The Department of Labor’s environmental, social and governance rule has been challenged in court since it took effect during the Biden administration. Now, the Trump-led DOL has asked the Fifth Circuit Court overseeing the litigation challenging the ESG rule to suspend the ongoing proceedings.
Similarly to the DOL’s request last week to allow an additional 60 days to consider next steps on legal challenges to its fiduciary rule, the DOL has asked for a suspension of the ESG rule, as it considers whether to get rid of the beleaguered rule that would allow fiduciaries to consider ESG factors in choosing investments for retirement and pension plans.
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The ESG rule, which gives fiduciaries the ability to utilize ESG factors when choosing investment funds, has been challenged since it took effect Jan. 30, 2023. The rule allowed that retirement fund managers may consider ESG factors when choosing investment funds. The case was brought back to the appeals court after a federal district judge ruled for the second time that the ESG rule was permissible under the Employment Retirement Income Security Act.
“Now that its new leadership has had the requisite time to gain familiarity with the issues in this case, the department has determined that it intends to reconsider the challenged rule, including by considering whether to rescind the rule,” DOL Attorney Daniel Winik stated in the Motion for Abeyance to the U.S. 5th Circuit Court of Appeals in which it is seeking to delay the appeal of 2023 litigation filed by 26 state attorneys general and several conservative interest groups challenging the legality of the ESG rule.
Shortly after the DOL's Employee Benefits Security Administration finalized its ESG rule in 2023, the GOP attorneys general filed a lawsuit, alleging that the 2022 Rule “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 challenge was denied twice, most recently in February.
In March 2023, the House and Senate voted to block the sustainable investing rule, which was then vetoed by President Biden – the first veto of his presidency.
Related: Democratic officials urge SEC, DOL to protect ESG investing, post American Airlines 401(k) lawsuit
The ESG rule ended a Trump-era ban on retirement investment managers considering ESG factors. The GOP-led states argued to a federal appellate panel July 9, 2024 to get the rule overturned. However, now that the Supreme Court overturned the Chevron case last year, which affects how federal agencies defer cases where Congressional statutes are ambiguous, the ESG case was sent back to the Texas district court.
Under the ESG rule, achieving the highest rate of return needs to be the main consideration for plan fiduciaries when making investment decisions, but when two options offer equivalent return rates, a plan sponsor can use ESG considerations as a “tiebreaker.”
Last month, the Securities and Exchange Commission voted to stop defending its climate risk disclosure rule, which required companies to disclose certain climate-related risks, in court
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Lynn Cavanaugh
Lynn Varacalli Cavanaugh is Senior Editor, Retirement at BenefitsPRO. Prior, she was editor-in-chief of the What's New in Benefits & Compensation newsletter. She has worked for major firms in the employee benefits space, Vanguard and Willis Towers Watson, as well as top media companies, including Condé Nast and American Media.
