ESG rule needed to counter ‘chilling effect,’ DOL says

By John Hilton

The Department of Labor's ESG rule is needed to correct the "chilling effect" a previous Trump administration rule placed on those environmental, social and corporate governance investment options, U.S. attorneys argued in a brief filed Friday.

The brief accompanies a request earlier this month asking a Texas judge to toss out a lawsuit by Republican-led states seeking to strike down the ESG rule. The government maintains that its ESG rule – which took effect Jan. 30 – is appropriate under the Employee Retirement Income Security Act of 1974.

Plaintiffs "continue to deny – contrary to all evidence – that the [ESG] Rule was properly based upon concerns about a chilling effect," U.S. attorneys wrote. "Plaintiffs also erroneously, and baselessly, argue that the Rule permits fiduciaries to evade their duties under ERISA. Neither is true. Plaintiffs cannot manufacture violations of the Administrative Procedure Act by mischaracterizing the Rule and ignoring much of its contents."

The lawsuit

A group of 25 Republican attorneys general sued the DOL in January over the Biden administration regulation, which gives retirement plan sponsors more freedom to consider ESG factors when selecting investments.

In their June 9 reply, plaintiffs say the ESG rule is "contrary to law and arbitrary and capricious." Plaintiffs denied that the 2020 Trump-era rule improperly "chilled" ESG investing.

The Trump rule "did not prohibit ESG considerations relevant to a financial analysis, while the 2022 Rule improperly permits nonpecuniary factors and eliminates protections for participants at every turn. It is an attempted end run around ERISA’s strict fiduciary requirements," the response reads.

Congress voted in March to repeal the rule but Democratic President Joe Biden vetoed the proposal.

The final rule remains in force while the lawsuit plays out. Meanwhile, it has become a political flashpoint as the financial services industry expands efforts to offer ESG-focused retirement plans to more Americans.

'Exclusive purpose'

The ESG rule has become a favored target for conservatives seeking to exploit the so-called "woke agenda." High-profile lawmakers and presidential candidates are claiming the rule allows plan sponsors to sacrifice financial gains for pet ESG investments.

"President Biden is jeopardizing retirement savings for millions of Americans for a political agenda," Sen. Mike Braun, R-Ind., said in a statement. "In a time when Americans' 401(k)s have already taken such a hit due to market downturns and record high inflation, the last thing we should do is encourage fiduciaries to make decisions with a lower rate of return for purely ideological reasons."

Except Labor Department officials say that isn't true.

The ESG rule "reaffirms, consistent with ERISA’s statutory text, that fiduciaries’ exclusive purpose must be to secure financial benefits for plan participants and beneficiaries, and that this purpose may never be subordinated to unrelated goals," the new brief explained.

The DOL proposed ESG rules during the Trump administration that would require retirement fund advisors to put pecuniary interests ahead of ESG goals in investing, replete with a note from then-DOL Secretary Eugene Scalia deriding social goals in ERISA-protected plans. The Biden administration took back the rule to realign it with ESG objectives, but ultimately kept the primary focus on monetary considerations.

During a webinar last month, Brad Campbell, partner with Faegre Drinker Biddle & Reath and former assistant secretary of labor under President George W. Bush, called the Biden ESG rule a "neutral" regulation.

"What I personally believe ... is that this may be a big-picture fight about the role of certain policies and investments, but this is the wrong rule to have that fight on," Campbell said. "What DOL actually did in the final rule was take a very neutral position."

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.