On April 10, 2019, President Trump issued an “Executive Order on Promoting Energy Infrastructure and Economic Growth” (the “EO”) that included a separate section on “Environment, Social, and Governance Issues; Proxy Firms; and Financing Energy Projects Through the United States Capital Markets,” instructing the Department of Labor to review current ERISA guidance with respect to proxy voting and shareholder engagement.
Why this matters to retirement plan sponsors
Some sponsors have implemented proxy voting and shareholder engagement policies targeting the environmental, social, and governance (ESG) policies of the companies in which the plan (either directly or indirectly) invests. As we discuss below, those policies are generally allowed (subject to a cost/benefit test) under current DOL guidance (which itself has gone through a number of somewhat confusing iterations).
The Trump Administration, in this new EO, is in effect instructing DOL to review current plan investment practice in this regard (based on “available data filed with [DOL]”) to determine whether it has any effect on capital market support for “the Nation’s energy infrastructure.” And to review current DOL guidance on the fiduciary responsibilities with respect to proxy voting “to determine whether any such guidance should be rescinded, replaced, or modified to ensure consistency with current law and policies that promote long-term growth and maximize return on ERISA plan assets.”
This DOL review – due within 180 days – may generate a revision in current policy and may affect current plan proxy voting and shareholder engagement practice.
In what follows, we review the EO, current DOL guidance, and consider the outlook for this project.
Background – the Executive Order generally
The stated purpose of the Executive Order (EO) is to “promote efficient permitting processes and reduce regulatory uncertainties that currently make energy infrastructure projects expensive and that discourage new investment.”
It instructs the Administrator of the Environmental Protection Agency and the Secretaries of Transportation, Interior, Agriculture, Commerce, and Labor to take certain actions in furtherance of that purpose.
The EO states that “[i]t is the policy of the United States to promote private investment in the Nation’s energy infrastructure” through (among other things): “timely action on infrastructure projects that advance America’s interests and ability to participate in global energy markets; increased regulatory certainty regarding the development of new energy infrastructure;… and support for American ingenuity, the free market, and capitalism.”
Instruction to the Secretary of Labor
In order to “advance the principles of objective materiality and fiduciary duty, and to achieve the policies” identified above, the EO instructs the Secretary of Labor to review (1) “available data filed with [DOL] by retirement plans subject to the [ERISA] in order to identify whether there are discernible trends with respect to such plans’ investments in the energy sector” and (2) “existing [DOL] guidance on the fiduciary responsibilities for proxy voting to determine whether any such guidance should be rescinded, replaced, or modified to ensure consistency with current law and policies that promote long-term growth and maximize return on ERISA plan assets.”
This reconsideration of current DOL policy is to be undertaken “[t]o advance the principles of objective materiality and fiduciary duty.” In this regard, the EO references Supreme Court precedent holding that “information is ‘material’ if ‘there is a substantial likelihood that a reasonable shareholder would consider it important.’” And it states that “the United States capital markets have thrived under the principle that companies owe a fiduciary duty to their shareholders to strive to maximize shareholder return, consistent with the long-term growth of a company.”
Bottom line: President Trump seems to be instructing DOL to review, yet again, its policies on ERISA fiduciary responsibility with respect to proxy voting and shareholder engagement.
DOL proxy voting and shareholder engagement guidance
As we discussed in our article Field Assistance Bulletin 2018-1 – DOL clarifies guidance on economically targeted investments and proxy voting, again, the Clinton, Bush, Obama, and Trump DOL’s have each in their turn weighed in with (differing) guidance on ESG investing generally and proxy voting in particular. This guidance has generally reflected the politics of the Administration then in power.
Thus, in 2016, the Obama DOL (in IB 2016-1) “decided to withdraw [the Bush DOL’s 2008] IB 2008-2 and replace it with Interpretive Bulletin 2016-1 which reinstates the language of [the Clinton DOL’s 1994] IB 94-2 with minor updates.” In doing so, it criticized the changes the Bush DOL had made to Clinton DOL guidance as “out of step with important domestic and international trends in investment management and have the potential to dissuade ERISA fiduciaries from exercising shareholder rights, including the voting of proxies, in areas that are increasingly being recognized as important to long-term shareholder value.”
The Obama DOL guidance – IB 2016-1 – focused on three issues:
Proxy voting as a fiduciary obligation. “The fiduciary act of managing plan assets that are shares of corporate stock includes the voting of proxies appurtenant to those shares of stock.”
