GOP Attorneys General Sue Labor Department Over ESG Rule

The Labor Secretary, Marty Walsh, and the Labor Department were recently sued by a party of twenty-five Republican attorneys general over a regulation passed by the administration. The regulation in question provides more freedom to retirement plan sponsors in considering environmental, social, and governance factors while selecting investments. The rule, which has been in effect since last month, shall remain in force while the lawsuit continues.

As per the complaint filed on January 26, the rule tends to weaken the key protections currently in place for retirement savings and violates the department’s statutory authority under the Employee Retirement Income Security Act or ERISA. Passed in 1974, ERISA governs a range of retirement benefit plans.

Terming the regulation as a violation of both the Administrative Procedure Act and ERISA, the lawsuit calls upon the court to waive it. Filed in the U.S. District Court for Northern Texas, it mentions that, “The 2022 Investment Duties Rule contravenes ERISA’s clear command that fiduciaries act with the sole motive of promoting the financial interests of plan participants and their beneficiaries.”

It further adds that “DOL does not adequately justify its decision to permit fiduciaries to consider non pecuniary factors when making investment decisions or exercising shareholder rights. By formally injecting ESG concepts into the ERISA prudent duty regulations, DOL has ventured into territory that Congress explicitly rejected when it drafted ERISA.”

The new regulation reverses restrictions imposed earlier by Trump’s Administration on retirement plan managers. Utah Attorney General Sean Reyes, who is leading the coalition of Republicans, argued that the new rule, which permits asset managers to direct people’s money into ESG investments would put “trillions of dollars of retirement savings at risk in exchange for someone else’s political agenda.” Many ERISA benefits attorneys are also not in favor of the law.

At present, legislators in states like Utah, Virginia, Indiana, and South Carolina have brought in laws that restrict the consideration of ESG factors while selecting investments for state-run retirement plans. However, the situation is different in other states like Washington, New York, Massachusetts, Oregon, and Connecticut. Here, lawmakers are in favor of rules that allow the use of ESG factors in retirement plans.

“This divergence in approach between federal and state law (and among states) can create particular challenges for asset managers that need to balance the demands of benefit plans subject to the laws of such states and those benefit plans subject to ERISA,” an observation published in a Client Alert Commentary by Latham & Watkins LLP states. “Navigating these complications in the investment landscape will be an increasingly important consideration for investment managers seeking investments from both employee benefit plans subject to ERISA and those subject to state and local laws,” the note added.

However, despite the uncertainty surrounding the new rule, certain companies have already started going ahead with retirement plans catering to people who are interested in ESG investments.

For instance, Morningstar recently launched the Morningstar ESG Pooled Employer Plan, which is an ESG-focussed investment plan. The president of the global retirement and workplace solutions at Morningstar Investment Management, Brock Johnson, is of the opinion that “The Department of Labor ruling is a great win for employers and advisors as it gives them options to choose investments that not only provide an appropriate diversification and return profile but also gets employees engaged with their retirement savings and comfortable that their investments are being mitigated against long-term ESG risk.”

While the Labor rule has also faced opposition from legislators, the Democrats have maintained that ESG factors are just as relevant as financial factors. They have also announced the formation of the Congressional Sustainable Investment Caucus, which focuses on educating lawmakers on the benefits of ESG investment among other things.