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DOL Pushes Back on Motion to Halt ESG Reg

ESG Investing

Claiming that the suit by 25 state attorneys general “rests on a false premise,” the Labor Department is pushing back on a motion to forestall implementation of the so-called ESG regulation.

More specifically, the “Defendants’ Opposition to Plaintiff’s Motion for Preliminary Injunction” says that a “proper reading of the Rule reveals this lawsuit to be a thinly veiled attempt to roll back the Rule’s placement of the economic effects of ESG considerations on an equal footing with other risk-return factors.” The suit referenced here — filed in late January by a coalition of Republican state attorneys general — claimed that “the 2022 Rule oversteps the Department’s statutory authority under the Employment Retirement Income Security Act of 1974 (‘ERISA’), 29 U.S.C. § 1001 et seq., and is contrary to law” — and comments that “the 2022 Rule is also arbitrary and capricious.” 

As it turns out, on the very same day that this response was filed, the Labor Department lost its bid to move the case to Washington, D.C. 

The Case

But in making this case, the Labor Department stated that “Plaintiffs cannot meet their burden to obtain the extraordinary remedy they seek here.” Beyond that, they state that, “At the outset, Plaintiffs cannot demonstrate irreparable harm — in fact, the majority of Plaintiffs lack standing to bring this lawsuit.”

The Labor Department goes on to state that “any alleged harm to any Plaintiff due to reduced investment in the fossil fuel industry would be caused by fiduciaries’ independent exercise of their statutory duties in selecting investments, not by the Rule. Liberty Oilfield Services and Western Energy Alliance have additionally alleged they will undertake voluntary, unspecified additional “monitoring” of their ERISA fiduciaries; any such self-inflicted costs cannot constitute irreparable harm. Moreover, Plaintiffs’ unexplained delay in seeking emergency injunctive relief — a full three months after the Rule was signed, and nearly a month after its effective date — alone counsels against finding irreparable harm.” The rule — Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights — took effect Jan. 30, 2023.

And — if that weren’t enough — the Labor Department notes that the “Plaintiffs also are unlikely to succeed on the merits. The Department was authorized to promulgate the Rule by a broad and deliberate delegation of rulemaking authority with respect to ERISA; the tiebreaker provision fills a gap in the statute and is in harmony with its text. The major questions doctrine is inapplicable here because the Rule addresses an area that DOL has regulated for over forty years, is consistent with the Department’s decades-old positions, and implements clarifying guidelines rather than imposing any mandatory action. Finally, the Rule is neither arbitrary nor capricious. It is the product of reasoned decisionmaking reflecting the appropriate consideration of alternatives and of all important aspects of the problem at issue. Plaintiffs’ criticisms of the Rule amount to policy disagreements with DOL’s conclusions, but this Court may not substitute its judgment for that of the agency by ruling on that basis.”

“Finally,” the Labor Department concludes,[i] “the public interest here weighs heavily in the government’s favor. The Rule protects ERISA plan participants and beneficiaries’ retirement savings by confirming that fiduciaries’ investment selections must be for the exclusive purpose of providing financial benefits to plan participants and beneficiaries, and by clarifying that they may consider all appropriate factors relevant to a risk-return analysis in selecting investments. The Rule also makes clear that fiduciaries must act consistent with these principles when exercising shareholder rights,” stating that as a result of the foregoing, “the Court should deny Plaintiffs’ request for a preliminary injunction.”

In summary, the response outlines the following points.

The state plaintiffs lack standing:

  • No cognizable injury.
  • Loss of general tax revenue cannot confer standing.
  • “Speculative injuries” to a handful of plaintiff states cannot confer standing generally.
  • The states can’t bring suit as a “parent” of its citizens.

The extraordinary remedy of a preliminary injunction is not warranted:

  • No showing of “irreparable” harm.
  • Haven’t shown a “substantial likelihood” of success on the merits of their arguments (because the rule falls within DOL’s statutory authority, the rule is the product of “reasoned decisionmaking,” and a preliminary injunction isn’t in the public interest.

Stay tuned.


[i]Those are the basic arguments, though in presenting the history of the regulation, the Labor Department not only acknowledged the “broad authority” granted to the Secretary of Labor by Congress, but outlined the timeline that resulted in this regulation — President Biden’s Executive Order (E.O.) 13990, which recognized the Nation’s “abiding commitment to empower our workers and communities” and to “protect our public health and the environment,” and that “in light of the administration’s priorities, including ‘to bolster resistance to the impact of climate change,’ the E.O. directed all federal agencies to review regulations promulgated between January 20, 2017 and January 20, 2021 that might be inconsistent with these goals and, ‘as appropriate and consistent with applicable law,’ to consider whether to suspend, revise, or modify those agency actions.” 

All of which, the filing led to the Labor Department’s subsequent “outreach to, and heard feedback from, ‘a wide variety of stakeholders,’ including ‘asset managers, labor organizations, and other plan sponsors, consumer groups, service providers, and investment advisors’ regarding the 2020 Rules.” The Labor Department noted — as they did in releasing the regulation — that “these stakeholders questioned whether the 2020 Rules properly reflected fiduciary duties of prudence and loyalty,” and “they also questioned whether the 2020 Rules adequately addressed the “substantial evidence submitted by public commenters” about the use of ESG considerations “improving investment value and long-term investment returns for retirement investors,” as well as whether the 2020 Rules were “rushed.”   Moreover that the 2020 Rules were reportedly creating “confusion” among investors about “whether climate change and other ESG factors may be treated as ‘pecuniary’ factors” — and, “in the eyes of stakeholders, creating a ‘chilling effect’ on “appropriate integration of climate change and other ESG factors in investment decisions.”

Ultimately, the Labor Department said it “was also concerned that the regulation ‘ha[d] created a perception that fiduciaries are at risk if they include any ESG factors in the financial evaluation of plan investments’ — and that ‘even ordinary exercises of shareholder rights’ might require ‘special justifications.’” And that “the proposed rule was intended to address these uncertainties ‘relating to the consideration of ESG issues’ to ‘help safeguard the interests of participants and beneficiaries.’”