Investment policy statements on proxy voting. “A statement of proxy voting policy would be an important part of any comprehensive statement of investment policy.”
Under what circumstances significant shareholder engagement may be appropriate. “An investment policy that contemplates activities intended to monitor or influence the management of corporations in which the plan owns stock is consistent with a fiduciary’s obligations under ERISA where the responsible fiduciary concludes that there is a reasonable expectation that such monitoring or communication with management, by the plan alone or together with other shareholders, is likely to enhance the value of the plan’s investment in the corporation, after taking into account the costs involved.”
Given the focus of the Trump EO, the parts of IB 2016-1 that discuss “environmental” issues that might conceivably be associated with the “energy infrastructure” are especially pertinent. IB 2016-1 states that appropriate issues for shareholder engagement “may include such matters as … the nature of long-term business plans including plans on climate change preparedness and sustainability… [and] policies and practices to address environmental or social factors that have an impact on shareholder value, and other financial and non-financial measures of corporate performance.”
Trump DOL guidance – FAB 2018-1
In 2018, the Trump DOL took its turn at these issues, in Field Assistance Bulletin (FAB) 2018-1. Rather than repudiating IB 2016-1, FAB 2018-1 sought to clarify that any ERISA plan fiduciary action on proxy voting or shareholder engagement must pass a cost vs. benefit test:
All that language in the IB [i.e., the language in IB 2016-1 quoted above] should be read in the context of the Department’s observation that proxy voting and other shareholder engagement typically does not involve a significant expenditure of funds by individual plan investors because the activities are generally undertaken by institutional investment managers that are appointed as the responsible plan fiduciary …. The IB was not intended to signal that it is appropriate for an individual plan investor to routinely incur significant expenses to engage in direct negotiations with the board or management of publicly held companies with respect to which the plan is just one of many investors. Similarly, the IB 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.
In this regard FAB 2018-1 quoted the preamble to IB 2016-01: “[t]he Department has rejected a construction of ERISA that would render ERISA’s tight limits on the use of plan assets illusory and that would permit plan fiduciaries to expend trust assets to promote myriad public policy preferences. Rather, plan fiduciaries may not increase expenses, sacrifice investment returns, or reduce the security of plan benefits in order to promote collateral goals.”
What does Trump want?
FAB 2018-1 seems to leave room for, for instance, some plans to take a proxy voting position on, e.g., climate change, sustainability, and other environmental factors, and, via an explicit investment policy statement, to instruct investment managers to do likewise. So long as they believe they can justify such an approach on a cost/benefit basis.
The Trump EO seems to be asking for a stronger rule in this regard. One that emphasizes “materiality” – presumably, the materiality of the targeted environmental concerns to the plan’s investments – and the ERISA “fiduciary duty” to “promote long-term growth and maximize return on ERISA plan assets.”
Will the EO change DOL policy on proxies and shareholder engagement?
Whether anything at all will come of the EO’s instruction to DOL depends on the answer to three questions:
Is there really a problem here? DOL’s first job (under the EO) is to determine whether “there are discernible trends with respect to such plans’ investments in the energy sector.” It is entirely possible that capital market support for “energy infrastructure” is unaffected by the efforts of some plans, however robust, to change corporate environmental policy.
Is DOL willing to act aggressively on these issues? The Trump DOL’s “clarification” of the Obama DOL’s position on these issues (in FAB 2018-1) was, as noted, relatively modest. Taking a more aggressive “anti-ESG” position on proxy voting and shareholder engagement will certainly be controversial and generate considerable opposition.
Is there an adequate legal theory for a more aggressive position? One way of thinking about ESG is as, in effect, an active management strategy. Fiduciaries raising concerns about ESG issues argue that – regardless of politics – they have an effect on shareholder value. How do you disprove that?
Implications for ETI/ESG investment policies
As noted, the EO specifically instructs DOL to review “guidance on the fiduciary responsibilities for proxy voting.” It does not target DOL guidance on economically targeted investments (ETIs) and environmental, social, and governance (ESG) investmentpolicies – the other main element of DOL guidance in this area. It is conceivable, nevertheless, that a review of those policies might become a follow-on project.
We discuss (Trump) DOL policy on ETI/ESG investing in detail in our article on FAB 2018-1.
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We will continue to follow this issue as it progresses.