A federal judge in Texas has dismissed a lawsuit challenging a rule adopted by the U.S. Department of Labor that would allow fiduciaries managing the assets of retirement plans to weigh environmental, social and governance factors in their investment decisions.
In January, New Hampshire joined 25 states, 23 with Republican governors, asking the court to strike the rule. They claim the rule undermines the fundamental principle of the Employment Retirement Income Security Act, which requires fiduciaries to consider only pecuniary factors by seeking the optimal return at the least risk when making investment decisions. The suit claims the rule weakens protections for the retirement savings of 152 million workers with $12 trillion in assets.
Writing in the Wall Street Journal, Vice-President Mike Pence warned, “The woke left is poised to conquer corporate America and has set in motion a strategy to enforce their radical environmental and social agenda on publicly traded corporations.”
Since then, nearly 20 states, all governed by Republican majorities, have enacted more than 40 laws to prohibit or penalize financial firms that apply ESG criteria to their investment decisions.
The rule follows on a rule adopted by the Trump Administration in 2020 that the plaintiffs argue effectively prohibited fiduciaries from applying other than pecuniary criteria when making investment decisions.
However, U.S. District Court Judge Matthew Kacsmaryk disagreed, finding that the rule was not contrary to ERISA. The judge wrote, “Since at least 2015, the Department of Labor has posited that ESG factors ‘may have a direct relationship to the economic value of the plan’s investment.’ And likewise, the 2020 rule stated that failing to consider ESG-related risk-return factors could constitute a violation of the duty of prudence in some circumstances.”
He noted that even the plaintiff “concede that ESG factors can be considered or risk-return purposes in appropriate circumstances.”
The rule, Kacsmaryk concluded, “makes unambiguous that it is not establishing a mandate that ESG factors are relevant under every circumstance, nor is it creating an incentive for a fiduciary to put a thumb on the scale in favor of ESG factors.”
When the suit was filed New Hampshire-Attorney General John Formella said, “Asset managers should not have an automatic green light to just start directing trillions of U.S. retirement dollars into ESG investments without their clients directing them to, and that’s exactly what they’ll get starting next week if we don’t stop this.”
In April, Gov. Chris Sununu issued an executive order requiring state agencies to ensure that no public funds are invested in accounts “solely based on ESG criteria” and encouraged the New Hampshire Retirement System not to invest in funds following ESG criteria.