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Participants Challenge ESG Rule in Different Venue


“For Americans of all races, creeds, and political stripes, the American dream includes the prospect of a comfortable retirement.” So begins a second lawsuit challenging the Labor Department’s so-called ESG rule.[i]

However, while that one was brought by roughly half the Attorneys General in the country (along with a plan sponsor and an unrelated plan participant), this one was brought in a different federal court (the U.S. District Court for the Eastern District of Wisconsin) by participants; Richard Braun (Operations Manager for SWAT Environmental, a soil, water, and air technologies company that provides radon mitigation and other services), and Frederick Luehrs III (a Maintenance Supervisor at Petron Corporation, a supplier of engineered lubricants, in New Berlin, Wisconsin)—both of whom participate in the respective defined contribution plans of their employers.[ii]

Proposed ‘Sell?’

But despite the differences in venue (Wisconsin, rather than Texas), the arguments are much the same—and in many respects focus more on the more provocative positioning in the proposed regulation, than on the actual final regulation.

“The fundamental principle that retirement investments are made for the benefit of retirees is now under attack via the guise of an investing fad often referred to as ‘ESG,’ which by its nature focuses on environmental, social, and governance goals rather than maximizing investment returns,” the suit alleges. It continues, “Whatever euphemism one wishes to use—'people over profits,’ ‘standing for something more,’ etc.—the ESG investment trend contemplates a focus on policy objectives rather than financial returns. This ERISA forbids.”

Noting that the so-called ESG rule “stems from a broader executive initiative,” the suit (Braun v. Walsh, E.D. Wis., No. 2:23-cv-00234, complaint filed 2/21/23) goes on to state that “…Congress never granted President Biden the authority to override ERISA’s text and its stated objective to protect retirees in favor of progressive policy dreams like social credit scores, reducing pay for CEOs, or instituting racial quotas for corporate boards.” More precisely, the plaintiffs state that “the ESG Rule violates ERISA and exceeds the authority granted to the Secretary by statute. In addition, it unlawfully politicizes the retirement system and, in doing so, puts the retirement savings of millions of Americans at substantial risk in service of a policy choice not found in ERISA or otherwise enacted by Congress.”

Exceeds Authority

In response—they claim to be “entitled to a declaration that the ESG Rule exceeds the authority conferred on the Secretary and the Department by Congress, and a preliminary and permanent injunction enjoining the ESG Rule.”

The suit proceeds to outline the history of the “focus on financial return” that it notes “has been consistent in federal rules and regulations over the nearly three decades between 1994 and the present day, regardless of what party controlled the White House during that time,” and then goes on (harkening back to the 2020 rule) to note that since that time “fiduciaries have been free to select investments that account for ESG factors, provided that the pecuniary factors underlying these investments and other investment options are equivalent and that fiduciaries document for the participants and beneficiaries the reasoning for their choices.” 

As did the previous suit by 25 state Attorneys General, these plaintiffs bemoan the removal of a specific documentation requirement contained in the Trump Administration’s version, commenting that that “documentation requirement provides protection for plan participants and beneficiaries and ensures that fiduciaries will only consider these non-economic factors when doing so will not put the economic returns of participants and beneficiaries at risk at the expensive of collateral objectives.”

The plaintiffs then turn their attention to the sequence of events following the Biden Administration coming to power, beginning with their announcement that they would not enforce the 2020 Rule “despite that rule having gone through the complete rulemaking and public comment process.”

Provocative Positioning?

Again, most of the criticism here seems focused on the (admittedly) more political (and arguably provocative) positioning of the rule initially proposed by the Biden Administration. The plaintiffs here caution that “a rule that endorses or provides cover for selecting investments based on factors other than financial returns necessarily disadvantages individual employees and participants,” glossing over the reality that the final regulation seems very much in concert with that position (see Tim Hauser Interview: DOL Official Sheds New Light on ESG Reg). 

Indeed, they point out that “the ESG Rule, initially proposed in October 2021 to supersede the 2020 Rule and finalized on December 1, 2022, will fundamentally alter the focus on investment returns for plan participants and beneficiaries, instead injecting consideration of ESG factors—but without requiring that fiduciaries quantify the benefits of any such factors, or even document the reasoning behind their consideration.” The documentation requirement referenced is, of course, to be found in the Trump Administration’s own ESG rule – that called for specific analysis and documentation in “the rare circumstances when fiduciaries are choosing among truly economically ‘indistinguishable’ investments.” 

The suit questions returns on ESG options, as well as alleging that those options carry higher fees. 

In another “lookback” to the proposed rule, the plaintiffs point to text in the Biden Administration’s proposed rule that said proper fund evaluation “may often require an evaluation of the economic effects of climate change and other ESG factors” that was specifically rejected in the final rule. It cited the elimination[iii] of the aforementioned special documentation requirement (in favor of the standard review/process long applied to all plan investments) as a diminution of fiduciary protection—claiming that even with the removal of those special considerations “the spirit of the proposed rule—to favor investments based on these non-pecuniary factors—remains.” 

‘Required’ Removal

Indeed, the plaintiffs here claim that “the ESG Rule and its summary employs two primary vehicles to achieve these objectives: 1) language authorizing and encouraging consideration of ESG factors; and 2) elimination of documentation requirements for ‘tiebreaker’ inquiries.” They go on to state that “while this language, combined with the removal of the word ‘required,’ may appear to solve the problems associated with the Proposed Rule at first glance, the remainder of the regulation, along with the lengthy summary, makes clear that these ESG investments are favored under the new regulation despite a lack of evidence that they provide increased returns for investors.”

Also in the spirit of alleging less protections for participants, these plaintiffs viewed the Trump Administration’s initial prohibition of ESG target-date funds as qualified default investment alternatives (QDIA) as a protection now removed.

As for the Labor Department’s rationalization of the need to reissue a new regulation to counter confusion of terms like “pecuniary,” and the notion that the previous regulation had a “chilling effect” on consideration of ESG factors as… well—at best—unnecessary. And at worse, exactly the opposite of what the final regulation claims to do—putting the financial interests of plan participants and beneficiaries above all other considerations. 

The suit concludes “Unless the Secretary is immediately restrained from implementing the ESG Rule, Plaintiffs and millions of American participants and beneficiaries like them face a substantial likelihood that their retirement contributions will be invested in a manner inconsistent with the statutory requirement that contributions be invested solely in their interest.”

We’ll see.


[ii] The Wisconsin Institute for Law & Liberty represents the plaintiffs.

[iii] The plaintiffs here claim there “are only two plausible reasons why the Department would eliminate a documentation requirement. One would be to eliminate any realistic chance of a participant proving a breach of the duty of prudence and loyalty if a fiduciary subverts the participants’ economic return to collateral considerations.” As for the second reason, the plaintiffs state that “it is difficult, if not impossible, to quantify the economic impact of the ESG factors the ESG Rule, whether in the short or the long term.”