Another ESG financial rule is on shaky ground: States suing the feds

Twenty-five Republican state attorneys general are taking aim at the Department of Labor’s rule on retirement plan investing.

The November 21, 2022 rule – “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” – says that “consistent with the fiduciary duties of prudence and loyalty under the Employee Retirement Income Security Act (ERISA), retirement plan fiduciaries may consider environmental, social and governance (ESG) factors when selecting investment and exercising shareholder rights, such as voting proxies.”

While many individual investors, and possibly even the majority of a company’s employees, may want to invest in companies with bona fide ESG credentials, ERISA is patently clear on the legal responsibility of fiduciaries – to make money for their clients based solely on financial data and forecasting.

Case in point: Exxon and Chevron stockholders did better than most in 2022. An index fund that shies away from fossil fuel companies runs the legal risk of shorting its clients if it excludes them.

The AGs suing Labor argue the rule violates the Administrative Procedure Act by bypassing a Congressional vote on the matter, and that it reverses two previous agency rules on fiduciaries’ duties under ERISA. The rule also “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 ESG factors in investing.”

The AGs are asking the a district court in Texas to set aside the rule until an appeal is heard, which the court will likely do. In the meantime, opposition to the Labor rule is growing on Capitol Hill as 49 Republican Senators and Democrat Joe Macnhin of West Virginia are calling on the White House to scrap it.

Other federal ESG rules are running into roadblocks

Labor’s rule follows President Biden’s climate/ESG executive order from May 2021. Other federal agencies promulgated ESG rules that critics are now characterizing as overreach, such as:

• a U.S. Securities and Exchange Commission (SEC) rule that mandates publicly traded companies report direct and indirect greenhouse gas emissions, and
• guidance for companies on how to earn or trade climate-related credits from the Financial Accounting Standards Board (the courts typically view government agency guidance documents as de facto regulations in legal appeals brought by companies and industry groups).

Litigation brought by GOP state AGs is also pending against the SEC rule.