25 states file lawsuit to block DOL’s new ESG rule for retirement plans

Republican attorneys general representing 25 states last week filed suit in a Texas federal court seeking to block the Labor Department rule that allows fiduciaries to consider climate change and other environmental, social and governance factors when they select retirement investments and exercise shareholder rights.

“This rule is an affront to every American concerned about their retirement account,” Attorney General Ken Paxton, explaining why the suit was filed. “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.”

The rule went into effect on Monday.

Paxon was joined by 24 other state attorneys general, advocacy group Western Energy Alliance, oil service companies Liberty Energy and Liberty Oilfield Services and retirement plan participant James Copeland. The suit was filed in the U.S. District Court for the Northern District of Texas.

Related: Do employees really want ESG options in their retirement plans?

The state AGs filing suit represent the states of Texas, Utah, Virginia, Louisiana, Alabama, Alaska, Arkansas, Florida, Georgina, Indiana, Idaho, Iowa, Kansas, Kentucky, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Ohio, South Carolina, Tennessee, West Virginia and Wyoming.

The plaintiffs are seeking a temporary injunction blocking the rule and a ruling that permanently blocks enforcement of the regulation.

In the suit, the state officials allege that the rule, issued last year “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 states and energy groups contend that the rule violates the Labor Department’s authority under ERISA.

They said that the 2022 rule fails to define ESG or the time period over which the associated investments should be considered. “This makes its value proposition difficult, if not impossible, to quantify,” they said. And it would, they said, allow fiduciaries and investment advisors to substitute their own ESG priorities under the guise of evaluating possible investments.

The rule loosens restraints placed on fiduciaries by ERISA, giving them more discretion than they ordinarily would have, they argued.

The AGs noted that several of the states filing suit have significant oil and gas deposits and that fossil fuel companies have a substantial presence in their states.

Related: Florida bans more state pension funds from investing in ESG

In joining the lawsuit, the Western Energy Alliance accused the Biden Administration of “definancing American oil and natural gas companies.” The alliance represents 200 companies engaged in exploration and production of oil and natural gas in the western United States.

“The rule raises ESG and climate change factors above maximizing returns for pension plans and 401(k)s,” says Kathleen Sgamma, president of the Alliance.  She adds, “The Biden Administration is putting at risk the lifetime earnings of Americans and making them less secure in retirement, all in furtherance of a political agenda that Americans have not agreed to through the democratic process.”

The Biden Administration has not commented on the lawsuit but has said in the past that the rule will improve workers’ retirements.

“Climate change and other environmental, social and governance factors can be useful for plan investors as they make decisions about how to best grow and protect the retirement savings of America’s workers,” Lisa Gomez, the department’s assistant secretary for employee benefits security said, when the final rule was issued.

However, Virginia Attorney General Jason Miyares, whose state joined the lawsuit begged to differ.

“But this new rule—created by an unelected and unaccountable bureaucracy without input from Congress or the American people—puts progressive politics above Virginians’ financial wellbeing and security,” he said, as the lawsuit was filed. “It is another unilateral and illegal power grab by the Biden Administration,”

In a related development, on Monday, 11 of the state attorneys general sent a letter to Institutional Shareholder Services and Glass Lewis & Co. accusing the firms of putting ESG and Diversity, Equity, and Inclusion issues in front of their duties to investors.

“In this letter, we provide evidence of these potential breaches, specifically as they relate to your climate and diversity, equity, and inclusion priorities,” the AGs wrote. “We seek written assurance that you will cease such violations and commit to following the law.”