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This rulemaking implements Executive Order 13990 of January 20, 2021, titled Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis, and Executive Order 14030 of May 20, 2021, titled Climate-Related Financial Risks. Among other things, these Executive Orders direct Federal agencies to review existing regulations promulgated, issued, or adopted between January 20, 2017, and January 20, 2021, that are or may be inconsistent with, or present obstacles to, the policies set forth in section 1 of the orders 86 FR 7037 (January 25, 2021); 86 FR 27967 (May 25, 2021). Such policies include the promotion and protection of public health and the environment and ensuring that agency activities are guided by the best science and protected by processes that ensure the integrity of Federal decision-making, and to advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk, including both physical and transition risks. Section 2 of E.O. 13990 provides that for any such regulatory actions identified by the agencies, the heads of agencies shall, as appropriate and consistent with applicable law, consider suspending, revising, or rescinding the agency actions. Section 4 of E.O. 14030 directs the Secretary of Labor to consider publishing, by September 2021, for notice and comment a proposed rule to suspend, revise, or rescind "Financial Factors in Selecting Plan Investments," 85 FR 72846 (November 13, 2020), and "Fiduciary Duties Regarding Proxy Voting and Shareholder Rights," 85 FR 81658 (December 16, 2020). The Department of Labor’s Employee Benefits Security Administration therefore will undertake a review of regulations under title I of the Employee Retirement Income Security Act in accordance with these orders, including "Financial Factors in Selecting Plan Investments," 85 FR 72846 (November 13, 2020), and "Fiduciary Duties Regarding Proxy Voting and Shareholder Rights," 85 FR 81658 (December 16, 2020).

Statement of Need:

The Department of Labor’s Employee Benefits Security Administration undertook a review of the "Financial Factors in Selecting Plan Investments" and the "Fiduciary Duties Regarding Proxy Voting and Shareholder Rights," final rules in accordance with Executive Order 13990 and Executive Order 14030.  Those final rules were intended to provide clarity and certainty regarding the scope and application of ERISA fiduciary duties to plan investment decisions and to the exercise of shareholder rights, including proxy voting.  Stakeholder reactions to the 2020 rules, however, suggest that the rules may have caused more confusion than clarity.  Many interested stakeholders have expressed concerns that the terms and tone of the rules and related preambles have increased uncertainty about the extent to which plan fiduciaries may take into account environmental, social, or governance (ESG) considerations, including climate-related financial risk, in their investment and proxy voting decisions, and that the final rules have and will continue to have chilling effects contrary to the financial interests of ERISA plans and their participants and beneficiaries.  The NPRM is needed to address these concerns and negative impacts.

Summary of the Legal Basis:

The Department is proposing the amendments pursuant to ERISA sections 404 (29 USC 1104) and 505 (29 USC 1135), and Executive Order 14030 (86 FR 27967 (May 25, 2021)) and Executive Order 13990 (86 FR 7037 (January 25, 2021)). 

Alternatives:

The Department considered various alternatives, including leaving the current regulations in place without change, rescinding the Financial Factors in Selecting Plan Investments and Fiduciary Duties Regarding Proxy Voting and Shareholder Rights final rules, and revising the current regulation by, in effect, reverting it to its form before the 2020 final rules. 

Anticipated Costs and Benefits:

Anticipated Benefits - The primary benefit of the proposal is clarification of legal standards, which should empower fiduciaries to take proper account of ESG factors when making investment decisions and exercising proxy voting rights on behalf of plan participants.  The Department has heard from stakeholders that the current regulation, and investor confusion about it, has already had a chilling effect on appropriate integration of ESG factors in investment decisions, and could deter plan fiduciaries from taking into account ESG factors even when they are material to a risk-return analysis.  Stakeholders also indicated that confusion surrounding the current regulation could discourage proxy voting and other exercises of shareholder rights even when doing so is in the plan’s best interest.  A significant benefit of this proposal would be to ensure that plans do not inappropriately avoid considering material ESG factors when selecting investments or exercising shareholder rights, as they might otherwise be inclined to do under the current regulation.  Acting on material ESG factors in these contexts, and in a manner consistent with the proposal, will redound, in the first instance, to employee benefit plans covered by ERISA and their participants and beneficiaries, and secondarily and indirectly, to society more broadly but without any sacrifices by the participants and beneficiaries in ERISA plans. Further, by ensuring that plan fiduciaries would not sacrifice investment returns or take on additional investment risk to promote unrelated goals, this proposal would lead to increased investment returns over the long run. The proposal would also make certain that ERISA regulation would not chill or otherwise discourage proxy voting by plans governed by the economic interests of the plan and its participants. This would promote management accountability to shareholders, including the affected shareholder plans. These benefits, while difficult to quantify, are anticipated to outweigh the costs. 

Anticipated Costs - By reversing aspects of the current regulation, this proposal would facilitate certain activities among plan fiduciaries in their investment decisions, including potential changes in asset management strategies and proxy voting behavior, that these plan fiduciaries otherwise likely would not take under the current regulation.  The precise impact of this proposal on such behavior is uncertain.  Therefore, a precise quantification of all costs similarly is not possible.  To the extent that the proposal changes investment-related behavior among ERISA plans, its benefits are expected to outweigh the costs.  Overall, the costs of the proposal are expected to be relatively small, in part because the Department assumes most plan fiduciaries are complying with the pre-2020 interpretive bulletins to the extent relevant to costs (specifically Interpretive Bulletin 2016-1 and 2015-1), and it is expected that the proposal would track that guidance to a very large extent.  Known incremental costs of the proposal would be minimal on a per-plan basis.

Risks:

The risk of not pursuing this rulemaking is that, if the current regulation is not amended, it could have a) a negative impact on plans’ financial performance as they avoid materially sound ESG investments or integration of material ESG considerations in investment analysis, b) a negative impact on plans’ financial performance as they shy away from economically relevant considerations in proxy voting and from exercising shareholder rights on material issues, and c) broader negative economic/societal impacts (e.g., negative impacts on climate change and on corporate managers’ accountability to the shareholders who own the companies they serve).