In December 2022, we provided 401(k) Specialist readers with “A Closer Look at Biden Administration’s New ESG Rule.”
Since then, there have been significant developments on the issue. However, one thing that stakeholders have not been provided is certainty, as the regulatory and political landscape continues to shift on these issues. We describe some of these developments below.
States Push Back
Twelve or more states have now enacted either legislation or regulation discouraging the consideration of ESG factors, and many other ESG-related bills are pending in state legislatures.
These rules vary wildly in scope, potential effect, and terminology. For instance, in Florida, HB 3 forbids state and local governments from using ESG factors in investment and procurement processes.
In Alabama, SB 261 aims to prevent state entities from doing business with private entities when those private entities themselves boycott other businesses that do not meet environmental or corporate governance standards.
The wide range of terminology and subject matter of these state-level rules is something that stakeholders will be paying close attention to as laws and regulations continue to be released.
Litigation
The action on the ESG issue has not been limited to state legislatures, but has also spilled into the courtroom in recent months.
In June 2023, as reported by 401(k) Specialist, a would-be class of airline employees filed suit against their employer sponsored plan fiduciaries alleging breaches of fiduciary duty based on the retention of investment funds that pursue ESG policy goals. The complaint alleges that offering ESG funds as options within the plan was a violation of the plan sponsor’s ERISA-mandated duties to maximize financial benefits in the sole interest of plan participants.
Additionally of note to 401(k) Specialist readers, and as previously reported on 401(k) Specialist, in January 2023, more than two dozen state attorneys general sought to overturn the Department of Labor’s new ESG regulation in State of Utah v. Walsh, pointing to the rule’s alleged inconsistency with ERISA. In September 2023, the court dismissed the action, holding in part the rule did not violate ERISA’s “exclusive purpose” requirement that plan sponsors manage the plan only to provide financial benefits to participants.
Groom Law Principal Kevin Walsh praised the clarity of the ruling. “This is a breath of fresh air in terms of how decisions are written. It gets to the point—it gets in, it gets out—it doesn’t leave you reading 100 pages,” Walsh told 401(k) Specialist. “I think ESG is likely to have had its time in the sun [at the DOL] and there’s a whole lot of other flareups that are about to get brighter.”
Regulatory Uncertainty May Continue
As we flagged in a previous column, the DOL’s latest rule regarding ESG factors represents the latest in a decades-long back and forth spanning five presidential administrations.
The description of just some of the many subsequent developments in this ongoing battle show that the story is far from over. As before, the stances by Republicans at the state and federal level, as well as in the courtroom, underly the fact that further changes and developments may be expected.
George Sepsakos is a principal at Groom Law Group, Chartered, where he represents clients on a broad range of ERISA, federal tax, and securities law matters. Jake Eigner is an associate at Groom Law Group, Chartered, who specializes in ERISA’s application to financial institutions.
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