Biden DOL Announces Non-Enforcement Policy on ESG Regulations
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On March 10, 2021, the Department of Labor (DOL) announced a non-enforcement policy for Trump-era regulations that had sought to constrain the ability of ERISA plan fiduciaries to select ESG (environmental, social and governance) focused investment funds for retirement plan vehicles by generally requiring fiduciaries only to consider "pecuniary factors" when selecting investment options, including the plan's qualified default investment alternative. The announcement signals that the Biden administration, in its reconsideration of the regulations, is likely to be much more friendly to ESG focused investment alternatives than was the predecessor administration. DOL noted in the release that part of the reason for its action was hearing from stakeholders that the rule "had a chilling effect on appropriate integration of ESG factors in investment decisions, including in circumstances that the rules can be read to explicitly allow," suggesting that they believe that ESG-focused funds can have a greater role in retirement plans than they do today. The government's position on this issue has historically swung back and forth, albeit within a relative narrow range, due to questions about whether DOL has the statutory authority broadly to permit ESG-focused investment options into plans, depending on which party has held the White House. This time around, however, the issue has a much higher profile because there is enhanced public awareness of ESG considerations generally, along with heightened interest among segments of plan participants to have ESG options made available to them. In addition, the DOL announced a non-enforcement policy on Trump-era regulations relating to plan proxy voting and shareholder rights. These regulations among other things, would restrict a plan fiduciary from exercising voting rights on investments unless it were doing so for the pecuniary benefit of participants, effectively limiting the ability to vote to reflect ESG concerns. It remains to be seen how permissive the Biden DOL will be in allowing and encouraging plan fiduciaries to take ESG factors into account when selecting plan investment options or whether proposals will be introduced in Congress to amend ERISA to be expressly ESG-fund friendly. While the non-enforcement policy may be welcome news to many plan fiduciaries, plan fiduciaries should beware that the DOL policy does not prohibit private enforcement actions claiming breaches of fiduciary duties based on factors discussed in the regulations, and citing the regulations (which the DOL left in place notwithstanding the DOL's non-enforcement policy) for support.
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