May 1, 2018

DOL’s New Guidance May Impact E&S Shareholder Engagement

In recent years, as SEC rulemaking has stalled on topics like proxy access and political spending disclosure, “private ordering” has become the catalyst for ESG changes (see Broc’s earlier blog about how that’s faring). This may have been due partly to Department of Labor interpretive bulletins from 2015 and 2016 which assured ERISA fiduciaries – i.e. pension plans – that they could consider ESG factors in making investment decisions.

But now, the DOL has issued a new “field assistance bulletin” that revises its earlier interpretations by stating that ERISA fiduciaries must always put the economic interests of the plan first. This Sullivan & Cromwell memo summarizes the key instructions (also see these memos in our “ESG” Practice Area):

1. Fiduciaries must avoid too readily treating ESG issues as being economically relevant to any particular investment choice

2. Fiduciaries may not incur significant plan expenses to (i) pay for the costs of shareholder resolutions or special shareholder meetings, or (ii) initiate or actively sponsor proxy fights on environmental or social issues

As noted in a CII alert, the most significant impact of the guidance likely will be on shareholder engagement. Earlier guidance – the bulletin says – didn’t suggest that it’s always appropriate for plans to engage with the board or management of companies in their portfolios. The guidance “was not meant to imply that plan fiduciaries, including appointed investment managers, should routinely incur significant plan expenses” to fund advocacy or campaigns on shareholder resolutions or proxy fights on environmental or social issues at portfolio companies. It appears that this new field assistance bulletin shifts the burden to pension funds to prove there are tangible activism benefits in every case. This creates a negative presumption that most ESG factors are not economically significant.

The change in tone will undoubtedly elicit angst among governance & sustainability advocates. It’s the latest in a long history of back-and-forth: the DOL’s 2015 & 2016 bulletins were issued in response to a 2008 bulletin, which walked back 1994 guidance. Also see this Davis Polk blog entitled “Are the Reports that the DOL Guidance Will Lead to the Demise of ESG-Focused Plans Greatly Exaggerated?”…

Sustainalytics’ ESG Ratings Now on Yahoo! Finance

Here’s the intro from this blog by Davis Polk’s Ning Chiu:

Some companies may not be aware that since February, their Yahoo Finance web page includes a separate tab with the ESG scores from Sustainalytics. The Sustainalytics quote page shows a company’s numerical rating for three categories, environment, social and governance, along with the overall ESG score. Scores range from 1 to 100.

There is also a graphic representation of the score that, according to the Sustainalytics press release, will be tracked against the average in each category and plotted over time. The graph, currently reflecting data from 2014 to now, is intended to display trends of how a company ranks against industry peers.

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Liz Dunshee