Red States Seek Quick Win in Lawsuit Challenging ESG 401(k) Rule

Red states suing over the Biden administration’s new regulation allowing socially conscious retirement investing asked for a quick victory, arguing that the records produced by the Labor Department confirm that the rule is invalid.

The states accuse the DOL of contradicting itself, saying that the challenged rule is at odds with the department’s prior conclusions that strict regulations are necessary to protect investors from “shortcomings” in the market for environmental, social, and corporate governance investments. Without offering evidence to rebut this earlier finding, the department’s new rule “weakened or eliminated those protections” and expressly allowed investment decisions based on these factors, the states argued in a Tuesday court filing.

The lawsuit by more than 25 Republican attorneys general asks Judge Matthew J. Kacsmaryk of the US District Court for the Northern District of Texas to invalidate the 2022 rule allowing private-sector retirement plans to consider ESG investments on a limited basis. According to the states, the rule prioritizes these investment goals over protecting American workers’ retirement savings.

The Labor Department has defended the rule, saying it “certainly does not mandate ESG investing” but rather puts retirement plan participants “on equal footing with other market participants” who can “take advantage of economic opportunities presented by, and protect against economic risks posed by, ESG factors.”

In their latest filing, the states charge the DOL with justifying the rule based only on generic claims about “chill” and “confusion” surrounding socially conscious investments without providing any specific details sufficient to warrant eliminating protections for retirement plan participants.

“Mere invocation of ‘chill’ or ‘confusion’ cannot allow an agency to depart however it wants from prior regulations and the underlying statutory framework,” the states argued.

In a previous filing, the states requested a preliminary injunction blocking the rule from being enforced. In their latest filing, they argued that Kacsmaryk has all the information he needs to set aside the rule and enter final judgment in their favor.

Kacsmaryk, a Trump appointee known for his preliminary ruling suspending approval of the abortion drug mifepristone, previously denied the Labor Department’s motion to move the lawsuit out of his courtroom.

The case is Utah v. Su, N.D. Tex., No. 2:23-cv-00016, summary judgment motion 5/16/23.