DOL Reframes ESG Investing and Proxy Voting for ERISA Fiduciaries | Morgan Lewis

The US Division of Labor launched a last rule reframing how ERISA-regulated fiduciaries can take into account environmental, social, and governance components in retirement plan funding choice making.

The US Division of Labor (DOL) launched a last regulation, informally generally known as the “ESG Rule,” on November 22, 2022, titled “Prudence and Loyalty in Choosing Plan Investments and Exercising Shareholder Rights,” (Closing Rule). The Closing Rule reframes how fiduciaries regulated by the Worker Retirement Revenue Safety Act of 1974, as amended (ERISA), can take into account environmental, social, and governance (ESG) components in fiduciary funding choice making for retirement plans. The Closing Rule additionally clarifies how fiduciaries can fulfill their duties when voting proxies and exercising different shareholder rights for plans.  

The Closing Rule clarifies that ERISA-regulated fiduciaries could take note of ESG components which can be related to an funding’s anticipated threat return and different monetary components. Whereas the Closing Rule offers a (inexperienced) thumbs as much as ESG investing in sure circumstances, when thought of towards the proposed model of the rule revealed by the DOL in October 2021 (the Proposed Rule), it deemphasizes ESG components particularly and as an alternative offers a extra principles-based gloss on applicable fiduciary choice making processes typically. Notably, the Closing Rule does not recommend or require that ERISA fiduciaries should take into account ESG components in funding choice making.

Morgan Lewis posted an preliminary abstract of the rule within the ML BeneBits weblog, in addition to a short abstract and an extended evaluation of the proposed model of this rule revealed by the DOL in October 2021 (the Proposed Rule).


The important thing ERISA concern offered by ESG investing is the extent to which consideration of ESG components could be in step with ERISA’s stringent fiduciary duties of loyalty and prudence. ERISA’s obligation of loyalty requires fiduciaries to behave solely within the curiosity of the plan individuals and beneficiaries when making fiduciary selections. ERISA’s obligation of prudence requires a fiduciary to behave “with the care, ability, prudence, and diligence” {that a} prudent individual would use.

The DOL has grappled with this concern in numerous varieties for over a number of many years, in a way typically resembling a ping-pong match, as positions bounce forwards and backwards with altering presidential administrations. The steering through the years, nevertheless, has uniformly required that any consideration of ESG or comparable components in funding choice making should fulfill the duties of loyalty and prudence.

The latest volley previous to the Closing Rule is the regulation adopted in 2020 titled “Monetary Elements in Choosing Plan Investments” (2020 Rule). The 2020 Rule interpreted the obligation of loyalty and the obligation of prudence in a way reflecting skepticism that consideration of ESG components may very well be in step with these duties. The 2020 Rule additionally overhauled long-standing DOL steering on proxy voting and the train of different shareholder rights.

The present management on the DOL was involved that the 2020 Rule created uncertainty with respect to ESG investing and the notion that fiduciaries have been in danger in the event that they included any ESG components of their analysis of investments. The DOL said that it intends the Closing Rule to handle the chilling impact that it believes the 2020 Rule created with respect to the consideration of ESG components in deciding on investments and exercising shareholder rights.


The Closing Rule was anticipated to take a extra pro-ESG strategy and as anticipated, the DOL’s new regulation ought to present some readability and adaptability for fiduciaries relating to the permissible function of ESG components in funding choice making.

Beneath is a abstract of 4 key takeaways, noting areas by which the Closing Rule differs from the 2020 Rule:

1. The Closing Rule takes a extra impartial, middle-of-the-road strategy to ESG components, clarifying that considering ESG components is permissible however not prescribed.

The Closing Rule clarifies that ESG components could also be financially related components thought of and will appropriately be included as a part of ERISA fiduciary funding choice making. Whereas the Proposed Rule prompt there could also be circumstances the place consideration of sure ESG components have to be thought of, the Closing Rule consists of no such requirement. As a substitute, beneath the Closing Rule, ESG components can take their place among the many many components that ERISA fiduciaries could take into account when making funding selections. ESG components don’t require particular remedy or particular documentation.

A central take a look at beneath the Closing Rule is that funding components, together with ESG components, could be thought of if they’re “related to the actual funding or funding plan of action” (which DOL has usually interpreted to imply components which can be financially related) as long as they don’t subordinate individuals’ curiosity in “retirement revenue or monetary advantages.” Whereas the Closing Rule (and prior DOL steering on this space) has been generally known as the ESG regulation, notably the requirements within the Closing Rule appear to use extra broadly past ESG and will enable consideration of different non-traditional components past ESG components (as long as they’re financially related).

Commentary: With the Closing Rule, the DOL deliberately takes an strategy supposed to attain “applicable regulatory neutrality,” which may serve to insulate this rule from additional regulatory ping-pong sooner or later. We anticipate this principles-based strategy will likely be welcomed by ERISA stakeholders who consider that ESG ought to have a spot in retirement plan investing (as a result of the interpretation will cut back limitations to ESG utilization) in addition to these stakeholders looking for to finish uncertainty with a extra sturdy regulation.

