States sue to block DOL’s ESG rule
Twenty-five states are suing the Biden administration in an attempt to block a Department of Labor rule that allows trustees to consider environmental, social and governance (ESG) factors when choosing retirement investments.
Republican attorneys general from 25 states — led by Texas Attorney General Ken Paxton and Utah Attorney General Sean D. Reyes — filed the court case January 26.
In a statement announcing the filing, Paxton alleged that the rule “prioritizes woke environmental, social and governance investments over protecting the retirement savings of approximately two-thirds of the U.S. population.”
The DOL rule, which came into effect on January 30, was finalized in November following an executive order signed by President Joe Biden in May 2021 that directed federal agencies to consider policies to protect against climate-related financial risk threats.
SHRM online collected additional news on the subject.
DOL rule finalized
The final ESG rule—Prudence and loyalty in the selection of plan investments and the exercise of shareholder rights– was finalized in November by the DOL, allowing pension plan trustees, such as 401(k) plan sponsors, to consider climate change and other ESG factors when selecting investment options and exercise shareholder rights, such as proxy voting for securities held by the plan.
The DOL concluded that regulations issued in 2020 and subsequently blocked by the Biden administration had unnecessarily restricted the ability of plan trustees to weigh ESG factors when choosing investments.
“Fiduciaries have an obligation to provide investment options that take into account the physical and transition risks of climate change,” said Steven M. Rothstein, managing director of Ceres Accelerator for Sustainable Capital Markets at Ceres, an organization at nonprofit working on sustainability challenges.
However, the DOL pointed out that the rule allowed trustees to consider these factors, not required them.
The DOL’s final rule is seen as more neutral than the one previously proposed, according to some experts. Indeed, unlike the October 2021 proposal, it does not include examples of specific ESG factors that trustees might consider. It also removed language that a prudent fiduciary process “may often require” consideration of ESG factors.
Why “Courts Should Hesitate”
In their filing last week, the states argued that the ESG DOL rule conflicts with the Employee Retirement Income Security Act (ERISA) since current law requires trustees to consider financial benefits first and not ” non-financial and non-monetary benefits”. They also said the DOL was deviating from past policy as its 2020 rule still required financial factors to take precedence.
ERISA covers some 747,000 pension plans, 2.5 million health plans and 673,000 other benefit plans. Employee benefit plans cover about 152 million workers and more than $12 trillion in assets, equivalent to more than half of the country’s gross domestic product, according to the complaint.
“The sheer scale of assets the 2022 investment rights rule would affect — more than half of the GDP of the entire United States — suggests that courts should hesitate before concluding that the DOL has the power to regulate in this area for non-financial purposes,” Paxton said. .