ESG rule ‘wrong rule’ to have ideological fight, analyst says

A Texas judge could decide any day on a lawsuit brought by state attorneys general against the Department of Labor's environmental, social and governance investing rule.

The briefing is complete and both sides are just waiting on the judge, said Brad Campbell, partner with Faegre Drinker Biddle & Reath. Speaking during a Thursday webinar, Campbell isn't convinced the plaintiffs have a strong case.

"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."

A group of 25 Republican attorneys general sued the DOL in January over a Biden administration regulation, introduced in November, that gives retirement plan sponsors more freedom to consider environmental, social and governance factors when selecting investments.

The final rule took effect in February 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.

Plaintiffs say that the department’s ESG rule undermines key protections for retirement savings and oversteps the department’s statutory authority under a 1974 law known as the Employee Retirement Income Security Act, which governs a broad range of retirement and health benefit plans.

The lawsuit claims the ESG rule is “arbitrary and capricious” and a violation of both ERISA and the Administrative Procedure Act.

Long time in the shop

The Labor Department's ESG rule bounced from the Trump administration to Biden’s. The final rule that went into effect Jan. 30 peeled off some of the provisions that opponents found objectionable, but not enough for the plaintiffs.

The final changes are not that significant, Campbell said.

"They need to consider all relevant factors, and it merely says they may consider these ESG-related factors if they determine that they are relevant," he explained. "They still cannot sacrifice returns intentionally to achieve collateral objectives. They still can't increase risks on purpose to achieve collateral objectives. They have to invest for the economic interest of the workers and their retirement. So you have all the normal protections."

One important difference pertains to the idea of a "tie" between two equal investment choices, added Fred Reish, partner at Drinker Biddle, and whether the client would be informed.

"The Trump-era rule said you have to provide all this information to the participants annually," Reish said. "And the Biden-era rule says 'No, that's a fiduciary's job to make that decision.'"

Court of last chance

Whatever the District Court for the Northern District of Texas decides, that ruling is likely to be appealed. ESG opponents are most certainly limited to the courts now that efforts to kill the DOL rule failed in Congress, the analysts concluded.

The U.S. Senate voted 50-46 to adopt a resolution to overturn the ESG rule, but Biden vetoed the measure.

What does it all mean for plan administrators and sponsors? Not much, the analysts concluded.

"If you employ a prudent, thorough, well-documented process, any investment that makes it through those screens is, per se, prudent, and they're all equally prudent," Campbell said. "You can pick any one of the ones that make it through those screens, and you should be given deference by the courts that that was a prudent decision."

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.

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