March 11, 2021

ESG: DOL Won’t Enforce ERISA Plans’ Investment & Voting Limitations

In what investors are saying is a big win, the DOL announced yesterday that it won’t enforce its pair of recent rules that limited consideration of ESG factors in retirement plans’ voting & investment decisions. The details of the non-enforcement stance are explained in a 1-page policy statement. Here are the key takeaways:

The Department has heard from a wide variety of stakeholders, including asset managers, labor organizations and other plan sponsors, consumer groups, service providers, and investment advisers, who have asked whether these two final rules properly reflect the scope of fiduciaries’ duties under ERISA to act prudently and solely in the interest of plan participants and beneficiaries. Stakeholders have also questioned whether those rulemakings were rushed unnecessarily and failed to adequately consider and address the substantial evidence submitted by public commenters on the use of environmental, social, and governance (ESG) considerations in improving investment value and long-term investment returns for retirement investors.

The Department has also heard from stakeholders that the rules, and investor confusion about the rules, have already had a chilling effect on appropriate integration of ESG factors in investment decisions, including in circumstances that the rules can be read to explicitly allow. Accordingly, the Department intends to revisit the rules.

Until it publishes further guidance, the Department will not enforce either final rule or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply with those final rules with respect to an investment, including a Qualified Default Investment Alternative, or investment course of action or with respect to an exercise of shareholder rights. This enforcement statement does not preclude the Department from enforcing any statutory requirement under ERISA, including the statutory duties of prudence and loyalty in section 404 of ERISA. The Department will update its website at as more information becomes available.

CalSTRS Says “Activist Stewardship” Is Here

It’s shaping up to be an active proxy season. As this Wachtell Lipton memo explains, ESG & TSR activists are teaming up. In the throes of Engine No. 1’s dissident campaign – and facing pressure from hedge fund D.E. Shaw – ExxonMobil last week appointed two new directors to its board.

The new directors, Michael Angleakis of Atairos and Jeff Ubben of the “activist E&S fund” Inclusive Capital Partners, weren’t part of Engine No. 1’s dissident slate. so while D.E. Shaw welcomed the appointments, Engine No. 1 said they weren’t enough – and that campaign continues.

In this recent HLS blog, two influential leaders at CalSTRS – the country’s second largest pension fund, with approximately $275 billion in assets – suggest that this is just the beginning of a bigger “activist stewardship” trend. Here’s why:

1. Divestment of individual companies isn’t an attractive option for “universal owners” whose portfolios essentially reflect a representative slice of the economy – they need to manage systemic risks, as I blogged yesterday

2. These investors are growing frustrated with ineffective engagements at some companies

3. Activist techniques – such as replacing directors – can effect the types of changes that investors believe will improve the value of their overall portfolio

The blog points to Engine No. 1’s campaign, which CalSTRS supports, as a “pilot” for future activist stewardship. It lays out a game plan and says that CalSTRS’ goal is to create activist stewardship capabilities “at scale” in order to protect future investment returns. That means board composition – and disclosure about director skills – will continue to grow in importance.

Net-Zero Planning: Investors Want More Than “Offsets”

Yesterday, the UK’s “Institutional Investors Group on Climate Change” – representing 35 trillion Euro in assets under management – published this “Net-Zero Investment Framework 1.0.” The most surprising nugget in the 30-page document is that the use of carbon market offsets in achieving net-zero goals is specifically discouraged. While a lot of people in the sustainability space believe that offsets are mostly smoke & mirrors, the investor position stands in stark contrast to the “market-based solution” that the BRT and many companies have been embracing as a way to meet their recently announced corporate greenhouse gas reduction goals.

This Politico article also emphasizes that quality offsets are in short supply. The article says that today’s market isn’t big enough for a single major corporate pledge. As I blogged earlier this year, the Taskforce on Scaling Voluntary Carbon Markets found that the market would need to grow by at least 15-fold by 2030, enough to absorb 23 gigatons of GHGs per year, to be able to support the pledges that companies are making.

Liz Dunshee