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Proposed updates to rules on ESG factors and voting proxies

Climate|Retirement
Climate Risk and Resilience

By Michele Brennan , Gary Chase , Stephen Douglas , William (Bill) Kalten and Jonathan Pliner, CFA | November 22, 2021

The proposed rule affects how and when retirement plan fiduciaries can consider ESG factors when selecting investments and voting proxies.

On October 14, 2021, the Department of Labor (DOL) issued a proposed rule clarifying that fiduciaries of defined benefit (DB) and defined contribution (DC) plans subject to ERISA may take into account environmental, social and governance (ESG) factors when selecting investments or deciding on an investment course of action — and in some cases may be required to do so. The proposed rule, Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, modifies two Trump-era rules — Financial Factors in Selecting Plan Investments1 and Fiduciary Duties Regarding Proxy Voting and Shareholder Rights — affecting how and when fiduciaries could consider ESG factors when selecting investments and voting proxies.

The regulations will take effect 60 days after the final rule is published. Comments on the proposed rule are due by December 13, 2021.

Changes to the investment selection rule

The proposed rule provides that in order to evaluate an investment's risks and returns, a fiduciary may often be required to evaluate the economic effects of climate change and other ESG factors. Examples include risks from extreme weather as well as imminent or proposed regulations on emissions on the power sector.

The proposed rule also clarifies that a fiduciary may consider any material factor when performing a risk-return analysis, including ESG factors, and includes specific examples of material factors related to climate change, governance and workforce practices.

In addition, the proposed rule modifies a “tie-breaker” standard that would apply when a fiduciary is deciding between similar investments by replacing a requirement to document how the tie-breaker decision was made with a requirement to disclose to participants that collateral benefits were considered when selecting the investment.

Finally, the proposed rule eliminated a special restriction that prohibited the selection of a qualified default investment alternative (QDIA) that considered any non-material factors, so QDIAs would be treated just like any other investment option.

Changes to the proxy rule

The proposed rule includes four main changes to the proxy rule:

  1. Eliminates a statement that fiduciaries are not required to vote all proxies
  2. Imposes a duty to select and monitor delegations related to voting proxies that more clearly aligns with existing fiduciary requirements
  3. Eliminates specific safe harbors for proxy voting policies
  4. Eliminates a requirement for fiduciaries to document all proxy votes

Going forward

Fiduciaries of both DC and DB plans should consult with their investment advisors and ERISA counsel to determine whether existing policies and practices should be updated to reflect the proposed rule (particularly if they have already begun implementing the prior final rules).

Plan fiduciaries should also consider reviewing whether any investments have been selected based on a tie-breaker rule, and if so whether the collateral benefit that was considered will need to be disclosed to participants and beneficiaries.

Footnote

1 See “DOL proposes rule on ESG factors in selecting retirement plan investments,” Insider, August 2020.

Authors

U.S. Defined Contribution Solutions Leader

Director, Retirement and Executive Compensation

Senior Director, Retirement and Executive Compensation

Senior Director, Retirement and Executive Compensation

Senior Director, Investments – Head of Delegated Portfolio Management, U.S.

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