Federal appeals court to hear ESG rule arguments in July

By John Hilton

A New Orleans federal appeals court is scheduled to hear arguments the week of July 8 on whether the Biden administration's ESG rule meets the legal standard.

The U.S. Appeals Court for the Fifth Circuit is well known for its narrow, conservative interpretation of federal rulemaking. Twenty five state attorneys general are leading the appeal from a lower-court ruling upholding the ESG rule.

The Fifth Circuit notably tossed out the Obama administration's fiduciary rule in 2018.

The ESG rule addresses what fiduciaries can consider when making plan investments and outlines that they may, but are not required to, consider ESG [environmental, social, and governance] factors when evaluating plan investments.

In addition, the rule permits fiduciaries to use collateral factors as a tiebreaker between two or more investments when both investments equally serve the interests of the plan and for fiduciaries to use qualified default investment alternatives that use consider nonfinancial factors, if it is a prudent investment.

In addition to the 25 AGs, the plaintiffs included Liberty Energy, Inc., an energy company, and three individuals, while the defendant was then-DOL Secretary Marty Walsh.

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. U.S. District Judge Matthew Kacsmaryk threw out their lawsuit on Sept. 21.

As Politico reported in a recent story, the politically ripe ESG issue is set to land in multiple courts over the coming months. Judges in at least six states will weigh in on a wide range of ESG litigation this year.

The Labor Department's ESG rule bounced from the Trump administration to Biden’s. The final rule that went into effect Jan. 30, 2023 peeled off some of the provisions that opponents found objectionable, but not enough for the plaintiffs.

No 'risky holdings'

Meanwhile, House Republicans are floating another bill to ban ESG investing, this one introduced by Rep. Greg Murphy, R-NC.

The “Safeguarding Investment Options for Retirement Act” would prohibit tax-advantaged retirement plan trustees from considering factors other than financial risk and return in investment choices on behalf of workers, retirees, and their beneficiaries. The bill remains in the House Committee on Ways and Means.

“Americans’ nest eggs should be built on a solid foundation that confers the greatest growth probability, not investments that are unstable and whitewashed with fake ethical and sustainability scores," Murphy said in a news release. "Such an endeavor may be noble for those willing to pursue it independently but not managed plans that millions rely on for retirement.”

In its reply filed in March, the DOL denied that it is sanctioning the selection of poorer-performing investments in the name of ESG. In fact, doing so would expressly violate a bulletin the department sent to fiduciaries.

"An investment would 'not be prudent,' the bulletin explained, “if it would provide a plan with a lower expected rate of return than available alternative investments with commensurate degrees of risk or is riskier than alternative available investments with commensurate rates of return,” the DOL pointed out in its brief.

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.