DOL Alert: Proposed Settlement on Environmental, Social and Governance Investments and Shareholder Rights – Shareholders

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The Department of Labor (DOL) is preparing to finalize a proposed rule that changes how environmental, social and governance (ESG) factors are considered in a sponsor’s investment process and proxy voting methods of diet. The proposal, which was published in October 2021, aims to help plan sponsors understand their responsibilities when investing in ESG strategies and makes significant changes to two previously published ESG rules.

Here is an update on the DOL’s proposed rule as we seek to help plan sponsors understand their potential new liabilities when considering ESG investments.


For many years, the DOL has considered how non-financial factors, such as the effects of climate change, can affect a plan sponsor’s fiduciary obligations. As the focus is increasingly on ESG investing, the Trump administration has issued a final rule on ESG in November 2020, which required plan trustees to consider only the financial returns of investments – and to ignore non-financial factors such as environmental or social effects. The rule also prohibited plan sponsors from using ESG investments as a qualified default investment alternative (QDIA).

A separate decision rendered in December 2020 said the management of proxy and shareholding functions (for investments under the scheme) should be done for the sole benefit of participants and beneficiaries – not for environmental or social advancements. He also said trustees were not required to vote on every proxy and exercise all shareholder rights.

In March 2021, the Biden administration said it would not implement decisions from the previous year until it completed its own review. The rule currently proposed is the result of this research.


In October 2021, the DOL proposed a new rule, “Prudence and loyalty in the selection of plan investments and the exercise of shareholder rightsUnder the proposed rule, trustees may be required to consider the economic effects of climate change and other ESG factors when making investment decisions and exercising proxy voting and other shareholder rights. The proposal states that trustees must consider ESG issues where material. The rule also overturned a previous provision on QDIAs, clearing the way for the use of ESG investment options in auto-listing as long as those investment options meet QDIA requirements.

The new ESG rule also made several changes to the responsibilities of fiduciaries when exercising shareholder rights. First, it changed a provision on proxy voting, giving trustees more responsibility to decide whether voting is in the best interest of the plan. Second, it removed two “safe harbor” examples of proxy voting policies. Second, the proposed rule eliminated the need for trustees to monitor third-party proxy voting services. Finally, the proposal removed the requirement to keep detailed records of proxy voting and other shareholder rights.

Additionally, the DOL has updated the “tie breaker” to allow trustees to choose an investment that has distinct advantages (for exampleESG factors) whether competing investments also serve the financial interests of the scheme.


The DOL received more than 22,000 comment letters on the proposed regulations. Ninety-seven percent of respondents support the proposed changes according to an analysis of comment letters from the Forum for Sustainable and Responsible Investing (US SIF), a membership association that promotes sustainable investing. While some respondents asked the DOL to review the tiebreaker provision and other details of the proposed rule, many respondents agreed that the proposed rule paves the way for fiduciaries to consider adding ESG investment options to benefit plans.


Based on the typical timeline for similar rule changes, the DOL is expected to release its final version of the proposed rule by mid to late 2022. This means plan sponsors shouldn’t have to wait long to seek clarification on their ability to add ESG investments to their plans. To prepare for the potential changes, plan sponsors should review the proposed rule and consider creating a careful selection process that considers all aspects relevant to an investment’s risk and return profile. As always, documentation is a critical step in this process.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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Helen D. Jessen