ESG 401(k) Objection Rests on ‘False Premise,’ Labor Agency Says

The US Labor Department is firing back at the more than two dozen red states, energy firms, and workers suing to stop its rule that permits socially conscious retirement investing, arguing those challenges rest on a “false premise.”

Regulators filed nearly identical opposition briefs in separate Texas and Wisconsin federal court cases Tuesday stating that the ESG investing rule reaffirms the department’s long-held position that financial returns are paramount and that “collateral benefits” can only be considered when two or more investment options are economically equivalent.

GOP-led opposition to the regulation falsely claims that the department has promulgated a rule green-lighting workplace retirement plan decision-makers to pursue non-financial goals, the DOL said. It’s a “thinly veiled attempt” to undo the Biden administration’s effort to treat environmental, social, and corporate governance criteria like any other relevant risk or return market factors, the briefs said.

The rule has come under scrutiny in the US District Court for the Northern District of Texas in a suit by Republican state attorneys general and several fossil fuel companies and trade groups. It’s also under threat in the US District Court for the Eastern District of Wisconsin, where it’s been challenged by several workplace retirement plan participants.

Both lawsuits say the department is subverting 401(k) plan performance in pursuit of radical investment theories, violating its duties under federal benefits law and administrative procedure requirements.

Retirement plan officials called fiduciaries are usually held to strict standards of conduct defined by the DOL that govern the process by which they can choose and monitor investments.

“The majority of their arguments amount to policy disagreements with DOL’s conclusions, or with ESG investing in general,” the department said of the plaintiffs in its Wisconsin brief. “But it is not appropriate for Plaintiffs to ask this Court to substitute its judgment for that of the agency, and it is factually incorrect to suggest that the Rule somehow requires fiduciaries to choose (or even consider) ESG-focused investments.”

The department’s rule, which took effect in January, undid a pair of Trump-era regulations that had a “chilling effect” on fiduciaries who may want to consider ESG factors when conducting a tie-breaker test between substantially similar investments, the department argued. But both administrations, and others going back decades, have adhered to the principle that economic considerations should always come first.

“The Rule restates the Department’s position—which has remained unswerving for nearly three decades, across five presidential administrations, and even in the rules it rescinds,” the brief said.

Republicans have attacked the department’s position on ESG investing from multiple fronts, most recently drafting a bill in Congress that would expressly prohibit their consideration under the Employee Retirement Income Security Act of 1974.

Meanwhile, Northern District of Texas Judge Matthew J. Kacsmaryk denied the department’s attempt Tuesday to transfer that case to a friendlier jurisdiction. The single-judge Amarillo division has been responsible for undoing several key Biden administration regulations.

The cases are Utah v. Walsh, N.D. Tex., No. 2:23-cv-00016, opposition brief filed 3/28/23 and Braun v. Walsh, E.D. Wis., No. 2:23-cv-00234, opposition brief filed 3/28/23.