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Last week we got the final regulation on ESG investments in defined contribution plans (and some clarity on proxy voting). What difference do you think this will make—and will it impact how you position these offerings?
Yes, just ahead of the Thanksgiving holiday, the Labor Department issued its final regulation on environmental, social and governance (ESG) issues with regard to investments in defined contribution plans. The bottom line is that the new position allows “plan fiduciaries to consider climate change and other environmental, social and governance factors when they select retirement investments and exercise shareholder rights, such as proxy voting.” The operative word for plan fiduciaries is MAY, not must consider ESG factors—a concern that had arisen in the wake of the proposed regulation previously issued.
The rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” specifically and pointedly sets aside the “pecuniary-only” standard at the center of the regulation set out in the waning days of the Trump Administration—a standard that Assistant Secretary of Labor Lisa Gomez said had had a “chilling effect” on plan investment decisions, even when those considerations were deemed to be in the best interests of participants and beneficiaries—causing them to miss out on opportunities, and failing to guard against risks.
Now—that’s likely not the end of the matter. Concerns remain around the definition of ESG, and its specific application for these purposes, benchmarks remain—well, fluid—and after a period where the returns on these type investments looked pretty favorable, they—like pretty much everything else in the markets—have fallen on hard(er) times.
Still—the Labor Department has arguably provided some new clarity, if not new direction[i] on these considerations—and while we’ve asked several times in the past how you’re feeling about ESG, with a new (and different) regulation in sight—well, we’re curious how, if at all, it may have changed your thinking?
REPLY to this week’s NAPA-Net Reader Radar Poll at https://www.research.net/r/R99HNMP.
And we’ll have it all sorted out for you by week’s end!
[i] In releasing the final rule, the Labor Department noted that it did NOT change two longstanding principles; that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on relevant risk-return factors and not subordinate the interests of participants and beneficiaries (such as by sacrificing investment returns or taking on additional investment risk) to objectives unrelated to the provision of benefits under the plan, and that the fiduciary duty to manage plan assets that are shares of stock includes the management of shareholder rights appurtenant to those shares, such as the right to vote proxies.
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