ML BeneBits


A hot topic in the world of money management, including the management of assets in retirement plans, is the consideration of environmental, social, and governance (ESG) factors when evaluating investments. For ERISA plans, one issue is how to consider ESG factors while satisfying the duties of loyalty and prudence under ERISA, including the duty to make investment decisions in the best interests of participants.

Over the last few years, the US Department of Labor (DOL) has issued several pieces of guidance providing instruction on how fiduciaries can use ESG factors in accordance with ERISA duties in the context of investment decisionmaking, proxy voting, and shareholder engagement and the limits on the use of those factors. But based on recent developments, there is reason to believe that more may be coming from the DOL on this topic.

First, in April 2019, US President Donald Trump issued Executive Order on Promoting Energy Infrastructure and Economic Growth, which touched on ESG investing. The executive order notes that it “is the policy of the United States to promote private investment in the Nation’s energy infrastructure.” The order then affirms the importance of US capital markets.

Based on the rationale of supporting both, the executive order then directs the DOL to complete a “review of available data filed with the Department of Labor by retirement plans . . . in order to identify whether there are discernible trends with respect to such plans’ investments in the energy sector” and to provide an update on those findings. In addition, the order directs the DOL to complete a review of “existing Department of Labor guidance on the fiduciary responsibilities for proxy voting to determine whether any such guidance should be rescinded, replaced, or modified to ensure consistency with current law and policies that promote long-term growth and maximize return on ERISA plan assets.” The order could be viewed as signaling an anti-ESG sentiment and a desire by the administration to further reevaluate guidance on the topic.

Second, and following the executive order, there have been recent reports that the DOL has begun issuing document requests, in the course of DOL enforcement examinations, to certain plans asking questions about their use of ESG factors. We are not aware of the DOL previously conducting enforcement examinations on this topic.

In light of this activity, it may be a good time for plan fiduciaries (including fund managers and investment consultants) that utilize ESG factors on behalf of ERISA plans to evaluate whether that usage fits squarely within the most recent DOL guidance on the topic.

As a refresher, prior to the executive order, there were two sets of recent DOL statements on the topic:

  • First, in 2015 and 2016, the DOL issued Interpretive Bulletins (IBs) 2015-01 and 2016-01. In the IBs, the DOL withdrew earlier DOL guidance and affirmed the position that plan fiduciaries may consider ESG factors in investment decisionmaking if the ESG factors have a direct relationship to the economic and financial value of the plan’s investment. The DOL further clarified that ESG factors can be a proper component of appropriate fiduciary investment decisionmaking (and not merely a “tie-breaker” factor).

    The DOL also affirmed that ESG factors could be incorporated into a plan’s investment policy statement. IB 2016-01 specifically touched on proxy voting, instructing that a fiduciary should engage in “traditional and customary” proxy voting and shareholder engagement activities in discharging its fiduciary obligations.

  • Then in 2018, the DOL under the Trump administration issued Field Assistance Bulletin (FAB) 2018-01. While not necessarily a repudiation of the previous guidance, FAB 2018-01 could be viewed as more cautious on the use of ESG factors—although FAB 2018-01 does not reverse IB 2015-01, it cautions that fiduciaries “must not too readily treat ESG factors as economically relevant to a particular investment choice at issue when making a decision.” To that end, the FAB instructs that the “weight given to [ESG] factors should also be appropriate to the relative level of risk and return involved compared to other relevant economic factors.” The FAB also cautions that ERISA fiduciaries “must always put first the economic interests of the plan in providing retirement benefits.” This language is a departure from prior DOL guidance that proceeded from the premise that ESG factors are part of the economic interests of the plan, not something that must be considered after the economic interests of the plan.

As for a plan’s investment policy statement, FAB 2018-01 permits an investment policy to include ESG provisions, but cautions that such provisions must be disregarded if they would cause a fiduciary to violate his or her fiduciary duties. FAB 2018-01 also addresses proxy voting. It reaffirms the instruction that a fiduciary should engage in “traditional and customary” proxy voting and shareholder engagement (and that plans may include proxy voting and shareholder rights policies in investment policy statements), but then cautions that the exercise of proxy voting rights should not involve a “significant expenditure” of plan assets. The DOL specifically clarified 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.”

Stay tuned for future developments. In the meantime, Morgan Lewis can assist with any questions on the proper use of ESG factors on behalf of ERISA plans or the DOL’s position on the topic.