and other plan sponsors, consumer groups,
service providers, and investment advisers. Many of the
stakeholders expressed skepticism as to whether the Current Rules
properly reflect fiduciaries’ duties to act prudently and
solely in the interest of plan participants and beneficiaries.

The DOL concluded there is a reasonable basis for concern that
the Current Rules appear to single out ESG investing for heightened
scrutiny and that the Current Regulations may be deterring
fiduciaries from taking steps that other marketplace investors
would take in enhancing investment value and performance or
improving investment portfolio resilience against the potential
financial risks associated with climate change and other ESG
factors (i.e., the Current Rules created a perception that
fiduciaries are at risk if they include any ESG factors in the
financial evaluation of plan investments, and that they would need
to have special justifications for even ordinary exercises of
shareholder rights).


In October of 2021, the DOL published a notice of proposed
amendments to the Current Rules (the Proposed Rules) to address
uncertainties regarding the Current Regulations, including
climate-related financial risk and investment and voting decisions,
intended to safeguard the interests of participants and
beneficiaries in plan benefits.


The espoused purpose of the Final Rules is to clarify the
application of ERISA’s fiduciary duties of prudence and loyalty
to selecting investments and investment courses of action,
including selecting QDIAs, exercising shareholder rights (such as
proxy voting), and the use of written proxy voting policies and

The Final Rules generally track the Proposed Rules with
clarifications and changes in response to public comments,
consistent with (1) the duties of prudence and loyalty and (2) the
duty to manage shareholder rights, such as voting proxies.


The Final Rules amend the Current Rules to:

  • delete the “pecuniary/non-pecuniary” terminology
    based on concerns that the terminology causes confusion and a
    chilling effect on financially beneficial choices;

  • clarify that a fiduciary’s determination regarding an
    investment must be based on factors that the fiduciary reasonably
    determines are relevant to a risk and return analysis, including
    the economic effects of climate change and other environmental,
    social, or governance factors;

  • remove the stricter rules for QDIAs, so that the same standards
    apply to QDIAs as to other investments;

  • permit fiduciaries to consider collateral benefits as a

  • remove the statement 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

  • remove the two “safe harbor” examples for proxy

  • remove provisions setting out specific monitoring obligations
    with respect to the use of investment managers or proxy voting
    firms. The Final Rules address such monitoring obligations more

  • remove the specific requirement on maintaining records on proxy
    voting activities and other exercises of shareholder rights;

  • replace the requirement that competing investments be
    indistinguishable based on pecuniary factors alone before
    fiduciaries can turn to collateral factors to break a tie with a
    standard that requires the fiduciary to conclude prudently that
    competing investments equally serve the financial interests of the

  • remove the special regulatory documentation requirements in
    favor of ERISA’s generally applicable statutory duty to
    prudently document plan affairs; and

  • clarify that fiduciaries do not violate their duty of loyalty
    solely because they take participants’ preferences into account
    when constructing a menu of investment options for
    participant-directed individual account plans.


The Biden Administration believes that the Final Rules are
neutral; and merely clarify the application of ERISA’s
fiduciary duties of prudence and loyalty in selecting investments
and exercising shareholder rights. Republican legislators have,
however, already introduced legislation to invalidate the Final
Rules; and new administrations will likely have different views,
making yet other course changes.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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DOL Issues Final ESG Investing And Proxy Voting Rules – Employee Rights/ Labour Relations – United States

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