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DOL Issues Proposed Rule on ESG Investing for ERISA Plans: Part 1: History and State of Play

On 23 June, the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) released a proposed rule, Financial Factors in Selecting Plan Investments (the Proposed Rule). EBSA has regulatory authority over retirement plans created under the Employee Retirement Income Security Act of 1974 (ERISA). The Proposed Rule is designed to address the trend towards environmental, social, and governance (ESG) investing. According to the Proposed Rule, “The [DOL] is concerned . . . that the growing emphasis on ESG investing may be prompting ERISA plan fiduciaries to make investment decisions for purposes distinct from providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan.” The release was accompanied by an op-ed from Secretary of Labor Eugene Scalia, in which he describes the Proposed Rule as “remind[ing] plan providers that it is unlawful to sacrifice returns, or accept additional risk, through investments intended to promote a social or political end.”

The Proposed Rule can be traced, in part, to Executive Order 13868 (10 April 2019) (the Executive Order). Section 5 of the Executive Order, titled “Environment, Social, and Governance Issues; Proxy Firms; and Financing Energy Projects Through the United States Capital Markets,” directed the Secretary of Labor to review guidance from the DOL with respect to the “fiduciary responsibilities for proxy voting to determine whether any such guidance should be rescinded, replaced, or modified to ensure consistency with current law and policies that promote long-term growth and maximize return on ERISA plan assets.” At the time, two DOL bulletins provided guidance to ERISA plan fiduciaries on consideration of ESG factors: Interpretive Bulletin 2015-01 (IB 2015-01) and Field Assistance Bulletin 2018-01 (FAB 2018-01).

The Proposed Rule includes a synopsis of interpretive bulletins from 1994 to 2015 and describes them as using an “all things being equal” test when making investment decisions that consider ESG factors.[1] IB 2015-01 allowed investments to be made in “economically targeted investments,” which are “selected for the economic benefits they create apart from their investment return to the employee benefit plan,” so long as the considered factors do not require fiduciaries to sacrifice returns or bear increased risks. FAB 2018-01 sought to clarify IB 2015-01 by noting that the ESG considerations permissible under IB 2015-01 are those “ordinarily collateral issues [that] are themselves appropriate economic considerations.” In other words, the DOL tried to clarify when ESG considerations may also be economic considerations. Secretary Scalia, in his op-ed, makes a similar statement. “Sometimes, ESG factors will bear on an investment’s value.”

In terms of specific changes, IB 2015-01 would be removed but some key elements of IB 2015-01 would be codified as part of the Proposed Rule, such as the recognition of possible overlap between ESG considerations and economic considerations. In codifying parts of IB 2015-01, the Proposed Rule would make certain amendments to the regulations for “investment duties” of ERISA plan fiduciaries. First, language would be added to codify that fiduciaries are required “to select investments and investment courses of action based on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.” Second, fiduciaries would be unable to subordinate returns in favor of “nonpecuniary” goals. Third, fiduciaries would be required to consider alternative investments to meet plan goals and “nonpecuniary” factors can break a tie between two or more economically indistinguishable investment choices. Fourth, fiduciaries would have to document their analyses when such tiebreakers occur, such as when a toxic chemical leak, to use the example above, is the tiebreaker.

Upon publication in the Federal Register, the Proposed Rule will be open for public comment for 30 days. The Proposed Rule was published in the Federal Register on 30 June, which means comments are due no later than 30 July.
On 23 June, the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) released a proposed rule, Financial Factors in Selecting Plan Investments (the Proposed Rule). EBSA has regulatory authority over retirement plans created under the Employee Retirement Income Security Act of 1974 (ERISA). The Proposed Rule is designed to address the trend towards environmental, social, and governance (ESG) investing. According to the Proposed Rule, “The [DOL] is concerned . . . that the growing emphasis on ESG investing may be prompting ERISA plan fiduciaries to make investment decisions for purposes distinct from providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan.” The release was accompanied by an op-ed from Secretary of Labor Eugene Scalia, in which he describes the Proposed Rule as “remind[ing] plan providers that it is unlawful to sacrifice returns, or accept additional risk, through investments intended to promote a social or political end.”

The Proposed Rule can be traced, in part, to Executive Order 13868 (10 April 2019) (the Executive Order). Section 5 of the Executive Order, titled “Environment, Social, and Governance Issues; Proxy Firms; and Financing Energy Projects Through the United States Capital Markets,” directed the Secretary of Labor to review guidance from the DOL with respect to the “fiduciary responsibilities for proxy voting to determine whether any such guidance should be rescinded, replaced, or modified to ensure consistency with current law and policies that promote long-term growth and maximize return on ERISA plan assets.” At the time, two DOL bulletins provided guidance to ERISA plan fiduciaries on consideration of ESG factors: Interpretive Bulletin 2015-01 (IB 2015-01) and Field Assistance Bulletin 2018-01 (FAB 2018-01).

