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The U.S. Department of Labor has unveiled its much-anticipated final ESG rule that it says will allow “plan fiduciaries to consider climate change and other environmental, social and governance factors when they select retirement investments and exercise shareholder rights, such as proxy voting.”
The operative word for plan fiduciaries is MAY, not must consider ESG factors—a concern that had arisen in the wake of the proposed regulation previously issued.
The rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” specifically and pointedly sets aside the “pecuniary-only” standard at the center of the regulation set out in the waning days of the Trump Administration—a standard that Assistant Secretary of Labor Lisa Gomez said had had a “chilling effect” on plan investment decisions, even when those considerations were deemed to be in the best interests of participants and beneficiaries—causing them to miss out on opportunities, and failing to guard against risks. 
“Today’s rule clarifies that retirement plan fiduciaries can take into account the potential financial benefits of investing in companies committed to positive environmental, social and governance actions as they help plan participants make the most of their retirement benefits,” said Secretary of Labor Marty Walsh. “Removing the prior administration’s restrictions on plan fiduciaries will help America’s workers and their families as they save for a secure retirement.”
In releasing the final rule, the Labor Department noted that it did NOT change two longstanding principles; that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on relevant risk-return factors and not subordinate the interests of participants and beneficiaries (such as by sacrificing investment returns or taking on additional investment risk) to objectives unrelated to the provision of benefits under the plan, and that the fiduciary duty to manage plan assets that are shares of stock includes the management of shareholder rights appurtenant to those shares, such as the right to vote proxies.
Participant Preferences
A new and interesting provision “clarifies” that fiduciaries “do not violate their duty of loyalty solely because they take participants’ preferences into account when constructing a menu of prudent investment options for participant-directed individual account plans. If accommodating participants’ preferences will lead to greater participation and higher deferral rates, as suggested by commenters, then it could lead to greater retirement security.” Thus, in this way, giving consideration to whether an investment option aligns with participants’ preferences can be relevant to furthering the purposes of the plan.
It appears this provision is intended to clarify that ESG-type investments can be added to a 401(k) menu based on the interests of participants, provided they satisfy the applicable fiduciary standards.
The final rule:
“The American Retirement Association appreciates the Department’s willingness to recognize the concerns we raised with the proposed rule,” said Brian H. Graff, CEO of the American Retirement Association. “We have had this for a very short amount of time but at first glance this looks like a victory for plan fiduciaries. The final rule makes it clear that ESG factors do NOT have to be considered for every plan investment but rather that they ‘may’ be considered if the plan fiduciary determines them to be relevant as part of a principles-based fiduciary analysis.”
This rule will be effective 60 days after publication in the Federal Register. The rule will also be applicable on that date except for a delayed applicability until one year after publication for certain proxy voting provisions to allow fiduciaries and investment managers additional time to review any proxy voting policies and guidelines and make any necessary changes.
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