Federal Judge Denies Challenge to Labor Department ESG Rule

In a significant victory for responsible investment, a federal judge in Amarillo, Texas denied a legal challenge by 26 Republican-led states that attempted to strike down a Department of Labor (DOL) rule on ESG investing in retirement plans, reports Benjamin Mullin in the New York Times.  "ESG" stands for considering environmental, social, and governance factors as part of the investment consideration process.

In his September 21st ruling, 5th Circuit Judge Matthew J. Kacsmaryk – a Trump appointee who is no friend of federal regulation – disagreed with the lawsuit’s claim that the DOL rule violates federal law on retirement plans.  While he did not endorse ESG investing, the judge argued that Congress has not specifically voted on whether or not ESG factors can be considered by fund managers.  Accordingly, he denied the plaintiffs’ request to strike down the DOL ESG rule.

“While the court is not unsympathetic to plaintiffs’ concerns over ESG investing trends, it need not condone ESG investing generally or ultimately agree with the rule to reach this conclusion,” Judge Kacsmaryk wrote.

It is important to note that the DOL rule in question does not mandate ESG investments.  It merely provides guidance on how to incorporate ESG considerations into the decision-making process.  This flexibility allows fiduciary fund managers to strike a balance between financial returns and non-financial (but still material to profitability) considerations, ensuring that they make well-informed choices that align with the best interests of plan participants.  Investors today are increasingly conscious of the social and environmental impact of their investments.  The DOL ESG rule enables retirement plan fiduciaries to cater to this demand by offering investment options that align with participants' values and objectives.

This lawsuit is part of an ongoing campaign against ESG investing fueled by Wall Street CEOs and their right-wing billionaire friends who would rather silence shareholders than be held accountable for the negative impacts of their business practices.  In 2020, after intense lobbying by trade groups including the Business Roundtable (BRT) and the National Association of Manufacturers (NAM), the Trump Administration’s Labor Department introduced a rule making it far more difficult for retirement fund managers to consider ESG factors.  In 2021, the Biden Administration reversed the Trump DOL rule change.  And in March 2023, President Biden issued his first veto, beating back an effort by Congressional Republicans to block the current DOL ESG rule.

We applaud Judge Kacsmaryk’s ruling as a victory for sanity and for the rights of investors to consider all material factors – including ethical governance practices, and a company’s impacts on workers, the environment, and the communities where it operates – when making investment decisions.  

As investors increasingly seek sustainable and ethical options – that are also profitable – this ruling ensures that retirement plan fiduciaries have the tools and guidance needed to meet these demands which, ultimately, benefits both investors and society as a whole. 

Note:  This material is intended for educational purposes only.  As with all our public writing, blog posts do not constitute tax or financial planning advice; likewise, they are neither an offer to sell nor solicitation to buy any investment or security.