Red States Renew ESG Retirement Rule Challenge in Fifth Circuit

The US Labor Department’s ESG-friendly retirement investing rule violates federal benefits law by authorizing investment decisions that are contrary to workers’ financial interests, more than two dozen Republican state attorneys general told the Fifth Circuit.

The states want the appeals court to vacate a 2022 regulation giving retirement plan fiduciaries greater flexibility to consider “non-pecuniary” factors like environmental, social, and corporate governance goals as a tiebreaker when selecting investments. According to the states, this violates the Employee Retirement Income Security Act, which requires plan fiduciaries to act “solely” and “for the exclusive purpose” of providing financial benefits to plan participants.

“Fiduciaries cannot serve two masters, no matter how limited or (allegedly) benign the circumstances,” they said in a brief filed Thursday in the US Court of Appeals for the Fifth Circuit.

The regulation, finalized by the Labor Department’s employee benefits arm last year, allows retirement plans to consider ESG factors when they are financially material to participants’ bottom lines. The state challengers characterize the rule as an attempt by regulators to steer private-sector investments into “woke” funds to the detriment of workers’ retirement savings.

Judge Matthew J. Kacsmaryk, a Trump appointee in the Northern District of Texas, upheld the rule in a September 2023 opinion. The judge, who has a history of undoing the Biden administration’s federal actions on issues ranging from birth control to LGBTQ+ bias, wrote that while he’s “not unsympathetic” to the states’ concerns about ESG investing trends, the Labor Department adequately explained why its 2022 rule was needed to clear up regulatory confusion.

On appeal, the states also criticized the regulation under the major-questions doctrine, which presumes that Congress doesn’t intend to delegate issues of major economic or political significance to federal agencies. ERISA-covered retirement plans hold nearly $13 trillion in assets, and using that “enormous sum” to pursue ESG objectives is the subject of “intense political debate,” they said.

The rule is also internally inconsistent, the states said, because it asserts the need for an investment “tiebreaker” while acknowledging that no two investments are the same in every respect.

The case is Utah v. Su, 5th Cir., No. 23-11097, brief 1/18/24.