DOL Rules on ESG Factors

The Department of Labor (“DOL”) has issued updated guidance on fiduciary issues related to the investment of plan assets and the pendulum has swung back in the other direction. The saga began back in 2020 after the DOL published a final rule which limited the ability of fiduciaries to consider, environmental, social, and corporate governance (i.e., “ESG”) issues when making investment decisions with plan assets. Under this rule, fiduciaries were required to focus on so-called “pecuniary” factors (i.e., monetary) and could only consider non-economic factors in limited circumstances.

All that changed after the most recent Presidential election. In March of 2021, the DOL announced that it would not enforce its own 2020 rule. Then, on October 14, 2021, the DOL published a proposed regulation entitled, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” which addresses the ESG investment factors again.

No More Strict Pecuniary Investing

In the newly proposed rule, the Department of Labor views the strict pecuniary investment standard as “chilling” and confusing. They’ve responded to these sentiments by encouraging ESG investment strategies. In the newly proposed Rule, the DOL indicates that a prudent analysis of an investment may include a consideration of the economic effects of climate change and other ESG factors. The Proposed Rule isn’t getting rid of the pecuniary factors but instead the DOL feels that non-pecuniary factors are just as important.

When evaluating an investment or investment course of action, a prudent fiduciary may consider any factor which is material to the risk-return analysis such as:

  • climate-change related factors, including both the direct effects and risks associated with climate change;
  • governance factors, such as board composition, accountability, transparency, and compliance with applicable laws; and
  • workforce practices, including diversity, retention, and training practices.

Tie Breakers and Collateral Considerations

The Proposed Rule uses a more lenient standard for determining when a “tie” occurs. The proposed rule now allows a fiduciary to use collateral factors as a tie-breaker if the investments “equally serve the financial interests of the plan over the appropriate time horizon.” The DOL did not include any restrictions on the kinds of collateral ESG factors that could be considered but solicited comments on whether to include such limitations. The use of collateral factors as a tie-breaker are not required to be documented, but when involving investment options for a participant-directed plans, the nature of the collateral benefits considered must be “prominently displayed in disclosure materials.”

QDIA and Collateral Considerations

The old rules prohibited plans from using ESG factors to designate Qualified Default Investment Alternatives (“QDIAs”). Defined contribution plans use QDIAs as default investments when participants fail to make investment elections. Under the new rules, plans can consider ESG factors when determining what investment funds will serve as the plan’s QDIA. However, fiduciaries still must ensure that the QDIA is financially prudent and otherwise satisfies the underlying QDIA regulations. Any collateral considerations that were taken into account must also be displayed in disclosure materials.

Fiduciary Duties and Proxy Voting

The Proposed Rule reaffirms the DOL’s longstanding view that an ERISA fiduciary’s duties extend to the management of shareholder rights relating to shares of stock that are plan assets. Ultimately, the rule reaffirms that proxies should be voted unless a fiduciary determines that voting the proxy would not be in the plan’s best interest (i.e., due to the prohibitive cost involved). The responsibility for exercising shareholder rights lies with the plan’s trustees unless it is subject to the directions of a named fiduciary or discretion over relevant assets has been properly delegated to an investment manager.

The proposed Rule also reaffirmed the 2020 Proxy Rule’s requirements that when a fiduciary is considering whether and how to exercise a plan’s shareholder rights, it must:

  • act solely in accordance with the economic interests of plan participants and beneficiaries;
  • consider relevant costs involved in exercising shareholder rights;
  • evaluate material facts that form the basis for the proxy vote or exercise of shareholder rights; and
  • exercise prudence and diligence in the selection and monitoring of service providers that exercise or otherwise assist with the exercise of shareholder rights.

A fiduciary is also prohibited from following a proxy adviser’s recommendations without determining that such adviser’s guidelines are consistent with those described above. According to the proposed Rule, a fiduciary can always override a plan’s proxy voting policy, if deviating from the voting policy is in the best interests of the plan. Plan fiduciaries are not required to maintain records on proxy voting and other shareholder rights under the proposed Rule.


The DOL basically got rid of the use of “pecuniary and non-pecuniary” in its newly proposed rule. The three major changes listed in the proposed rule include: allowing ESG investment factors to be considered in investment courses of action, allowing collateral factors to be considered in the selection of QDIAs, and considering collateral factors to be considered in investment tie-breaker scenarios. Other subjected discussed were mostly unchanged from the previous rule issued in 2020. Check back for more updates on the finalization of this proposed rule.