The US Department of Labor (DOL) issued Field Assistance Bulletin (FAB) 2018-01, on April 23. This FAB updates previous DOL Interpretive Bulletins (IB 2015-01 and 2016-01) regarding an ERISA fiduciary’s consideration of environmental, social, and governance (ESG) factors when evaluating investments for employee benefit plans and when voting proxies and exercising other shareholder rights. The appropriate role of ESG factors, as well as the appropriate fiduciary approach to proxy voting and shareholder engagement, are issues of perennial interest to the DOL and a topic that tends to shift with the political winds. The key issue here is how the consideration of ESG factors fits with an ERISA fiduciary’s obligation to act prudently and solely in the interest of plan participants and beneficiaries, including when making investment decisions.
While not necessarily a repudiation of the previous guidance, we anticipate that FAB 2018-01 may be viewed as a narrower interpretation of the previous Interpretive Bulletins, inviting further deliberation by fiduciaries considering ESG factors in investment or proxy voting and shareholder engagement.
Consideration of ESG Factors
In IB 2015-01, the DOL took the position that plan fiduciaries may consider ESG factors in investment decisionmaking when the ESG factors may have a direct relationship to the economic and financial value of the plan's investment. In those cases, ESG factors are an integral component of the fiduciary’s overall consideration of the economic merits of an investment.
FAB 2018-01 does not reverse that position but cautions that fiduciaries “must not too readily treat ESG factors as economically relevant to a particular investment choice at issue when making a decision.” When a fiduciary does determine that ESG factors are economically relevant, the DOL notes that the “weight given to those factors should also be appropriate to the relative level of risk and return involved compared to other relevant economic factors.” The DOL then goes on to reiterate that ERISA fiduciaries “must always put first the economic interests of the plan in providing retirement benefits.”
Thus, the difference from IB 2015-01 may be viewed as one of emphasis and tone. IB 2015-01 emphasized the notion that ESG factors can be economic factors. FAB 2018-01 seeks to define when ESG factors are indeed economic factors and, if they are, what that should mean to fiduciaries.
IB 2015-01 also stated that ESG factors could be incorporated into a plan’s investment policy statement. FAB 2018-01 does not take a different position, but notes that even provisions in an investment policy statement must be disregarded if application of the investment policy would be inconsistent with ERISA’s fiduciary duties.
Finally, the DOL acknowledged the potential role of an ESG-oriented investment option in the lineup of a 401(k) or other participant-directed plan, where the lineup also includes a similar traditional investment choice, but urges caution in the application of ESG factors in the selection of the plan’s qualified default investment alternative.
Proxy Voting and Shareholder Engagement
On proxy voting and shareholder activism, FAB 2018-01 reiterated the prior guidance that a fiduciary should engage in “traditional and customary” proxy voting and shareholder engagement activities in discharging its fiduciary obligations. The DOL further notes that plans may include proxy voting and shareholder rights policies in investment policy statements, with the expectation that such activities will enhance the value of the plan’s investments in corporate stock.
FAB 2018-01, however, emphasizes that the exercise of such rights should not involve a “significant expenditure” of plan assets and focuses on an analysis of the level of expenses warranted by proxy voting and shareholder engagement in light of the potential economic gain, noting that IB 2016-01 was not “meant to imply that plan fiduciaries . . . should routinely incur significant plan expenses to, for example, fund advocacy, press, or mailing campaigns” or “actively sponsor proxy fights on environmental or social issues relating to such companies.”
Fiduciaries who have started down the path of considering ESG factors in their investment decisionmaking, proxy voting or shareholder engagement based on the 2015 and 2016 guidance may wish to review their process and their policies in light of FAB 2018-01. For example, fiduciaries may wish to review their process for determining whether and to what extent ESG factors are economic factors affecting the plan’s investment choices. Similarly, it may make sense for fiduciaries to review how they conduct the cost-benefit analysis for various types of shareholder activities. And, as was the case under the 2015 and 2016 guidance, ERISA fiduciaries should not consider ESG factors based on their “collateral” social impact (unless such social impact represents a “tie-breaker” between two otherwise equally prudent investment choices).