As first reported by Bloomberg Law, a federal judge in Texas on Thursday denied a “red” state bid to derail the Department of Labor’s controversial ESG investing rule.
Judge Matthew J. Kacsmaryk, who was appointed by former President Donald Trump, upheld the Biden Administration’s 2022 ESG rule in a lawsuit brought by 25 red state Attorneys General, meaning the DOL’s environmental, social, and corporate governance investing rule will remain effective.
The Republican-led challenge to the ESG rule—which is formally called Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights—claimed that it oversteps the DOL’s statutory authority under the Employment Retirement Income Security Act of 1974 (ERISA), because current law requires fiduciaries to consider financial benefits above any “nonfinancial and nonpecuniary benefits,” that the DOL is “arbitrary and capricious” in drafting it and sought to undo it under the Administrative Procedure Act.
Bloomberg Law notes Judge Kacsmaryk, in granting the DOL’s cross-motion for summary judgment in the case (Utah v. Walsh, N.D. Tex., No. 2:23-cv-00016, 9/21/23), rejected the states’ APA argument, writing that although the court is “not unsympathetic” to the plaintiffs’ concerns about ESG investing trends, the department adequately explained why its 2022 rule was needed to clear up regulatory confusion. The 2022 ESG rule was put forth by the Biden Administration to replace a pair of Trump-era regulations that the DOL said had a “chilling effect” on ESG investments.
The court “need not condone ESG investing generally or ultimately agree with the rule to reach this conclusion,” Kacsmaryk wrote.
The judge added that the DOL has long posited that ESG factors “may have a direct relationship” to a retirement plan’s economic value, even previous to its 2020 and 2022 ESG rules.
Industry reaction
The decision quickly drew praise from American Retirement Assocation CEO Brian Graff. “ARA supports this decision and believes the DOL struck the right balance in the final rule when giving plan fiduciaries the discretion to decide whether ESG factors were relevant when evaluating retirement plan investments,” Graff posted on LinkedIn Friday.
“ARA supports this decision and believes the DOL struck the right balance in the final rule when giving plan fiduciaries the discretion to decide whether ESG factors were relevant when evaluating retirement plan investments”
Statement on LinkedIn from ARA CEO Brian Graff
“In my opinion, the court came to the right conclusion in this case,” Endeavor Retirement Chief Solutions Officer Bonnie Treichel told 401(k) Specialist. “The court’s opinion outlines how the rule keeps financial considerations paramount and methodically dispels the plaintiffs’ characterizations to the contrary.”
Treichel added that the sledding probably gets even tougher for the current anti-ESG cases moving forward. “This case was in front of a very conservative judge, Judge Kacsmaryk, who has been sympathetic to other conservative causes,” she said, noting that the DOL had even tried to transfer the case away from this judge, arguing that plaintiffs had engaged in judge-shopping. That request was subsequently denied back in March.
“Judge Kacsmaryk’s rejection of the Plaintiffs’ claims here does not bode well for two similar cases pending in front of less-conservative courts”—one case in Wisconsin against DOL and another in Texas against American Airlines.
“Importantly, Judge Kacsmaryk did not reach the standing question (which some questioned in this matter) and instead decided the case on the merits. While the two other cases are not identical, there is considerable overlap—particularly in the Wisconsin case,” Treichel said. “And while the other two courts will not be bound by Judge Kacsmaryk’s ruling, the ruling will be compelling persuasive authority that those cases should likewise be dismissed. The plaintiffs in those cases (and in other anti-ESG cases moving forward) will face a tall order showing how their facts fall outside Judge Kacsmaryk’s reasoning.”
Groom Law Principal Kevin Walsh praised the clarity of the ruling in a call with 401(k) Specialist Friday. “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 said Judge Kacsmaryk makes the point that, “Democrats have been yelling, ‘You can take ESG into account as a tiebreaker, and Republicans have been yelling, ‘you can only take ESG into account as a tiebreaker.’ To some extent the two sides have been really been talking past each other.”
He added that while the Republican Attorney Generals may decide to appeal, “I think the focus is very quickly going to shift away from ESG rulemaking at the Labor Department and focus more on ESG rules that are coming down the pike from the SEC,” and also senses a shift toward the DOL’s revised fiduciary rule sent to OMB on retirement security sent earlier this month.
“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,” Walsh said.
The lawsuit was brought back in January by a coalition of 25 states, along with publicly traded energy company Liberty Energy and its subsidiary Liberty Oilfield Services, and oil and gas non-profit Western Energy Alliance. The states participating in the suit were Alabama, Alaska, Arkansas, Florida, Georgia, Indiana, Idaho, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Ohio, South Carolina, Tennessee, Texas, Utah, Virginia, West Virginia, and Wyoming.
Back in March, President Joe Biden vetoed a bill that sought to repeal the ESG rule. The U.S. House of Representatives later failed to meet a majority vote that would override the veto.
SEE ALSO:
• Coalition of 25 States Sue Biden Administration on ESG Final Rule