DOL Proposes New Set of ESG Investing Rules; Offers Clarity to Fiduciaries

The Department of Labor today issued a proposed rule regarding the environmental, social or governance investing and a fiduciary’s proxy voting activity under the Employee Retirement Income Security Act. This marks the second attempt by the DOL to implement rules regarding ESG investing; a previous final rule—issued in 2020—prompted the American Bankers Association and other industry groups to raise concerns that it would have a “chilling” effect on the integration of ESG factors in investment decisions. (DOL said earlier this year that it did not intend to enforce compliance with that final rule until further guidance could be published.)

Today’s proposal clarifies that climate change and other ESG factors are often material and that in many instances fiduciaries should consider climate change and other ESG factors in the assessment of investment risks and returns. The proposal provides examples “that, depending on the facts and circumstances, may be material to the risk-return analysis.”

The proposal would also remove the special rules for qualified default investment alternatives that apply under the current rule; replace the existing “tie-breaker” standard with one that requires the fiduciary to conclude prudently that competing investments, or competing investment courses of action, equally serve the financial interests of the plan over the appropriate time horizon; and make changes to the current rule’s provision on exercises of shareholder rights, including proxy voting. Comments on the proposal are due 60 days after publication in the Federal Register.