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A Biden-era Labor Department rule that permits environmental, social, and corporate governance (ESG) factors to be considered by retirement fund managers when they’re choosing investments for 401(k) plans was again upheld by a Texas federal judge in Amarillo, Texas. The DOL’s ESG rule has been challenged since it took effect January 30, 2023. But the judge essentially rejected arguments by 26 Republican state attorneys general, whose challenge to the regulation had been sent back to the district court by the Fifth Circuit.
The ESG rule ended a Trump-era ban prohibiting retirement investment managers from considering ESG factors. In March 2023, the House and Senate voted to block the sustainable investing rule. Biden then vetoed that bill—the first veto of his presidency.
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Shortly after the DOL’s Employee Benefits Security Administration (EBSA) finalized the rule, the GOP attorneys general filed their lawsuit, alleging that the 2022 rule “undermines key protections for retirement savings of 152 million workers—approximately two-thirds of the U.S. adult population and totaling $12 trillion in assets—in the name of promoting environmental, social, and governance (‘ESG’) factors in investing, including the Biden Administration’s stated desire to address climate change.”
The states argued to a federal appellate panel on July 9, 2024, that the rule should be overturned. However, when the Supreme Court overturned the so-called Chevron doctrine last year, the ESG case was sent back to the Texas district court. The Chevron doctrine, established by a 1984 Supreme Court decision, required that federal courts defer to federal agencies’ interpretations when the language in Congressional statutes is ambiguous. By overturning it, the Supreme Court determined that courts no longer must be deferential in rulemakings of the federal government.
The federal appellate panel called for Judge Matthew Kacsmaryk of the U.S. District Court for the Eastern District of Texas to consider the impact of the 2024 Chevron ruling on the DOL ESG rule. Last week, Kacsmaryk found, for the second time, that ESG investment decisions don’t inherently harm participants and beneficiaries, despite the government’s position. The judge noted that fiduciaries “should strenuously guard against letting impermissible considerations taint their decisions” and that it’s not the court’s job to decide the best outcome but rather to interpret the law. He concluded that “the 2022 rule does not permit a fiduciary to act for other interests than the beneficiaries’ or for other purposes than the beneficiaries’ financial benefit.”
However, the judge’s latest ruling runs counter to another Texas judge’s decision in the American Airlines ESG 401(k) lawsuit last month, when the judge ruled that American Airlines breached its fiduciary duty, under the Employee Retirement Income Security Act (ERISA), by basing investment decisions for its $26 billion employee retirement plan on environmental, social, and other nonfinancial factors and not on the “best financial benefit” of retirement plan participants. In that case, both sides must submit evidence to the court to determine what losses, if any, occurred as a result of BlackRock’s and American Airlines’ ESG investments in the 401(k) plan.
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From: BenefitsPRO
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Lynn Cavanaugh
Lynn Varacalli Cavanaugh is Senior Editor, Retirement at BenefitsPRO. Prior, she was editor-in-chief of the What's New in Benefits & Compensation newsletter. She has worked for major firms in the employee benefits space, Vanguard and Willis Towers Watson, as well as top media companies, including Condé Nast and American Media.
