The Department of Labor (DOL) has stated it will not enforce two final rules, “Financial Factors in Selecting Plan Investments” and “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” published late in 2020.
The first rule, “Financial Factors in Selecting Plan Investments,” focused on a plan sponsor’s ability to use Environmental, Social, and Governance (ESG) impacts in making investment decisions. The rule did not specifically mention ESG but stated that only ‘pecuniary factors’ could be used in making decisions related to investment options offered in a retirement plan. The rule also suggested that investments using social criteria or other non-pecuniary factors may not be appropriate as Qualified Default Investment Alternative (QDIA) investments.
The second rule, “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” is related to the fiduciary duties for plan sponsor proxy voting. This rule required fiduciaries to put the economic interest of participants first and to ensure that any vote advances those economic interests. Also, like the ESG rule, it indicated that fiduciaries must not use non-pecuniary objectives or goals. If the vote will have no impact on participants' economic interest or cost, then the fiduciary should not vote the proxy.
This announcement had been expected for some months. One of President Biden’s first executive orders directed the DOL to review the Financial Factors rule. The DOL indicated that it has “heard from stakeholders that the rules, and investor confusion about them, have already had a chilling effect on appropriate integration of ESG factors in investment decisions, including in circumstances that the rules may in fact allow.” The DOL is taking a different tone from the previous administration by showing support for the role ESG integration can play in monitoring plan investments. This follows a history of changes in the guidance on ESG investing coinciding with changes in administration.
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