Yesterday, the Department of Labor "released a final rule under the Employee Retirement Income Security Act (ERISA) . . . [that] clarif[ied] that fiduciaries may consider climate change and other environmental, social, and governance (ESG) factors when they make investment decisions and when they exercise shareholder rights, including voting on shareholder resolutions and board nominations." This rule effectively overturned two rules published in the last months of the Trump Administration, which essentially prohibited the consideration of ESG factors when ERISA fiduciaries made investments or exercised their rights. In short, the Biden Administration has now enabled investment managers of ERISA funds to consider "factors [that] may include the economic effects of climate change and other ESG consideration on the particular investment or investment course of action."
This action by the Department of Labor is one of several steps undertaken by the Biden Administration to enable (and promote) consideration of ESG factors, particularly climate-related risks, in the context of financial decision-making. (The most prominent of these initiatives is the pending SEC proposed rule which would require climate-related disclosures by public companies, and so promote consideration of climate factors by investors due to the availability of this type of information.) Indeed, as part of the Biden Administration's broader climate agenda, it has consistently focused on financial decisions as a means to combat climate change, and this latest development fits neatly within that broader framework.
It should also be noted that the timing of this action suggests that the Biden Administration has been emboldened by the results of the 2022 midterm elections to proceed with its climate agenda. As a parallel point, shortly after the elections, the Biden Administration issued a rule that will compel federal contractors to disclose GHG emissions--this action by the Department of Labor is encompassed within the same overall architecture of initiatives designed to encourage the incorporation of ESG factors into financial decision-making.
With respect to the Department of Labor rule itself, the key point is that ESG factors may now be considered when making an investment decision, without fear of enforcement action (as suggested by the Trump-era guidance). Specifically, the “regulatory text clarif[ies] that a fiduciary’s duty of prudence must be based on factors that the fiduciary reasonably determine are relevant to a risk and return analysis and that such factors may include the economic effects of climate change and other ESG considerations on the particular investment or investment course of action.” (emphasis added) In other words, the regulation embraced by the Department of Labor expressly contemplates that ESG considerations can be incorporated into financial decision-making because such factors are deemed to have an economic impact.
Notably, the federal government’s embrace of the consideration of ESG factors as part of prudent financial decision-making in the context of investing for retirement, as reflected in this Department of Labor rule concerning ERISA, conflicts directly with initiatives embraced by certain conservative-leaning states, such as Florida, which have prohibited the consideration of ESG factors (albeit with exceptions) in the investment decisions by state pension funds. This move by the Biden Administration reflects and amplifies the partisan divide over ESG, particularly climate risks, that is resulting in conflicting directives to companies across America.
The Department of Labor (Department) is adopting amendments to the Investment Duties regulation under Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA). The amendments clarify the application of ERISA’s fiduciary duties of prudence and loyalty to selecting investments and investment courses of action, including selecting qualified default investment alternatives, exercising shareholder rights, such as proxy voting, and the use of written proxy voting policies and guidelines. The amendments reverse and modify certain amendments to the Investment Duties regulation adopted in 2020.