MFA Supports the DOL’s Efforts to Remove Barriers to Plan Fiduciaries’ Ability to Consider ESG Factors
December 13, 2021
MFA supports the DOL’s efforts to remove barriers to plan fiduciaries’ ability to consider climate change and other ESG factors when selecting investments and exercising shareholder rights. However, we expressed some concerns that the proposed rule text and related guidance in the release could, in certain cases, suggest that consideration of certain ESG matters is effectively mandatory, which may not be in the best interest of plan participants and beneficiaries in all cases, and provide several suggestions to help mitigate these potential adverse consequences. We also request clarification in the release regarding proxy voting and proxy voting policies, including guidance that fiduciaries are not required to vote every proxy.
Regarding selecting plan investments:
- We state that we support the DOL’s efforts to remove barriers to plan fiduciaries’ ability to consider climate change and other ESG factors when selecting investments and exercising shareholder rights.
- We agree that “appropriate consideration” of the projected return of a portfolio relative the funding objectives of the plan may in appropriate circumstances include an evaluation of the economic effects of climate change and other ESG factors on the particular investment or investment course of action.
- However, we express concern with the rule text included in paragraph (b)(2)(ii)(C) of the Proposed Rule that states that these ESG considerations may often be required and suggest that the text of the Proposed Rule be modified to state that consideration of the projected return of a portfolio relative the funding objectives may include an evaluation of the economic effects of climate change and other ESG factors on the particular investment or investment course of action.
- We also state our belief that including three categories of permissible ESG considerations—climate change-related factors, governance factors and workforce practices—in the rule text would likely lead ERISA fiduciaries to conclude that consideration of those categories are effectively mandatory. Therefore, we recommend that the DOL remove these categories from the rule text and instead include them as examples of permissible ESG considerations in the guidance accompanying the final rule.
- We support the removal of the prohibition of ESG-oriented investment funds as qualified default investment alternatives (“QDIAs”).
- We also support the DOL’s proposal to replace the economically indistinguishable “tie-breaker” standard adopted in 2020, which could have resulted in ERISA fiduciaries avoiding comparable investments that incorporated ESG considerations.
Regarding exercising shareholder rights:
- We support eliminating the specific monitoring obligations where the authority to vote proxies or exercise shareholder rights has been delegated to an investment manager or where a proxy voting firm performs advisory services as to voting proxies.
- We support eliminating the specific requirements that plan fiduciaries maintain records on proxy voting activities and other exercises of shareholder rights.
- We suggest that the DOL include guidance in the final release indicating that fiduciaries do not have to vote every proxy or engage in shareholder activism and could adopt proxy policies that are consistent with the safe harbor examples for proxy voting policies that the DOL is proposing to remove.
- For example, we note that for many types of investment strategies, limiting voting resources to matters that are expected to have a material effect on the value of the investment is the prudent course of action and in the best interest of plan participants.
- We note that, in other cases, adopting a policy to refrain from voting on proposals, or particular types of proposals, based on a prudently determined quantitative threshold could be in the best interest of plan participants and beneficiaries.
- We suggest that if the DOL determines to remove the safe harbors, that it clarify in the adopting release that the removal does not preclude, and should not be interpreted as discouraging, the adoption of such policies in appropriate circumstances.