In this podcast, Isabel Dische and Josh Lichtenstein discuss President Trump's April 10, 2019 Executive Order on Promoting Energy Infrastructure and Economic Growth and its possible implications for Department of Labor guidance with respect to ERISA plan fiduciaries' consideration of environmental, social and governance (ESG) risks and opportunities as part of their investment processes and related proxy activities.
Isabel Dische: Hello, and thank you for joining us today on this Ropes & Gray podcast, the latest in our series of podcasts and webinars focused on ESG and corporate social responsibility issues. I'm Isabel Dische, a partner in our asset management group based in New York and co-chair of our institutional investor practice. Joining me today is Josh Lichtenstein, an ERISA partner in our tax and benefits group also in New York. Today we are going to be talking about President Trump's April 10, 2019 executive order on Promoting Energy Infrastructure and Economic Growth.
Josh, can you first describe the state of play for the Department of Labor's views of ERISA plans' consideration of, and engagement with respect to, environmental, social and governance (or ESG) risks and opportunities before to this executive order?
Josh Lichtenstein: Gladly. By way of background, the DOL has a history of issuing very similar guidance on how plan sponsors may consider non-economic factors such as ESG in making fiduciary investment or investment menu design decisions. On April 23, 2018 the Department of Labor (DOL) issued its most recent guidance under Field Assistance Bulletin (FAB) 2018-01. The DOL explained that FAB 2018-01 was intended to clarify two prior DOL guidance statements – Interpretive Bulletin 2015-01 on economically targeted investments and Interpretive Bulletin 2016-01 on the exercise of shareholder rights and written statements of investment policy. FAB 2018-01 stressed that ERISA fiduciaries "must not too readily treat ESG factors as economically relevant to the particular investment choice at issue when making a decision." Rather, plan fiduciaries must focus first on economic factors – such as risk and return – rather than sacrificing returns or taking additional risk to promote "collateral social policy goals." Indeed FAB 2018-01 indicated that plan fiduciaries should engage in a cost-benefit analysis as they consider engaging on ESG issues and reiterated the DOL's long standing position that these factors should only serve as a "tie breaker" when selecting between two otherwise equivalent options.
Isabel Dische: It is worth noting that a year ago many anticipated that ERISA plan managers might retreat from ESG investments or proxy involvement given the heightened uncertainty under the 2018 guidance.
Josh Lichtenstein: That is correct. Like I said before, the legal standard under guidance from the DOL on this issue has never really shifted, but the tone of the guidance has fluctuated between more open to or skeptical of using non-economic factors as part of the investment decision process. We have seen plan sponsors react to these shifts in tone when they consider ESG funds.
Isabel Dische: So, how does the recent executive order change the landscape? Many commentators have interpreted it as a renewed effort to chill the ESG investment market. Is that correct? What does it say?
Josh Lichtenstein: Well, the executive order is primarily intended to promote private investment in domestic energy infrastructure and its broader then just these retirement issues. As part of that, however, the executive order directs the DOL to complete a review of available data filed with the department by ERISA plans to identify whether there are discernible trends with respect to plans' investment in the energy sector (presumably to note if considering ESG factors has decreased levels of investment in US energy companies). The DOL is also supposed to complete a review of existing DOL guidance on plan sponsors' fiduciary responsibilities when voting proxies. Similar to the directions from the administration on the DOL's now defunct fiduciary rule, the department has been charged to determine if any of this guidance should be rescinded, replaced or modified to ensure consistency with current law and policies promoting long-term growth and maximizing financial returns. The department has 180 days in each case to complete its review. This follows up on the perceived shift away from ESG under the 2018 guidance and it could be read as an indication that the administration wants to see the DOL's position move further in that direction, either generally or specifically regarding the energy sector.
Isabel Dische: So we know that the DOL has been instructed to reassess how plan sponsors carry out their fiduciary duties in this space. What do we expect them to find? How should plan sponsors respond in the meantime?
Josh Lichtenstein: Uncertainty about future guidance may give plan sponsors pause in selecting ESG options or including them on a 401(k) plan lineup, but we don't know what the direction of any final guidance will be. It is possible that the DOL will indicate that non-economic factors are not appropriate for consideration at all, or that it will increase the burden on plan sponsors in demonstrating compliance with ERISA when choosing ESG funds. If the final outcome still includes the tie breaker rule that has been a long standing feature of guidance in this area, than the landscape may not shift much, but subtle changes in the wording or preamble could have significant repercussions on plan sponsor behavior. You can also expect people to "read the tea leaves" from any supplemental information requests that come out of the DOL as part of their review as part of their efforts to gauge what direction ESG investing might go in.
Isabel Dische: So, what does the landscape look like for 401(k) plan sponsors that want to add ESG focused investment options to their investment menus today? Are they able to respond to growing interest from plan sponsors and plan participants in ESG and socially responsible investing investment options?
Josh Lichtenstein: The greatest challenge that plan sponsors face in selecting ESG options remains the tie breaker test. ERISA is a very litigious area with an active plaintiff's bar, so plan sponsors who select ESG options must be prepared to document how they determined there was a "tie" between an ESG and non-ESG option and to defend the choice to consider ESG factors as a tie breaker. This all operates against the background of a focus on fees and fee adjusted performance, and plan sponsors who select an ESG option need to show on an ongoing basis that it remains prudent to keep the ESG option in the plan both as among other ESG options in the market and similar non-ESG options. Plan sponsors and investment fiduciaries would be well advised to continue to monitor this space as they strive to invest funds in or create investment funds in or create investment lineups that include investment options which will help plans and plan participants accomplish their financial goals while also being responsive to the desires of plan participants who are interested in ESG investing.
Isabel Dische: Thank you, Josh, for joining me today for this discussion. And thank you to our listeners. For more information on the topic we discussed today, or other topics of interest to the ESG and impact investing community, please visit our website at www.ropesgray.com. And of course if we can help you navigate any of these areas, please don't hesitate to contact any one of us.
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