The DOL’s proposed rule on ESG investments and proxy voting

Sep 6, 2022
  • BlackRock

On October 13, 2021, the U.S. Department of Labor (DOL) released a proposal under the Employee Retirement Income Security Act of 1974 (ERISA) to clarify that plan fiduciaries can 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.

Potential implications of the proposal

If finalized as proposed, the regulation could remove certain barriers for ERISA plans to select ESG investments so long as those selections are otherwise consistent with a prudent and loyal investment decision process.

Furthermore, the proposal acknowledges that ESG factors may be material to the risk-return analysis of a portfolio and that a fiduciary’s analysis may often require an evaluation of the economic effects of climate change and other ESG factors.


In late 2020, the DOL issued a final rule on Financial Factors in Selecting Plan Investments (the 2020 ESG rule) and a rule on Fiduciary Duties Regarding Proxy Voting and Shareholder Rights (the 2020 proxy voting rule). These rules became effective in January 2021. The rules generally require plan fiduciaries to choose investments and investment courses of action based solely on consideration of “pecuniary” factors.

While the rules were an improvement from their proposed versions, the general view of the asset management industry and retirement plan community is that they created uncertainty around whether ESG factors can be considered pecuniary and, as a result, whether a fiduciary may consider ESG and other factors in making investment and proxy voting decisions.

In March 2021, the DOL issued a non-enforcement statement under both rules. In May 2021, President Biden issued an Executive Order on Climate-Related Financial Risk directing the DOL to consider publishing a proposed rule to suspend, revise, or rescind the 2020 rules. This proposal would amend the 2020 rules.

Key provisions of the proposal

The proposal confirms that, in selecting plan investments, a fiduciary may not subordinate the financial interests of the participants and beneficiaries and may not sacrifice investment return or take on additional investment risk to promote benefits or goals unrelated to financial interests of the participants and beneficiaries.

The proposal makes several significant changes to the 2020 rules, including:

1. Removal of definition of “Pecuniary”

The proposal removes the 2020 ESG rule’s reference to pecuniary factors in the articulation of an ERISA fiduciary’s investment responsibilities. In addition, the proposal states that “A prudent fiduciary may consider any factor…that…is material to the risk-return analysis,” and it includes several specific examples of ESG factors that may be considered, such as climate-change related factors, board composition and progress on workplace diversity and inclusion. The proposal states that a fiduciary’s prudent consideration of investment decisions includes consideration of “the projected return of the portfolio relative to the funding objectives of the plan, which may often require an evaluation of the economic effects of climate change and other environmental, social, or governance factors on the particular investment or investment course of action."

2. Removal of restrictions for Qualified Default Investment Alternatives (QDIAs)

The 2020 ESG rule prohibits plans from adding or retaining any investment fund, product, or model portfolio as a QDIA, or as a component of a QDIA, if its objectives or goals or its principal investment strategies include, consider, or indicate the use of one or more non-pecuniary factors. The proposal would remove this restriction, clarifying that the same standards apply to QDIAs as apply to other investments. In the preamble to the proposal, DOL states that “[i]f a fund expressly considers climate change or other ESG factors, is financially prudent, and meets the protective standards set out in [DOL’s QDIA regulation], there appears to be no reason to foreclose plan fiduciaries from considering the fund as a QDIA.”

3. Clarification of the tie-breaker test and removal of corresponding paperwork

The proposal would modify the tie-breaker test in the 2020 ESG rule. Under the proposal, if a fiduciary prudently concludes that competing investments equally serve the financial interests of the plan over the appropriate time horizon, the fiduciary may choose one of the investments based on collateral benefits. Plan fiduciaries who use the tie-breaker rule to include an investment option on a 401(k) plan menu must prominently display the collateral-benefit characteristic of the fund in disclosure materials provided to participants and beneficiaries. The proposal does not require any other special documentation for such selections.

4. Removal of language that created incentives for plans not to engage and not to vote proxies

The proposal would eliminate the statement in the 2020 proxy voting rule stating that “the fiduciary duty to manage shareholder rights appurtenant to shares of stock does not require the voting of every proxy or the exercise of every shareholder right.” The DOL expressed concern in the proposal that its inclusion in the 2020 proxy voting rule could be misunderstood as suggesting that plan fiduciaries should refrain from exercising their rights as shareholders. The proposal would also remove the two “safe harbors” from the 2020 rule. These were policies that are optional ways for satisfying a fiduciary’s responsibilities regarding determining whether to vote. In addition, the proposal would eliminate the requirement that, when deciding whether to exercise shareholder rights and when exercising shareholder rights, plan fiduciaries must maintain records on proxy voting activities and other exercises of shareholder rights.

Comment period and BlackRock response

This is a proposed rule and is subject to change. The proposal was published with a 60-day comment period, and comments were due on December 13, 2021. The DOL is reviewing the public comments and may revise the proposal before issuing a final rule expected in 2022.