The Proposed Rule includes a synopsis of interpretive bulletins from 1994 to 2015 and describes them as using an “all things being equal” test when making investment decisions that consider ESG factors.[1] IB 2015-01 allowed investments to be made in “economically targeted investments,” which are “selected for the economic benefits they create apart from their investment return to the employee benefit plan,” so long as the considered factors do not require fiduciaries to sacrifice returns or bear increased risks. FAB 2018-01 sought to clarify IB 2015-01 by noting that the ESG considerations permissible under IB 2015-01 are those “ordinarily collateral issues [that] are themselves appropriate economic considerations.” In other words, the DOL tried to clarify when ESG considerations may also be economic considerations. Secretary Scalia, in his op-ed, makes a similar statement. “Sometimes, ESG factors will bear on an investment’s value.”

In terms of specific changes, IB 2015-01 would be removed but some key elements of IB 2015-01 would be codified as part of the Proposed Rule, such as the recognition of possible overlap between ESG considerations and economic considerations. In codifying parts of IB 2015-01, the Proposed Rule would make certain amendments to the regulations for “investment duties” of ERISA plan fiduciaries. First, language would be added to codify that fiduciaries are required “to select investments and investment courses of action based on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.” Second, fiduciaries would be unable to subordinate returns in favor of “nonpecuniary” goals. Third, fiduciaries would be required to consider alternative investments to meet plan goals and “nonpecuniary” factors can break a tie between two or more economically indistinguishable investment choices. Fourth, fiduciaries would have to document their analyses when such tiebreakers occur, such as when a toxic chemical leak, to use the example above, is the tiebreaker.

Upon publication in the Federal Register, the Proposed Rule will be open for public comment for 30 days. The Proposed Rule was published in the Federal Register on 30 June, which means comments are due no later than 30 July.

Notes
[1] The Proposed Rule discusses DOL’s first interpretive bulletins released on this subject, including Interpretive Bulletin 94-1 and its successor, Interpretive Bulletin 2008-01 (IB 2008-01). IB 2008-01 was later superseded by IB 2015-01.

Copyright 2020 K & L GatesNational Law Review, Volume X, Number 198

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Daniel Crowley, KL Gates Law Firm, Public Policy Attorney
Partner

Dan Crowley is a partner in the firm’s Washington, D.C. office. His practice is focused on public policy issues relating to financial services and capital markets.

Mr. Crowley represents category-leading financial services clients across a broad range of policy issues including accounting & financial reporting, broker-dealer & securities trading, commodities & futures, corporate governance, depository institutions, derivatives & securitization, hedge funds, insurance, investment management, mortgage banking & consumer finance, and retirement...

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Karishma Page, KL Gates Law Firm, Public Policy Attorney
Partner

Based in Washington, D.C., Karishma Shah Page is a member of K&L Gates’ Public Policy and Law Practice. Ms. Page concentrates her practice on federal legislative and regulatory policy, focusing on tax, financial services, retirement, health care, and employee benefits issues. Ms. Page has extensive experience working on a variety of tax legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act, retirement legislation, the Affordable Care Act, and related rulemaking and regulatory activity.

Ms. Page develops and implements a variety of advocacy strategies to advance client objectives, both from a Congressional and administrative perspective. In particular, she leads complex, multi-faceted policy campaigns incorporating lobbying, coalitions and third-party advocates, grassroots/grasstops strategies, and traditional and new media. Additionally, she has experience building, managing, and working with coalitions. 

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Bruce Heiman, KL Gates Law Firm, Public Policy Attorney
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Bruce Heiman engages in a wide ranging federal counseling and lobbying practice. He has represented leading companies and trade associations in technology, financial services, postal, trade, transportation and manufacturing industries. He is one of two Practice Area Leaders of K&L Gates’ Policy and Regulatory Practice and serves on the firm’s Management Committee. He is nationally ranked as a top government relations lawyer by both Chambers USA and The Legal 500.

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William Kirk, KL Gates Law Firm, Tax and Financial Services Attorney
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Bill Kirk, a partner at K&L Gates, represents clients before Congress and Executive Branch agencies with emphasis on tax, financial services, corporate and transportation and infrastructure matters. Mr. Kirk’s clients include public and private entities such as major corporations and national trade associations for whom he provides policy analysis and strategic advice and engages in advocacy with the Congress and Executive Branch agencies. He also has significant experience representing emerging and middle market firms on legal and policy matters (e.g., minority and...

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Dean A. Brazier, KL Gates, Corporate Mergers Lawyer, public Accountant Attorney
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