The Department of Labor late last year issued the ESG and proxy voting rule, officially called the Final Rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights. (Here’s our blog post on the announcement of the rule.)
This blog post, based on a recent ESG Research Café with Callan’s ESG Practice Leader Tom Shingler and Richard Ashley, partner and co-chair of the US Employee Benefits and Executive Compensation practice at DLA Piper, is the last in a series that focuses on the main aspects of the ESG rule and highlights some of the ways in which it is the same and ways in which it differs from the regulatory guidance issued during the Trump administration.
Tom Shingler: What do you believe the DOL is trying to accomplish by issuing this rule? Is it leveling the playing field? Do you regard it as promoting ESG incorporation
Richard Ashley: I think in looking at the regulation, the overall construct here is one where there was an additional concern layer that’s happening in the background with respect to ESG and the role of ESG. We’ve had some back and forth as to how prevalent ESG should be in connection with fiduciary decision-making. We have a regulation that came out in 2020 that was highly focused on the use of pecuniary factors and solely pecuniary factors. And people became concerned that that was putting a thumb on the scale against ESG.
And the new regulation has come back to put ESG, I think, in a more neutral construct. The DOL is not saying that fiduciaries have to include ESG in every decision set. What it is saying is that ESG can be an economic factor in connection with making a decision. And as a part of this rule there is a concept of the ability to look at ESG in circumstances where two different investments might equally serve the interests of the plan over the investment time horizon.
And in that situation, a fiduciary can look to noneconomic factors or collateral factors in deciding whether or not to pursue one investment choice over the other.
The nature of the overall regulation here, I think, is toward neutrality, toward trying to say that ESG is not better than or worse than any other factor that a fiduciary might consider in the course of a prudent process.
Tom: So it’s important to underline that one way ESG can come into play is in this financial materiality construct, where ESG factors could be material. And the second is in this tiebreaker concept, where collateral benefits could be ESG-related or not. The collateral benefits could be other collateral benefits, correct?
Richard: Correct. What the DOL is saying is that the fiduciary’s approach is one that is based on the facts and circumstances at the time. And it’s up to the fiduciary to decide what is material and what factors are economic factors, what factors might be beneficial but are noneconomic factors, and make its decision based on a prudent process that looks to overall benefit participants and beneficiaries in the first instance.
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