President Biden Vetoes Challenge to Department of Labor ESG Rule

    Late last year, the U.S. Department of Labor (DOL) finalized a rule allowing plan fiduciaries to consider climate change and other environmental, social, and governance (ESG) factors when they make investment decisions and exercise shareholder rights. Specifically, the rule clarified the application of the fiduciary duties of prudence and loyalty under the Employee Retirement Income Security Act of 1974 (ERISA) when selecting plan investments and exercising shareholder rights, including proxy voting.

    Congress subsequently issued a joint resolution (H.J. Res. 30) that would have nullified the DOL final rule. However, on March 20, 2023, President Biden vetoed the joint resolution. Accordingly, the final rule remains in effect, although additional court challenges to the rule are currently pending.

    Overview of the Final Rule

    The final rule provides that a fiduciary’s duty of prudence must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis. Under the final rule, such factors may include the economic effects of climate change and other ESG factors on the particular investment or investment course of action.

    In addition, the final rule:

    Removes the special rules for qualified default investment alternatives (QDIAs) that apply under prior rules from 2020 and would instead apply the same standards to QDIAs that apply to other investments;

    Changes the “tie-breaker” standard, which permits fiduciaries to consider collateral benefits as tie-breakers in some circumstances, by replacing existing provisions with a new standard and removing special documentation requirements; and includes three noteworthy changes to the 2020 rules related to exercises of shareholder rights, including proxy voting.

    The issue is far from settled. Campbell Insurance encourages individuals to research the Department of Labor’s fact sheet on this issue. We will continue to monitor this important topic impacting retirement plans.