On April 23, 2018, the U.S. Department of Labor (“DOL”) issued Field Assistance Bulletin No. 2018-01 (the “FAB”), which revisits two important topics relating to ERISA plan investments: (1) whether and to what extent a fiduciary can consider environmental, social and governance (“ESG”) factors when deciding between different investment options and (2) the exercise of shareholder rights.

The FAB clarifies that while ESG factors can present economic risks or opportunities that can be appropriately considered as part of an economic analysis, prior guidance should not be read to suggest that an investment’s promotion of ESG factors or positive market trends means that the investment is automatically a prudent investment choice. Rather, fiduciaries must always focus on the economic interests of plan beneficiaries and must be careful not to put too much weight into ESG factors.

Further, investment policy statements are permitted to include guidelines on ESG factors, but such guidelines are not required. A fiduciary would be obligated to follow any such guidelines because an investment policy statement is considered part of the plan documents. However, the DOL cautioned that a fiduciary must ignore any such guidelines to the extent a particular investment option would otherwise be imprudent, as an ERISA fiduciary may not follow plan documents if they conflict with ERISA. For example, if an ERISA plan’s investment manager were considering two similar investments, one with a better rate of return and lower risk profile and one with ESG factors that may better match the plan’s collateral ESG preferences, the investment manager may be required to ignore the investment policy statement because the second option would be imprudent.

Further, the FAB noted that while it may be appropriate to add an ESG-themed investment option to the investment platform of an ERISA 404(c) defined contribution plan that offers participants a broad range of investment choices, the DOL would be skeptical of the propriety of selecting such an investment option as the plan’s qualified default investment alternative (QDIA). Selection of a default option based on collateral policy goals was not contemplated by the QDIA regulation, and raises questions about the fiduciary’s compliance with ERISA’s duty of loyalty.

Finally, the FAB clarified that while fiduciaries should engage in proxy voting and other shareholder engagement activities, it would be inappropriate for a plan to incur significant expenses negotiating with the board or management of publicly-held companies where the plan is one of many investors in the company. A plan should not routinely spend significant assets to initiate or actively sponsor proxy battles, initiate shareholder meetings or fund campaigns on shareholder resolutions. The FAB noted that a more active engagement approach would be necessary in “special circumstances” when there are issues presenting significant operational risks and costs clearly connected to an investment’s long-term value. However, in any such case, a fiduciary should document its analysis determining that the cost of significant or routine expenditures are outweighed by the benefits of such shareholder activity.

While the DOL has remained consistent that it would be prohibited for a plan fiduciary to sacrifice economic benefits in favor of its own collateral ESG goals, it should be noted that the DOL’s gloss on this principle appears to have shifted. The DOL previously issued guidance on these topics in Interpretive Bulletins (“IBs”) 2015-01 and 2016-01. Generally, the 2016 IBs withdrew guidance previously issued in IBs 2008-01 and 2008-02 disfavoring the use of ESG factors and shareholder activism, and reinstated 1994 guidance favoring such practices. While the 2008 guidance stated that collateral and non-economic factors should rarely be considered, the 2015 guidance stated that ESG factors can be appropriately considered both as part of the economic impact of an ESG factor on an investment option and as a “tie-breaker” between two different investment options with similar characteristics, including the expected rate of return and level of risk. Further, the 2008 guidance suggested that a fiduciary considering an ESG factor in evaluating an investment option should thoroughly document its decision, while the 2015 guidance declared that the consideration of ESG factors does not necessarily require such additional documentation. Similarly, the 2008 guidance cautioned against the exercise of shareholder rights, while the 2016 guidance encouraged it. Thus, a plan fiduciary should remain wary of giving too much weight to ESG factors, as the DOL’s approach in this area has changed with each administration since the Clinton administration.