As the US Department of Labor (DOL) continues to contemplate the role of environmental, social, and governance (ESG) considerations in ERISA plan investing, ESG issues surrounding retirement plans are cropping up in another way: as a target for proxy vote proposals that seek to require companies to evaluate their ESG commitments in retirement plans.
A subset of shareholders have recently increased pressure on large companies to align their retirement plan offerings with their climate agendas. Specifically, some stakeholders are pushing companies to allow shareholders to vote on whether a company should include in its annual proxy statement a report analyzing how its retirement plan options align with its stated climate action goals.
SEC Findings
In response to these vote requests, several large companies recently brought these shareholder requests to the US Securities & Exchange Commission (SEC), asking for permission to refuse a shareholder vote on evaluating the companies’ 401(k) plans for environmentally friendly investment options. The request to the SEC was based on the argument that these decisions relate to (1) the company’s ordinary business operations and (2) general employee compensation and benefits, and as such, may be handled without shareholder input.
One company’s request to the SEC highlighted that it already offers an ESG screen investment option as well a brokerage window through which plan participants can choose from a broader array of investments outside of what is included in the investment lineup. The companies’ requests also discussed various fiduciary constraints, referencing federal regulations (i.e., ERISA) that require a fiduciary must make decisions about plan assets “solely in the interest of plan participants and beneficiaries.”
On May 4, 2022, the SEC publicized two denials of such company requests. In its decision, the SEC stated that the stockholders of these companies may include retirement plan evaluation proposals in their upcoming annual shareholder meeting agendas.
Implications
These developments are another sign of the increasing focus on the intersection of ESG issues and retirement plans. ERISA and similar standards create unique considerations for retirement plans.
With respect to ERISA plans, though the focus and nomenclature have changed, the DOL has been consistent over the last two decades in affirming that plan fiduciaries must make investment decisions in accordance with ERISA’s two key fiduciary duties of loyalty and prudence. These duties have historically been interpreted by the DOL to require ESG considerations—like climate change goals—to be material to retirement investment savings and not simply an ancillary policy goal.
For that reason, any socially conscious investing efforts, including these types of shareholder actions or other internal and external pressure to pursue ESG goals, must be weighed against ERISA’s requirements (or similar legal requirements for non-ERISA group retirement plans).
Retirement plans may increasingly find they have to balance these legal requirements against pressures such as the shareholder actions described above. Plans and fiduciaries must carefully consider these competing fiduciary requirements in navigating these issues.
For additional analysis on how the DOL is approaching ESG investing, see our October 2021 post, October 2021 LawFlash, and February 2022 post.
If you have any questions or would like more information on the issues discussed in this post, please reach out to the authors or your Morgan Lewis benefits contact.