DOL halts enforcement of final rule on ESG investments
Ignoring ESG criteria, one industry professional said, "made about as much sense as telling someone planning a trip they can’t look at a map.”
Recently published final rules on “Financial Factors in Selecting Plan Investments” and “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights” will not be enforced, the Department of Labor announced on March 10.
Until the publication of further guidance, the department 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.
“These rules have created a perception that fiduciaries are at risk if they include any environmental, social and governance factors in the financial evaluation of plan investments, and that they may need to have special justifications for even ordinary exercises of shareholder rights,” said Ali Khawar, principal deputy assistant secretary for the Employee Benefits Security Administration.
“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,” Khawar said.
The department heard from a wide variety of stakeholders, including asset managers, labor organizations and other plan sponsors, consumer groups, service providers and investment advisers who asked whether these two final rules properly reflect the scope of fiduciaries’ duties under ERISA to act prudently and solely in the interest of plan participants and beneficiaries.
Stakeholders also have questioned whether the department unnecessarily rushed the rulemakings and failed to adequately consider and address the substantial evidence submitted by public commenters on the use of environmental, social and governance considerations in improving investment value and long-term investment returns for retirement investors.
The department also has heard from stakeholders that the rules, and investor confusion about them, already have had a chilling effect on appropriate integration of ESG factors in investment decisions, including in circumstances that the rules may in fact allow.
Josh Lichtenstein, ERISA partner for the Ropes & Gray law firm, discussed several implications of the decision. “Although the statement doesn’t give any clear indications of how the DOL may modify the rules, it does say that the DOL intends to revisit them,” he said.
“This non-enforcement stance should allow asset managers and plan fiduciaries to pause their current work streams in response to the rule,” Lichtenstein said, “but managers working to implement the SFDR disclosure requirements should continue to make sure that any new disclosure on non-financial goals is not written in a way that may create issues for fiduciaries under the DOL’s historic approach to ESG.”
Industry and policy makers applauded the news:
Senator Patty Murray (D-WA), Chair of the Senate Health, Education, Labor, and Pensions (HELP) Committee said in a statement: “This step is a win for workers, retirees, investors, businesses, communities, the environment—everyone.
“Stopping these rules ensures people investing in their futures are able to make sound decisions to build their financial security while also helping to build a world that is more just, diverse, and sustainable.
“Financial security is about planning for the long term, and the Trump Administration’s requirement that people doing that ignore environmental, social, and governance criteria made about as much sense as telling someone planning a trip they can’t look at a map.”
Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment said:
“We welcome this statement of non-enforcement by the DOL on these two rules which were hastily finalized and ignored the large body of evidence that environmental, social and governance considerations and proxy voting are suitable for ERISA-governed retirement plans.
“We thank DOL staff for quickly reaching out to stakeholders to understand the impacts of the rules and look forward to continuing to engage with the DOL to ensure that further guidance and rulemaking clearly articulate the suitability of ESG considerations and proxy voting in retirement plans.”
Aron Szapiro, head of policy research for Morningstar, said about the news:
“This is welcome news for investors, and it signals the DOL will continue to review and hopefully replace the rule going forward. The transition period was not well defined for qualified defaults, and we believe without this action the rule could have reduced availability of investments using ESG considerations as part of their process.
“ESG investing is increasingly mainstream as it should be: ESG risks are pecuniary, financially material risks. Trying to define particular types of ESG strategies as unfit for 401(k) plans is not helpful and not necessary. ERISA fiduciaries know they need to pick investments that are best for their participants.”
Edward Farrington, Executive Vice President, Institutional and Retirement, at Natixis Investment Managers, commented on the DOL statement:
“We applaud today’s decision by the Department of Labor, which will reduce the uncertainty that has hamstrung ESG adoption by plan sponsors since the rule was proposed. Natixis was among the thousands of investors who offered evidence during the comment period that ESG considerations can support higher risk-adjusted returns for plan participants.
“We hope the DOL will provide additional guidance for plan sponsors that supports the use of ESG factors in retirement plans, which we believe can lead to investment options with a more complete picture of risk and opportunity.
“Our research also indicates ESG investing options can encourage more participation in retirement plans.”
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