2. The Closing Rule broadens applicability and eases utility of the “tie-breaker take a look at.”

Prior DOL steering included the notion of allowing ESG or comparable components for use to interrupt a “tie” between investments into account. The 2020 Rule arrange a difficult (some would possibly say extremely unlikely) state of affairs beneath which a fiduciary may take into account collateral components (i.e., these that aren’t immediately associated to the monetary efficiency of the funding in query) solely when “breaking a tie” amongst funding options that would not be distinguished primarily based on “pecuniary components” alone.

The Closing Rule, in distinction, doesn’t require the investments to be indistinguishable to permit for consideration of collateral advantages. Relatively, it permits for consideration of collateral advantages the place “competing investments . . . equally serve the monetary pursuits of the plan.” Additionally, the Closing Rule removes the documentation course of that accompanied tiebreakers beneath the 2020 Rule.

Commentary: This new take a look at ought to enable fiduciaries extra flexibility to think about “collateral advantages” as a result of it solely requires an funding chosen for such collateral advantages to equally serve the plan’s monetary pursuits, quite than be indistinguishable. Additionally, “collateral advantages” will not be outlined and will not be restricted to ESG components and so, in concept, may embrace non-ESG collateral advantages.

3. The Closing Rule permits fiduciaries of participant-directed plans deciding on plan funding choices to think about participant desire, in sure circumstances.

The Closing Rule provides a brand new provision not included in prior iterations of this regulation, stating that fiduciaries of participant-directed particular person account plans don’t violate the obligation of loyalty solely by contemplating participant preferences as a part of their funding choice making course of, so long as the opposite necessities beneath the Closing Rule are met. The DOL states that this provision isn’t supposed to be novel or a change in DOL place. It’s, nevertheless, the primary time DOL has explicitly addressed the function of participant desire in a regulation. You will need to word that this provision solely addresses the obligation of loyalty, not the obligation of prudence. Thus, a fiduciary could not honor participant desire for funding choices except the fiduciary believes the choices are prudent.

Commentary: We suspect that this provision could have been pushed by the analysis cited within the preamble supporting the notion that accommodating participant preferences, resembling a desire for an ESG-themed funding choice, could drive increased retirement plan participation and deferral charges, which may result in better retirement safety. On the one hand, we anticipate this will likely be a welcome clarification (or affirmation) for some ERISA fiduciaries who could have been involved that consideration of participant requests for an ESG funding choice may very well be construed as subordinating the curiosity in retirement revenue or monetary advantages beneath the plan. Then again, there stay open questions on how this consideration of participant desire will likely be put in apply. For instance, what about competing participant preferences? And the way a lot weight will courts give to a fiduciary’s consideration of participant desire when the funding is challenged as imprudent?

4. The Closing Rule reaffirms the fiduciary obligation to vote proxies and train shareholder rights.

The Closing Rule reemphasizes a long-standing DOL precept {that a} fiduciary’s obligation to handle plan belongings consists of the suitable train of shareholder rights associated to these shares, together with the suitable to vote proxies. The Closing Rule removes provisions included within the 2020 Rule that some learn as growing the regulatory burden for an ERISA fiduciary to vote proxies and train different shareholder rights.

Whereas the 2020 Rule didn’t negate the fiduciary duties relevant to proxy voting and the train of different shareholder rights, some seen the rule as downplaying the significance of, or discouraging, proxy voting and the train of shareholder rights by fiduciaries. The Closing Rule returns to an interpretation clarifying that fiduciaries ought to vote proxies except they’ve an excellent cause to not (e.g., if there can be vital prices concerned).

Commentary: The proxy voting and shareholder rights portion of the Closing Rule additionally displays the DOL’s supposed shift to a extra impartial and principles-based strategy within the Closing Rule. In comparison with the Prior Rule, this rule opens the door to elevated participation in proxy votes and different shareholder actions, so long as the difficulty up for vote is (ESG or not) financially related to the funding.


Whereas this rule is last, it’s not but efficient. Most provisions of the Closing Rule (aside from sure proxy voting provisions for proxy advisory corporations and pooled funding funds) will likely be efficient 60 days after publication within the Federal Register, which is anticipated imminently however has not but occurred as of the publication of this LawFlash. ERISA fiduciaries will wish to overview their present funding coverage statements and tips in mild of those rule adjustments, together with to find out whether or not any adjustments can or must be made to mirror the extra flexibility the Closing Rule affords.

No dialogue of subsequent steps for the Closing Rule can be full with out an acknowledgement of the bigger political and cultural surroundings surrounding ESG in the USA. Some members of Congress have expressed opposition to the Closing Rule, with just a few characterizing it as requiring consideration of ESG components, and have expressed an intent to introduce (or have already launched) laws to amend ERISA to explicitly prohibit consideration of ESG components. Additional, many US states are forging forward with their very own laws each selling and circumscribing the usage of ESG components in their very own state retirement packages.

With the subsequent US presidential election lower than two years away, any change in administration all the time brings the chance of a change in laws. So, whereas the Closing Rule offers what we consider many will take into account welcome readability, the present political surroundings could make certainty on this space elusive.

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