ESG investment rules are facing legal challenges: New York City case is on the docket

Much of corporate America is all-in on environmental, social and governance (ESG). Many companies voluntarily report their greenhouse gas emissions and set long-term sustainability goals to please shareholders and customers.

Ongoing litigation could slow down the ESG trend. Climate change activists and investors are keeping a close eye on a class-action lawsuit brought by New York City workers.

Americans for Fair Treatment is representing former NYC workers against city retirement plans that divested its holdings in fossil fuels such as oil and coal. The workers claim the city breached its fiduciary duty to “manage the [pension] plans with a singular and exclusive focus on promoting the retirement interests of plan participants and beneficiaries” and breached its “obligations to workers and retirees by using plan assets to advance a political agenda … for the ostensible purpose of fighting climate change.”

The claim was filed in the New York state supreme court. The city’s pension plans asked the court to dismiss the lawsuit with prejudice, arguing that the claimants – a subway train operator, a public school teacher, a school secretary and an occupational therapist at an elementary school – lack standing.

If the lawsuit is permitted to proceed, the claimants will try to show the plans lost value due to eliminating holdings in fossil fuel stocks. The Employee Retirement Income Security Act (ERISA) of 1974 mandates that fiduciaries act prudently and diversify a plan’s investments to minimize the risk of substantial losses.

Biden ESG rule passes 1st legal hurdle

In related news, an ESG rule issued by the Department of Labor was upheld in federal court. A judge for the Northern District of Texas ruled that favoring ESG investments in a retirement plan didn’t violate ERISA or the Administrative Procedures Act.

But the 25 Republican state attorneys general (AG) bringing the suit are already appealing. The 5th Circuit Appeals Court is up next to hear the case sometime next year. If the AGs lose again, they’ll try bringing the case before the Supreme Court.