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 first 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: In your view, have the main ERISA fiduciary principles of prudence and loyalty changed in any way based on this new rule?

Richard Ashley: The fundamentals in terms of duties have not changed. The nature of the regulation starts with the basics, and it still provides that a fiduciary has to discharge its duties with respect to the plan solely in the interests of the participants and beneficiaries for the exclusive purpose of providing benefits to participants and beneficiaries and defraying the reasonable expenses of administering the plan.

In addition, the rule still covers prudence and says that a fiduciary has to act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims.

Tom: Given that, what is different? What are the key features of the rule as it relates to the selecting-plan-investments component?

Richard: On the investment side, the fundamental change here is a change from the use of language that is constructed around solely pecuniary purposes to a construct of a risk-return analysis. The construct overall is focused on a more holistic approach to what constitutes a valid consideration by a fiduciary in making an investment decision.

In addition, there is flexibility with respect to how a fiduciary might consider any relevant factor, including ESG factors, in making an investment decision.

Tom: What does the rule say specifically about the use of ESG factors in making investment decisions?

Richard: The way the regulation is constructed now, a fiduciary’s job is that it is supposed to give appropriate consideration with respect to an investment or investment course of action with respect to those factors that are relevant. And then it talks about what are relevant factors. The rule says that a fiduciary has to look at the risk of loss or the opportunity for gain as compared to other available alternatives. And with respect to non-404(c) plans, what does a fiduciary look at? It looks at diversification, at liquidity, at projected return versus the objectives of the plan.

The rule says that the factors that a fiduciary has to look at are anything that is relevant to the risk-and-return analysis. And this is where ESG comes in because, in conjunction with the discussion of what the relevant risk-and-return factors may be here, the rule says that these factors may include the economic effects of climate change or other ESG factors.

It’s important to note that the rule says that whether a particular factor is appropriate is up to the fiduciary to determine. So it has to appropriately go through a fiduciary process to determine what’s relevant to an investment. But it is clear from the regulation that it is possible for climate or ESG factors to be relevant to an investment decision.

Tom: So it is not saying that ESG factors are necessarily always relevant or always have to be considered, but they could be?

Richard: Correct. It’s a part of the analysis or can be a part of the analysis. So I think that the way the DOL is formulating the regulation is to try to put together a rule that allows a fiduciary to be holistic in approach and, in some respects, is a counterbalance to some concerns with the original regulation, which did not, by preamble or otherwise, favor ESG as a fiduciary looked at what were pecuniary factors.