ERISA plan fiduciaries may be breathing a small sigh of relief this week after the U.S. Department of Labor (the “DOL”) issued a statement on March 10, 2021, that it would not pursue enforcement actions for violations of two recently published rules related to Environmental, Social, and Governance (“ESG”) investments.
Those final rules, including “Financial Factors in Selecting Plan Investments” (published November 13, 2020) and “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights” (published December 16, 2020), each amended the governing regulations for fiduciary responsibilities under Title I of the Employee Retirement Income Security Act (“ERISA”), Sections 403(c) and 404(a). As a result of the regulations’ amendment, ERISA plan fiduciaries would have been restricted to considering only “pecuniary factors” when selecting investments for ERISA plans. “Pecuniary factors” were defined to include any factors that the plan fiduciary prudently determined would have a material effect on risk and/or return of an investment, consistent with the plan’s investment objectives and funding policy. Plan fiduciaries’ ability to direct proxy votes or rely on proxy advisory firms would have been similarly restricted.
Some public commentators were quick to characterize the amendments as “political theater” because the rules specifically targeted ESG investments. However, even setting aside that speculation, the regulations would have potentially imposed new regulatory burdens on ERISA plan fiduciaries by requiring them to categorize investment considerations as being either pecuniary or non-pecuniary in nature.
Until the DOL publishes further guidance on the matter, ERISA plan fiduciaries can assume that it will not enforce the amended portions of those regulations with respect to their investment selections, investment courses of action, or exercise of shareholder rights. The DOL statement may also be a sign to plan fiduciaries that the new administration plans to take additional steps to emphasize ESG investments in the near future, possibly by initiating rule-making procedures of its own.