DOL Issues New Guidance for ESG Investing by Plan Fiduciaries

May 1, 2018

The U.S. Department of Labor (DOL), which oversees Employee Retirement Income Security Act-covered (ERISA) employee benefit plans, recently released new regulatory guidance "clarifying" that "fiduciaries may not sacrifice returns or assume greater risks to promote collateral environmental, social, or corporate governance (ESG) policy goals when making investment decisions." In Field Assistance Bulletin No. 2018-01 (FAB 2018-01), the DOL announced that "fiduciaries of ERISA-covered plans must avoid too readily treating ESG issues as being economically relevant to any particular investment choice" and that "plan fiduciaries (including investment managers) may not routinely incur significant plan expenses to pay for the costs of shareholder resolutions or special shareholder meetings, or to initiate or actively sponsor proxy fights on environmental or social issues."1

The DOL's guidance comes at a time when investors, especially institutional investors, are calling on companies to focus on ESG issues. For example, in his 2018 letter to CEOs, BlackRock chairman and CEO Larry Fink called on companies to ask themselves "What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce?" Fink further wrote that companies must exercise leadership on ESG issues because "a company's ability to manage environmental, social, and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process."2

BlackRock is not alone in its focus on ESG issues. According to a recent McKinsey report, "ESG integration, which is the systematic and explicit inclusion of ESG factors in financial analysis, has been growing at 17 percent per year." McKinsey further reported that ESG funds are growing rapidly worldwide, from 21.5 percent of assets under management in 2012 to 26 percent of assets in 2016—a total of $22.89 trillion.3 Even shareholder activists have been promoting ESG issues in recent months. For instance, Jana Partners recently created a new socially conscious investment fund and teamed up with California State Teachers' Retirement System (CalSTRS) to call upon Apple to change its iPhone settings so that parents can have more control over the setup of their children's iPhones.4

ERISA generally requires that plan fiduciaries, in managing a plan's investments, act with the "care, skill, prudence, and diligence" that someone familiar with such matters would exercise. The DOL's latest guidance elaborates on this general rule. At the same time, the 2018 guidance differs from the department's previous 2016 guidance issued by President Obama's administration. The 2016 DOL guidance stated that ERISA plan fiduciaries could consider ESG factors without violating their fiduciary duty, opening the way for more retirees to pursue socially responsible investment strategies. FAB 2018-01 asserts that the prior guidance "was not meant to imply that plan fiduciaries, including appointed investment managers, should routinely incur significant plan expenses to, for example, fund advocacy, press, or mailing campaigns on shareholder resolutions, call special shareholder meetings, or initiate or actively sponsor proxy fights on environmental or social issues relating to such companies." The guidance recommends that a fiduciary have a documented cost-benefit analysis before incurring significant costs in a shareholder campaign or engagement activity on an ESG issue in order to demonstrate that the benefits to be obtained were worth any costs expended.

The new guidance also notes that no DOL policy requires fiduciaries to consider or include ESG factors in their investment policies, or to develop ESG-specific guidelines or related tools or metrics as part of their investment plans. Further, while FAB 2018-01 states that plan fiduciaries are not "prohibited" from taking such actions, it reminds fiduciaries that they "must disregard" rote compliance with ESG policies or statements and must "always put first the economic interests of the plan" and make financial factors the main consideration when evaluating investments.

The DOL's new guidance may significantly impact the ongoing dialogue between companies and their investors on ESG issues. For example, the new guidance may reduce the number of shareholder proposals on ESG issues, including environmental and diversity issues that have been the focus of many institutional investors in recent years.

In this way, FAB 2018-01 seems consistent with recent U.S. Securities and Exchange Commission (SEC) rules focusing on the economic impact of ESG issues. For instance, SEC Staff Legal Bulletin No. 14I (SLB 14I),5 which was issued in November 2017, indicated that the SEC will look to a shareholder proposal's significance to the company's business in considering whether the proposal can be excluded from the issuer's proxy statement under Rule 14a-8(i)(5).6 In SLB 14I, the SEC stated that ESG proposals may be excluded under the "ordinary business" exception unless the proponent can show that the proposal has a "significant effect" on the company's business.

Another topic to consider is the type of analysis that will satisfy the DOL's guidance. In recent years, there have been many academic, statistical, and financial studies, among others, that look at a range of ESG issues. The empirical basis for much of this analysis remains hotly disputed, which includes issues ranging from climate change to diversity to dual-class stock. Given the question over what constitutes basic "facts" or "truth" in our current political environment, almost any ESG issue would seem to be open for challenge under FAB 2018-01 to such a degree that a prudent fiduciary might question whether to invest significant resources on that issue. Further, even if the prudent fiduciary has a strong general empirical study, will it satisfy the guidelines of FAB 2018-01 when applied to a specific company? Additionally, what type of process must a fiduciary acting in good faith engage in before making this decision?

Many of these issues are likely to play out in the coming months. One large institutional investor has already called for a "well-developed ESG research process centered on financial materiality" so that investors can satisfy their obligations under the new guideline.7 We believe that while ESG issues will continue to be a subject of discussion between companies and their investors, ERISA-plan fiduciaries may adopt a lower profile on some of these issues, at least until such time as there is more conclusive empirical analysis on particular issues.

For more information on the DOL's new regulatory guidance or any related matter, please contact any member of the securities and governance litigation practice at Wilson Sonsini Goodrich & Rosati.

1 See U.S. Department of Labor, Field Assistance Bulletin 2018-01, dated April 23, 2018, available at
2 Larry Fink's 2018 Letter to CEOs, titled "A Sense of Purpose," is available at
3 See Sara Bernow, Bryce Klempner and Clarisse Magnin, "From Why to Why Not: Sustainable Investing as the New Normal," (McKinsey Insights: 2017) available at
4 See, e.g., Svea Herbst-Bayliss and Ross Kerber, "Fields of Gold? Jana Seeks New Money, Allies With Impact Hedge Fund," Reuters, January 12, 2018 available at
5 See SEC Staff Legal Bulletin 14I, dated November 1, 2017, available at
6 Rule 14a-8(i)(5) under the Exchange Act permits companies to exclude a proposal that "relates to operations which account for less than 5 percent of the company's total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company's business."
7 See Emily Chasen, "Trump's DOL Upends Guidance on ESG Investments," ThinkAdvisor, (Apr.24, 2018) (quoting John Streur, CEO of Eaton Vance Corp.'s Calvert Research and Management) available at