Red States Sue to Stop Biden Administration Rule Allowing ESG Investing in $12 Trillion of Retirement Plans
A group of Attorneys General from 25 Republican-leaning U.S. states announced Thursday that they have launched a lawsuit against the Biden administration, aimed at stopping the implementation of a new Department of Labor (DOL) law that would allow for the consideration of climate and ESG factors in private employer-sponsored retirement plans (ERISA).
The rules are set to come into effect on January 30. In the lawsuit, the AGs contend that the 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 letter marks the latest move in an ongoing anti-ESG push by Republican politicians in the U.S., which has included initiatives targeting large investors, law firms, and proxy advisory firms.
The lawsuit follows the release late last year by the DOL of its final ruling allowing fund managers for ERISA plans to include ESG considerations in the investment process, and also allowing climate and ESG factors to be considered by fiduciaries when exercising shareholder rights, such as in proxy voting.
The DOL’s ruling marked a major reversal of a Trump administration move to block the integration of climate and ESG factors in these funds. In June 2020, the Trump administration DOL announced a proposed rule that effectively would put strict limits on ESG investing in ERISA plans.
Despite significant pushback from investors and other sustainability-focused groups blasting the proposal as outdated and counterproductive, it was finalized by the DOL later that year. In a further blow to ESG-focused investors, the DOL also issued rules regarding proxy voting, impacting the ability of investment managers to promote sustainability goals through their investments, and suggesting that proxy voting on ESG issues is not in the interests of investors.
In May 2021, President Biden directed the Department of Labor to consider reversing Trump-era rules, as part of an executive order directing federal government agencies to implement policies to act to mitigate climate-related financial risk and help safeguard investors’ savings and pensions from these risks. This led to the DOL’s proposals at the end of last year.
Addressing concerns that fund managers could potentially consider ESG factors that would not necessarily be in the best interest of investors, the new DOL rule added text clarifying that considerations “must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis,” such as the economic effects of climate change or other ESG factors on an investment.
Despite this, the lawsuit alleges are “arbitrary and capricious,” and violate ERISA rules aimed at protecting retirement assets, by adding increased risk through the consideration of non-financial factors in the investment process, instead of focusing on purely financial factors.
The lawsuit seeks an injunction to stop the rule’s implementation, and asks the court to set aside the rule.
In a statement announcing the new action, Texas AG Ken Paxton, who is co-leading the lawsuit, said that the DOL’s rule will prioritize “woke” ESG investing over protecting the retirement savings of workers.
““This rule is an affront to every American concerned about their retirement account. The fact that the Biden Administration is now opting to risk the financial security of working-class Americans to advance a woke political agenda is insulting and illegal.”