Comment Letter of Professors Max M. Schanzenbach and Robert H. Sitkoff on the Department of Labor's Proposed Rulemaking on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights

Abstract

In October of 2021, the Department of Labor proposed a rule-making on prudence and loyalty in selecting plan investments and exercising shareholder rights. In general, we are supportive of the Proposal’s main purpose of clarifying that ESG investing is not inherently suspect. In our previous comment letter and in our academic writings, we have consistently argued that, in accordance with law and sound public policy, ESG investing is subject to the same fiduciary principles of loyalty and prudence that are applicable to any type or kind of investment strategy. Moreover, we agree that a well-reasoned ESG investing strategy designed to improve risk-adjusted return can be consistent with fiduciary duties under ERISA and the background common law of trusts.

We do, however, have two criticisms of the Proposal. Our aim is to offer these criticisms constructively to assist the Department in revising the Proposal toward a final rule. These criticisms may be summarized as follows.

First, the Proposal at times suggests that ESG factors “should” be considered, which is contrary to the long-established neutrality principle in the law of fiduciary investment. The law neither favors nor disfavors ESG investing. The use of the term “often” in the regulatory text is particularly troubling.

Second, the revised tie-breaker rule strikes the enhanced record-keeping obligations of the 2020 Rule, and the preamble suggests that this documentation provision has been a deterrent to ESG investing outside of the tie-breaker context. On the contrary, enhanced scrutiny for conflicted actions, and the attendant record keeping responsibilities that comes with it, is consistent with long-standing trust law and was not an innovation of the 2020 Rule. Thus, we are concerned that the Proposal may create a trap for the unwary by implying that the normal trust law principles of enhanced scrutiny for a conflict-of-interest situation will not pertain to a collateral benefits ESG tie-breaker.

Additionally, in the same constructive spirit we offer some suggestions about how to account for the meaning of “portfolio” in the context of constructing a menu of designated investment alternatives for an individual account plan.

This comment letter is largely but not entirely based on “Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee,” 72 Stanford Law Review 381 (2020), https://ssrn.com/abstract=3244665.

Keywords: Trustee, Prudent Investor Rule, Loyalty, Mutual Fund, ESG, Environmental Social and Governance, Law and Economics, Law and Finance, Trust, Pension, Charity, Endowment, Active Investing, ERISA

JEL Classification: K22, G11, G14, G18