DOL Announces Non-Enforcement of ESG and Proxy Rules

The Department of Labor (DOL) has issued a statement that it will not enforce two final rules that were issued late in 2020. One rule, “Financial Factors in Selecting Plan Investments,” was published November 13, 2020, and effective January 12, 2021. This rule codified requirements for fiduciaries to consider regarding the promotion of nonfinancial objectives when selecting plan investments, generally requiring investment selection to be predicated on financial or “pecuniary” factors.

The other rule, “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” was published December 16, 2020, and effective January 15, 2021. This rule governs the proxy voting and shareholder rights exercised by fiduciaries of ERISA-governed retirement plans. They amend existing investment duties regulations that have been in place since 1979.

Federal agencies have been directed to review certain regulations that may be inconsistent with policies set forth under Executive Order 13990 titled, “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis”. The DOL indicates that they have heard from a variety of stakeholders who have questioned whether the rules fail to appropriately consider the merits of environmental, social, and governance (ESG) factors in improving investment returns for retirement investors.

Until further guidance is published, the DOL will not pursue actions against plan fiduciaries based on a failure to comply with those rules with respect to an investment, including a qualified default investment alternative, or with respect to an exercise of shareholder rights. However, the DOL notes it is not precluded from enforcing any statutory requirement under ERISA, including the duties of prudence and loyalty in ERISA Section 404.