The attorneys general (AG) of 25 states filed a lawsuit challenging a new rule proposed by the U.S. Department of Labor (DOL) allowing asset managers to factor in environment, social, and governance (ESG) standards in workers’ retirement investment plans.
The new DOL rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” took effect February 1.
Co-led by Utah AG Sean Reyes and Texas AG Ken Paxton, the AGs’ complaint filed with the U.S. District Court for the Northern District of Texas, Amarillo Division argues the rule is “arbitrary and capricious,” and would increase the likelihood of “imprudent investment options.” The rule encourages financial institutions to consider “nonpecuniary benefits” that could undermine the financial success of the invested savings.
In a press release issued by Reyes office on filing the lawsuit, Reyes said the new rule violates the Employee Retirement Income Security Act (ERISA) of 1974, which is supposed to protect Americans’ retirement savings from unnecessary risk.
“The Biden Administration is promoting its climate change agenda by putting everyday people’s retirement money at risk,” Reyes said. “Americans are already suffering from the current economic downturn.
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.”
‘Congress Explicitly Rejected’
The AGs point out that two-thirds of the U.S. population’s retirement savings accounts could potentially be affected by the new rule.
ERISA covers some 747,000 retirement plans, 2.5 million health plans, and 673,000 other welfare benefit plans. Employee benefit plans cover about 152 million workers and more than $12 trillion in plan assets—equivalent to more than half of the nation’s gross domestic product.
the DOL exceeded its authority in issuing the new rule, which violates restrictions on investments in ERISA intended to protect retirement savings from unnecessary risk, says the lawsuit.
“DOL goes not adequately justify its decision to permit fiduciaries to consider non-pecuniary factors when making investment decisions or exercising shareholder rights,” states the AGs’ filing. “By formally injecting ESG concepts into the ERISA prudent duty regulations, DOL has ventured into territory that Congress explicitly rejected when it drafted ERISA.”
Because the rule could potentially have a huge negative impact on millions of Americans’ welfare, quick court action halting the rule is justified, said Paxton in a statement.
“The sheer magnitude of the assets that the 2022 Investment Duties Rule would affect—over half of the GDP of the entire United States—suggests that courts should hesitate before finding that DOL has authority to regulate in this area for nonfinancial purposes,” Paxton said.
The AGs also argue that because many states have fossil-fuel dependent economies, the rule would harm investment in associated industries, thereby damaging the income of the states.
‘Arbitrary Left-Wing Political Goals’
The Biden administration’s push for ESG investment in retirement plans aims to impose the political views of liberal elites on companies and individuals, says Steve Milloy, founder and publisher of JunkScience.com, a securities lawyer, and a former investment fund manager.
“The purpose of ESG standards is to circumvent normal legislative and regulatory processes to impose arbitrary left-wing political goals on companies and to otherwise hijack them for political purposes,” Milloy said. “The Biden administration is doing its part by allowing federal retirement funds to be managed via ESG principles.”
Biden DOL officials said fighting climate change was a driving motivation behind the rule, citing President Joe Biden’s Executive Order 13990, “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis,” as a primary impetus for the new rule.
Because ESG focuses more on social and political priorities, like climate change action, rather than monetary stability or gain, it is irreconcilable with the intended purpose of a retirement or pension plan, Milloy says, and it is vital for Americans’ savings that the lawsuit succeeds.
“Federal retiree pension funds will now be operated for political versus financial purposes,” Milloy said. “The point of pushback against ESG, including this lawsuit, is to get things back to normal, where the duty of investment managers is to manage investments exclusively for the financial benefit of the beneficiaries or retirees instead of implementing a left-wing political agenda.”
‘Unilateral Edict’
This lawsuit is necessary to halt a policy that the Biden administration would be unable to get Congress to pass, says Jack McPherrin, research fellow at The Heartland Institute’s Socialism Research Center.
“The rightful actions taken by the attorneys general of half the states in our republic should serve as a strong rebuke against the power-hungry Biden administration,” McPherrin said. “When President Biden and other actors in his administration cannot implement their agenda via democratic methods, they simply circumvent democracy and rule by unilateral edict.”
Stopping this rule is critical to protecting consumer choice, McPherrin says.
“In this particular instance, Biden essentially tried to normalize ESG investing using the hard-earned money of unwitting Americans, which would set a dangerous precedent,” McPherrin said. “Putting a halt to this policy is vital to protecting Americans’ bank accounts, but also free markets and democratic institutions as a whole.”
The DOL’s new ESG rule took effect February 1, although plaintiff states have requested the court to halt implementation of the rule, pending the result of the lawsuit.
Linnea Lueken (llueken@heartland.org) is a research fellow with the Arthur B. Robinson Center on Climate and Environmental Policy at The Heartland Institute.
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