Bloomberg Law
March 10, 2021, 4:30 PMUpdated: March 10, 2021, 8:12 PM

Biden Labor Agency Won’t Enforce Trump-Era ESG, Proxy Rules (1)

Austin R. Ramsey
Austin R. Ramsey

The U.S. Labor Department won’t enforce two Trump administration rules widely regarded as attempts by the prior administration to curb retirement investments in environmental, social, and corporate governance funds.

The Employee Benefits Security Administration said in a policy statement Wednesday that it wouldn’t enforce the Trump-era investment duties or proxy voting rules nor pursue enforcement actions against plan fiduciaries who fail to comply with them. Officials said the department will revisit the rules.

Discussions with stakeholders led EBSA senior staff to conclude that both rules had created a perception that fiduciaries were at risk if they evaluated ESG factors as part of their plan lineups or that investment managers would need special justifications to exercise shareholder rights, officials said.

“We intend to conduct significantly more stakeholder outreach to determine how to craft rules that better recognize the important role that environmental, social and governance integration can play in the evaluation and management of plan investments, while continuing to uphold fundamental fiduciary obligations,” EBSA Principal Deputy Assistant Secretary Ali Khawar said in a statement Wednesday.

The department’s so-called “do-good” investing duties rule, which took effect Jan. 12, limited plan fiduciaries to investment decisions based on “pecuniary factors,” or solely the financial interests of plan participants and their retirement benefits.

The department’s final iteration of the rule, issued during the waning days of former President Donald Trump‘s administration, stripped the rule of explicit references to ESG factors, but created a tougher standard for fiduciaries to include them when choosing default investments, essentially codifying an earlier Trump field assistance bulletin that had outright banned them.

Similarly, Trump’s proxy voting powers rule, which took effect Jan. 15, prohibited asset managers from voting on a pension or 401(k) retirement plan matter unless it was in the plan’s financial interest.

After taking office in January, President Joe Biden said he wanted to review the investment duties rule, which had been criticized for being rushed. Both proposals had a shortened, 30-day comment period as opposed to the more common 60-day window. EBSA officials said Wednesday that stakeholders had criticized the Trump rulemaking process for failing to adequately consider and address public comments in support of ESG factors and proxy voting powers.

‘Perceived Threat’

The proposed “do-good” investment duties rule in particular was unpopular among investment firms that said it was out of touch with economic trends in support of long-term sustainability factors.

“I’ve never seen anything like it,” said Keith Johnson, a shareholder at Reinhart Boerner Van Deuren in Madison, Wis. “In reality, I think it fell a little closer to a perceived threat.”

The fallout of both rules proved that the size and scope of ESG investing had grown too big to fail. In fact, the rules may have served to persuade skittish fiduciaries to incorporate socially conscious investments, because they afforded credibility to a growing part of the market, attorneys said.

Public criticism of the rules, despite what they actually said, remained strong, said George Michael Gerstein, a co-chair of the Fiduciary Governance and ESG groups at Stradley Ronon Stevens & Young in Washington.

“It was going to become a self-fulfilling prophecy,” Gerstein said. “If it keeps being said that the rule is going to have a chilling effect on ESG investing, it’s going to have a chilling effect on ESG investing.”

The rules, he said, reflected longstanding DOL guidance and fiduciary behavior outlined in the Employee Retirement Income Security Act of 1974, which sets minimum standards for voluntary worker benefits in the private sector. Backlash against the rule conflated prudent ESG considerations with non-investment performance reasons. A growing body of evidence proves that ESG factors are financial factors, and therefore can and should be considered by retirement fiduciaries.

Industry groups and financial service firms that had been vocal critics of the rules applauded the Biden decision not to enforce them Wednesday.

“ESG risks are pecuniary, financially material risks,” said Aron Szapiro, head of policy research for Morningstar. “Trying to define particular types of ESG strategies as unfit for 401(k) plans is not helpful and not necessary. ERISA fiduciaries know they need to pick investments that are best for their participants.”

Recordkeeping Requirements

Because ESG factors have been viewed through a financial lens, some attorneys recommend that asset managers and plan administrators keep up stringent recordkeeping strategies outlined in both the investment duties and proxy voting rules.

“The cornerstone of the duty of prudence is a good process, so it’s incumbent upon fiduciaries to make good decisions and to document their processes,” Gerstein said.

Ropes & Gray ERISA partner Josh Lichtenstein said he’s still recommending that his clients maintain disclosure requirements under the European Union’s Sustainable Finance Disclosure Regulation. New disclosures on non-financial goals should be written in a way that’s in line with the DOL’s historic approach to ESG, he said.

Because the DOL has spent so much time debating whether ESG factors are pecuniary, they’ve lagged behind other nations that already have adopted comprehensive reporting processes that are uniform and sustainable, Johnson said.

Michael Kreps, a principal at Groom Law Group in Washington, said the DOL’s decision not to enforce the rules takes the industry back to the status quo. To avoid DOL oversight or litigation, fiduciary prudence already required strict recordkeeping.

“The rules tried to layer on more specificity,” he said. “Most folks thought that wasn’t necessary and that those specific requirements were creating special burdens for ESG factors. But most people in the investment community began to view ESG factors as economic considerations that are not different than any others.”

Therefore, they should be held to the same reporting standards. But Kreps said the DOL’s announcement is a clear indication that Biden will reopen the rulemaking process on ESG factors and may seek to create more uniform reporting requirements.

(Updates with additional reporting throughout.)

To contact the reporter on this story: Austin R. Ramsey in Washington at

To contact the editors responsible for this story: Martha Mueller Neff at; Andrew Harris at