The Republican attorneys general from 25 US states have filed a lawsuit challenging the Biden administration’s plan to allow retirement fund managers to make ‘socially conscious’ investment decisions.
The federal suit filed on Thursday in US District Court for Northern Texas seeks to halt the implementation of the Department of Labor rule, which allows private benefit plans to invest in funds focused on environmental, social, or governance (ESG) issues.
The suit alleges the new rule ‘undermines key protections for retirement savings of 152 million workers… totaling $12 trillion in assets’ in the name of social policies, including addressing climate change.
The rule, set to take effect on January 30, reverses a restriction imposed during the Trump administration that requires retirement plans to consider only financial factors in making investment decisions and exercising shareholder rights.
‘The Biden Administration is promoting its climate change agenda by putting everyday people’s retirement money at risk,’ said Utah Attorney General Sean Reyes, who is leading the suit, in a statement to DailyMail.com.
Utah Attorney General Sean Reyes is leading 24 other GOP attorneys general in a lawsuit challenging the Biden administration’s rule easing restrictions on ESG investments
The Labor Department and Biden’s Labor Secretary Marty Walsh (above) are named as defendants in the suit, which was filed on Thursday in US District Court for Northern Texas
‘Permitting asset managers to direct hard-working Americans’ money to ESG investments puts trillions of dollars of retirement savings at risk in exchange for someone else’s political agenda,’ he added.
‘We are acting with urgency on this case because this illegal rule is set to take effect next week. It must be stopped,’ said Reyes.
The Labor Department and Biden’s Labor Secretary Marty Walsh are named as defendants in the suit. A spokesman for Walsh referred requests for comment to the Justice Department, which did not immediately respond to a message late Thursday night.
The final rule at the heart of the dispute is known as the ‘Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights’ and took up 65 pages in the Federal Register when it was published on December 1.
If it takes effect as planned on Monday, it would rescind a 2020 Trump-era rule that had been criticized by some business groups and the financial industry.
The Labor Department has argued the Trump-era rule restricting investments in ESG funds failed to account for the positive impact that ESG considerations can have on long-term investment returns.
The new rule also allows plan fiduciaries to consider ESG factors when proxy voting on behalf of shareholders.
The Labor Department has argued the Trump-era rule being rescinded failed to account for the positive impact that ESG considerations can have on long-term investment returns (file photo)
The plaintiffs in the suit are 25 Republican state attorneys general, as well as several private employers with benefits plans, and one individual enrolled in an ERISA plan
Lisa Gomez, who heads the Labor Department office that issued the rule, previously told Reuters that the new policy would remove needless barriers to investing based on ESG principles and end ‘the chilling effect created by the prior administration.’
The Labor Department argues the rule, which only applies to private retirement plans governed by the Employee Retirement Income Security Act of 1974 (ERISA), does not allow retirement plans to pursue social goals at the expense of financial returns.
‘Outside the ERISA context, investors may choose to invest in funds that promote collateral objectives, and even choose to sacrifice return or increase risk to achieve those objectives,’ the department’s commentary on the rule states.
‘Such conduct, however, would be impermissible for ERISA plan fiduciaries, who cannot sacrifice return or increase risk for the purpose of promoting collateral goals unrelated to the economic interests of plan participants in their benefits,’ it adds.
The ERISA Industry Committee, which represents employee benefit plans, has been cautiously supportive of the new Biden administration rule, after opposing certain language in earlier drafts.
‘[T]he final rule does not establish a mandate to consider any specific factor in every circumstance or put a thumb on the scale when selecting investments, leaving fiduciaries to manage plans for the best interests of workers and retirees,’ Andy Banducci, the group’s senior vice president said in a statement in November.
‘This rule is an affront to every American concerned about their retirement account,’ said Texas Attorney General Ken Paxton, a plaintiff in the suit
But the rule change has provoked fury from Republicans, who argue that it will unleash activist retirement plan managers to squander workers’ savings.
‘This rule is an affront to every American concerned about their retirement account,’ said Texas Attorney General Ken Paxton, a plaintiff in the suit, in a statement on Thursday.
‘The fact that the Biden Administration is now opting to risk the financial security of working-class Americans to advance a woke political agenda is insulting and illegal,’ he added.
The lawsuit comes amid growing debates over ESG investing, with investment industry stalwarts such as Blackrock facing backlash over their ESG goals.
Meanwhile, some public companies have faced increasing pressure from activist shareholders to address ESG issues that could pose threats to their stock value, such as carbon emissions and workplace diversity.
Funds adhering to ESG principles oversee an estimated $6.5 trillion in assets, according to Reuters, though they experienced an unprecedented drop in investments last year amid the market downturn.
The case is 2:23-cv-00016-Z in United States District Court for the Northern District of Texas.
