Last week, the Department of Labor (DOL) proposed a rule to explicitly permit plan fiduciaries to consider environmental social and governance (ESG) factors in selecting and monitoring investment products in qualified retirement plans subject to the Employee Retirement Income Security Act (ERISA).
The change had been expected and comes on the heels of the DOL issuing a notice that it would not be enforcing the previous DOL rule, which sought to exclude non-pecuniary factors in investment selection.
Directionally, the rule clarifies that climate change and other ESG factors may materially impact risks and returns and, therefore, should be considered in investment evaluation. While it does not go so far as to require the incorporation of these factors in investment selection, it increases fiduciary latitude in determining the relevance and importance of these factors.
The rule does not speak to whether ESG could or should be included as an employee accommodation. As a result, sponsors that elect to offer or continue to offer ESG investment products would want to review those products consistent with their investment risk and return merits.
If the rule is adopted in its current form, it would permit ESG considerations in qualified default investment alternatives (QDIA) but could significantly impact proxy voting. While under the previous DOL rule, “the fiduciary duty to manage shareholder rights appurtenant to shares of stock does not require the voting of every proxy or exercise of every shareholder right,” the proposed rule would eliminate this statement.
When speaking of the proposed rule, the DOL has stated that voting proxies are part of a fiduciary’s core responsibilities.
ESG and proxy voting have become heavily politicized in the last decade, with administrations under either party changing guidance on the topics significantly and rapidly.
The Rule proposal, “Prudence and Loyalty in Selecting Plan Investment and Exercising Shareholder Rights,” is subject to a 60-day comment period, where it is likely to receive a high volume of comments.
We have believed for some time that ESG factors may be pecuniary in nature and as a result inclusion of those factors in investment selection and monitoring is sound fiduciary practice. The proxy voting aspects of the rule are far narrower in the application, as many retirement plans hold assets exclusively in mutual funds where stock proxies are voted by the asset manager.
If you have questions on how the proposed rule may impact your plan, please contact a Multnomah Group consultant.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.