A group of 26 “red state” attorneys general has filed a notice of their appeal of a federal court’s judgement rejecting their challenge to the Labor Department’s ESG rule.
The notice of appeal (Utah v. Walsh, N.D. Tex., No. 2:23-cv-00016, notice of intent to appeal, 10/26/23)—filed Thursday in the U.S. District Court for the Northern District of Texas—comes roughly a month after Judge Matthew J. Kacsmaryk surprised many by ruling against the coalition of attorneys general, concluding that the Labor Department didn’t exceed its regulatory limits or violate federal benefits law in establishing the regulation.
The coalition[i] that brought the suit in January 2023, alleged that the 2022 Rule “undermines key protections for retirement savings of 152 million workers—approximately two-thirds of the U.S. adult population and totaling $12 trillion in assets—in the name of promoting environmental, social, and governance (‘ESG’) factors in investing, including the Biden Administration’s stated desire to address climate change.”
The rule—Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights—took effect Jan. 30, 2023. The suit 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.”
Arguments that Judge Kacsmaryk rejected. In doing so, he explained that “the 2022 Rule changes little in substance from the 2020 Rule and other rulemakings. Where the 2020 Rule explained that collateral factors may be considered when a fiduciary is ‘unable to distinguish’ between two investment options based on financial factors alone, the 2022 Rule allows the same when the two options ‘equally serve the financial interests of the plan.’” He continued, “And while Plaintiffs aver that the 2022 changes loosen restrictions on fiduciaries, there is little meaningful daylight between ‘equally serve’ and ‘unable to distinguish.’” The Rule also explains that fiduciaries remain free “to determine that an ESG-focused investment is not in fact prudent.”
“Additionally, the Rule's statement that risk return factors ‘may include’ ESG factors differs from the ‘may often require’ language of the proposed rule,” he observed. “As DOL clarified, the proposed language ‘was not intended to create an effective or de facto regulatory mandate’ or ‘an overarching regulatory bias in favor of ESG strategies.’ To the contrary, the Rule ‘makes unambiguous that it is not establishing a mandate that ESG factors are relevant under every circumstance, nor is it creating an incentive for a fiduciary to put a thumb on the scale in favor of ESG factors.’"
Stay tuned.
[i] The states participating in the suit were Utah, Texas, Virginia, Louisiana, Alabama, Alaska, Arkansas, Florida, Georgia, Indiana, Idaho, Iowa, Kansas, Kentucky, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Ohio, South Carolina, Tennessee, West Virginia, and Wyoming.
