A state-led Republican challenge to the US Labor Department’s “ESG Rule,” governing retirement investing with respect to environmental, social, and corporate governance (ESG), is now under consideration by the US Court of Appeals for the Fifth Circuit. Over two dozen Republican state attorneys general lodged a suit against the department, appealing against the regulation of ESG factors in 401(k) investing.
This lawsuit is viewed as the most promising Republican strategy to revoke the Labor Department’s rule since President Joe Biden vetoed a Congressional challenge, which had some Democratic backing, in March. The integration of ESG investing has pushed sponsored retirement plans into the political spotlight, leading to disputes in both Congress and the courts.
The claimants in the Texas case depict the rule as an attempt by regulatory bodies to push private-sector investments into “woke” funds. Conversely, the Biden administration stresses the rule’s neutrality on ESG as an investment strategy. The rule succeeded in replacing two Trump-era regulations, both criticized by Biden’s Department of Labor for suppressing ESG factors, even when financially pertinent.
Federal Judge Matthew J. Kacsmaryk, a Trump appointee, unexpectedly ruled against the states in the previous month, asserting the EBSA (Employee Benefits Security Administration) did not overstep its regulatory bounds or contravene federal benefits law. His decision banked on the principle known as the Chevron doctrine, which affords federal agencies the benefit of the doubt in close cases. Notably, this principle is currently under scrutiny by Supreme Court due to its supermajority.
Facing unpredictable futures, the ESG rule will be evaluated by a Fifth Circuit appellate panel, which has become a hotspot for challenges to Biden administration policies. The Biden rule also still faces a Wisconsin federal court review, along with renewed efforts by Congressional Republicans attempting anew at enforcing Trump’s ESG policies.
Anti-ESG politics have already resulted in at least one lawsuit targeting an American Airlines Group Inc. 401(k) plan, and more are expected in the future.
For more in-depth report, refer to the detailed Bloomberg Law report.