The U.S. Department of Labor has announced that it will not enforce recently published final rules by the prior Administration on “Financial Factors in Selecting Plan Investments” and “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights.”
This policy statement is in furtherance of the Biden Administration issued Executive Order 13990, entitled “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis,” directing federal agencies to review existing regulations promulgated, issued, or adopted between January 20, 2017 and January 20, 2021 that are or may be inconsistent with, or present obstacles to, policies .. including, advancing the use of environmental, social and governance (ESG) considerations in investments.
Labor’s Employment Benefits Security Administration released the announcement as an enforcement policy statement under Title I of the Employee Retirement Income Security Act of 1974.
Until the publication of further guidance, Labor announced it will not enforce either final rule or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply with those final rules with respect to an investment, including a Qualified Default Investment Alternative, or investment course of action or with respect to an exercise of shareholder rights.
As such, today it is like the Wild West as companies are under pressure to take stands on ESG issues, but risk a fast changing regulatory environment.
Principal Deputy Assistant Secretary for the Employee Benefits Security Administration Ali Khawar said,
We intend to conduct significantly more stakeholder outreach to determine how to craft rules that better recognize the important role that environmental, social and governance integration can play in the evaluation and management of plan investments, while continuing to uphold fundamental fiduciary obligations.”
By way of background, on Nov. 13, 2020, Labor published a final rule on “Financial Factors in Selecting Plan Investments,” which adopted amendments to the “Investment Duties” regulation under Title I of ERISA. The amendments generally require plan fiduciaries to select investments and investment courses of action based solely on consideration of “pecuniary factors.” On Dec. 16, 2020, Labor published a final rule on “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” which also adopted amendments to the Investment Duties regulation to address obligations of plan fiduciaries under ERISA when voting proxies and exercising other shareholder rights in connection with plan investments in shares of stock.
As President Obama was quoted saying, “elections have consequences.” The Biden Administration has advised that it heard from a wide variety of stakeholders, including asset managers, labor organizations and other plan sponsors, consumer groups, service providers and investment advisers that have questioned whether Labor failed to adequately consider and address the substantial evidence submitted by public commenters on the use of ESG considerations in investing. Labor has also heard from stakeholders that the rules, and investor confusion about them, have already had a chilling effect on integration of ESG factors in investment decisions, including in circumstances that the rules may in fact allow. Accordingly, Labor intends to revisit the rules.
This is consistent with the policies of the new Administration coming on the heels of an announcement I posted about some days ago, SEC to Update Required Climate Related Disclosures. ESG investing has been among the SEC’s priorities in 2021 and just this past Friday the Commission said that some businesses promoting ESG were potentially misleading investors having not adhered to global ESG frameworks or otherwise incorrectly pursuing those strategies from climate change to corporate diversity. It did not name the scofflaws nor describe the misleading statements, but the announcement is seen as step toward justifying a U.S. government regulatory standard for ESG disclosure.
While we all await new rules, this law firm has for years and continues to assist businesses in matters of mitigating risk in ESG disclosures, including providing advice and counsel on climate change and sustainability that may be marketplace driven, as companies seek to position themselves as forces for societal good, as well as in anticipation of impending regulation.