Seyfarth Synopsis: For those of you following the saga of ERISA’s fiduciary duties and ESG investing, we are nearing a possible finish line. The latest turn in the saga came when the DOL issued a new set of proposed regulations this month. The approach taken by the DOL comes as no surprise. Looking at the broader ESG shifts in the regulatory environment, the DOL regulations create a symmetry with SEC activities under Gary Gensler’s helm as the SEC’s taken a very vocal approach on the role of ESG factors in an investor’s ability to assess the value of an investment. We further discuss the evolution of the market’s approach to ESG factors in our four-part series you can access here.

The Road to the Latest Swing

Avid subscribers to Beneficially Yours may recall where we started in June 2020 when the DOL issued proposed regulations addressing how ERISA fiduciaries should evaluate an investment or investment strategy based on environmental, social or governance (ESG) factors. Summarized here and here, that guidance indicated that ERISA fiduciaries should focus on pecuniary factors when evaluating an investment or investment strategy, and it cast doubt on whether ESG factors would meet that standard.

The DOL pushed that further in August 2020 with proposed rules described here on a fiduciary responsibility when exercising shareholder rights (including voting proxies) for the plan’s assets. When these rules were finalized and published in November and December 2020 (discussed here and here), they indicated that plan fiduciaries must evaluate investments and investment strategies based solely on pecuniary factors, made it clear that, in DOL’s eyes, ESG factors are not pecuniary in nature, and severely restricted fiduciaries’ ability to vote proxies for the plan’s assets. The new Administration sidelined those 2020 regulations (discussed here), and in March 2021, the DOL announced that it would not enforce those regulations.

The New Proposal’s Approach

Staying grounded in ERISA’s fiduciary duties of loyalty and prudence, the new proposed rules recognize the evolving importance of ESG factors when investing. While the DOL still emphasizes the importance of the risk-return analysis of a proposed investment, the proposal is clear that such an analysis may require evaluating the potential economic effects of climate change and other ESG factors on the proposed investment. This echoes the SEC’s views on ESG. The proposal also specifically permits ESG factors as a material consideration for plan fiduciaries. The DOL explains that “a fiduciary may consider any factor material to the risk-return analysis, including climate change and other ESG factors. … [M]aterial climate change and other ESG factors are no different than other ‘traditional’ material risk-return factors … .” Thus, under ERISA, if a fiduciary prudently concludes that a climate change or other ESG factor is material to an investment or investment course of action under consideration, the fiduciary can and should consider it and act accordingly, as would be the case with respect to any material risk-return factor.”

To demonstrate the potential economic materiality of these factors, the provision lays out examples in each of the E, S and G areas. On the environmental side, the DOL noted that climate change is already imposing significant economic consequences on businesses resulting from, for example, extreme weather damage to physical assets and disruption of business productivity and supply chains. The DOL also noted that proposed governmental regulations and policies (for example, to address green-house gas emissions, and to shift away from carbon intensive investments) could impact an entity’s value. Because pension plans have long term investment horizons, the expected effects of climate change is especially pertinent to the plans’ projected returns.

The DOL noted that governance factors involving board composition, executive compensation practices, corporate decision-making and compliance are also potential material considerations when evaluating an investment. Similarly, workforce diversity and inclusion, training and labor relations could be material factors. The proposed rule acknowledges that financial risk resulting from each of these areas can have a significant impact on reducing volatility and mitigating long term risks to plan assets and should be taken into consideration when selecting investments and investment strategy.

Key Changes

Tie-Break Standard Remains with a Clarification. The proposed rules do retain an element of the old tie-breaking standards, but clarify that a fiduciary is not prohibited from selecting an investment due to any collateral benefits other than investment returns — which was perceived under the 2020 regulations as targeting ESG factors. However, if collateral factors (for example, the ESG factors) tipped the scale in favor of including an investment option in the investment line-up of a participant-directed defined contribution plan, the fiduciaries must ensure that those collateral factors are prominently displayed in the disclosures provided to participants.

Record-keeping and Disclosure Requirements. The proposal also eliminates the special documentation requirement when the fiduciary has concluded pecuniary factors alone were insufficient to make a decision. The prosed rules recognized that such a requirement was not necessary given the existing fiduciary obligations, which are commonly understood to include documenting fiduciary decisions.

QDIAs are a Go. The proposed rules also eliminate the prohibition on ERISA fiduciaries designating investments that use ESG metrics as a plan’s QDIA, as long as those funds otherwise meet the standards.

Proxy Rules Have Give. The proposed rules also address the exercising of shareholder rights (including proxy voting) aspects of the 2020 regulations. The new proposed rules emphasize that the fiduciary duty to manage plan assets includes exercising the shareholder rights associated with those assets, and fiduciaries should conscientiously exercise those rights to protect the interests of the plan participants. As a result, fiduciaries should weigh the cost and effort of voting proxies against the significance of the issue to the plan, and apply the general fiduciary principles.

The proposal eliminates several provisions that were couched as “safe harbors” in the current rule based on the DOL’s concern that they were being construed as permission for fiduciaries to abstain from voting proxy without properly considering the plan’s interests as a shareholder. In addition, the proposed rule prohibits a fiduciary from following the recommendations of a proxy advisory firm or other service provider unless the fiduciary determines that its proxy voting guidelines are consistent with the guidance in the proposal.


If you would like to discuss how these proposed rules could impact you, contact your Seyfarth Shaw employee benefits attorney. If you would like to comment on the proposal, your comments must be summited to the DOL by December 13, 2021.