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DOL Finalizes Rule Limiting ESG Considerations in Proxy Voting

By Alex Padalka December 14, 2020

The Department of Labor has issued a final rule that requires retirement plan fiduciaries to proxy vote solely on the basis of their plans’ financial performance, which critics have said could be to the detriment of social and environmental considerations.

Earlier this year, the agency proposed a new rule aimed at ensuring that retirement plans governed by the Employee Retirement Income Security Act base their proxy votes only on the direct financial impact on their plans, saying that “concerns about plans’ voting costs sometimes exceeding attendant benefits has been amplified by the recent increase in the number of environmental and social shareholder proposals introduced.”

“It is likely that many of these proposals have little bearing on share value or other relation to plan interests,” the DOL said.

The proposal received around 300 written comments and 6,700 form letters, the DOL says, adding that some of the commenters “argued that, although exercising shareholder rights on the basis of environmental, social, or governance factors (commonly referred to as “ESG”) may be welcomed by some private investors, proxy rights should be exercised only for financial matters.”

The new rule, issued Friday, restricts plan fiduciaries to voting “solely in the interest of, and for the exclusive purpose of, providing plan benefits to participants and beneficiaries considering the impact of any costs involved” and bars them from making decisions that would “subordinate the interests of participants and beneficiaries in their retirement income or financial benefits under the plan to any non-pecuniary objective, or promote non-pecuniary benefits or goals.”

“Erisa plan fiduciaries must put the growth and security of workers’ retirement savings first,” acting assistant secretary of labor for the Employee Benefits Security Administration Jeanne Klinefelter Wilson says in a statement. “This rule will help Erisa plan fiduciaries follow the law and navigate their prudence and loyalty duties when exercising shareholder rights and obligations.”

The proxy rule comes a little over a month after the DOL finalized a rule requiring retirement plans to prove that the ESG funds they select are “economically indistinguishable” from other investments. Critics of that rule have said it would set a double standard by forcing more scrutiny on ESG funds than on non-ESG alternatives.

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Tags:  ERISA plans/institutional management , Regulatory/legal issues , Investment strategies

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