Dive Brief:
- The Department of Labor requested that the U.S. Fifth Circuit Court of Appeals suspend legal proceedings in a case where a number of states have sought to overturn a Biden-era rule allowing pension fund managers to consider ESG factors, according to court documents.
- Now, with federal agencies operating under the Trump administration, the department will consider rescinding the rule, according to a motion for abeyance filed Monday. The motion was filed in an appeal from over two dozen Republican state attorney generals who have opposed the regulation since 2023..
- The case was brought back before the appeals court after a federal district court judge ruled for the second time that the regulation was permissible under the Employment Retirement Income Security Act of 1974.
Dive Insight:
The rule was challenged in court by 26 Republican state attorneys general, who initially saw their case tossed by Northern Texas District Court Judge Matthew Kacsmaryk in September 2023. Kacsmaryk’s initial dismissal relied on the now-overturned Chevron doctrine, which saw courts give agencies deference in interpreting ambiguous statutes. After hearing arguments from the plaintiffs — which also include public oilfield services company Liberty Energy — and the Biden administration, the Fifth Circuit remanded the case to Kacsmaryk for a review in light of the doctrine’s overturn.
The case remained on the Fifth Circuit’s docket pending Kacsmaryk’s narrow ruling, and the Labor Department requested an extension to file supplemental briefs in March. The agency, now under new leadership, said Monday that a further suspension of the proceedings would “greatly conserve the litigants’ and the court’s resources. Additionally, if the agency is to rescind the rules, it would preclude the need for the litigation.
“Now that its new leadership has had the requisite time to gain familiarity with the issues in this case, the Department has determined that it intends to reconsider the challenged rule, including by considering whether to rescind the rule,” Labor Department Attorney Daniel Winik wrote.
Under the Biden administration, the Labor Department finalized the “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” rule in 2022, and it has been in effect since January 2023. The rule allows retirement fund managers to consider ESG factors in the case of a tiebreaker. It was also designed to overturn guidance from the first Trump administration barring fiduciaries from using “non-pecuniary” in investment decisions that the agency later said had a “chilling effect.”
The rule gives fiduciaries the ability to utilize ESG factors and other collateral benefits in the case where two or more investments “equally serve” the financial interests of the plan and it would be imprudent to invest in both or all of the options.
Josh Lichtenstein, a Ropes & Gray partner who manages the firm’s ERISA and benefits practice, previously told ESG Dive he expected a second Trump administration to find a way to revert to the 2020 rule. He said that rule had been written so broadly that private 401k plan fiduciaries were concerned that including non-sustainability focused index or target funds were worried that they could be considered running afoul of it.
“While the rhetoric that you would hear from the Trump administration about that rule would generally be [that] this is just protecting retirees, I think that a lot of plan sponsors and a lot of industry participants, including asset managers, would view a return to that rule as a pretty big problem for actually just the regular operation of retirement plans in America,” Lichtenstein said prior to the election.
The Labor Department’s fiduciary rule was among the Biden-era ESG-related regulations considered most imperiled by a second Trump administration. Experts also predicted the Securities and Exchange Commission’s climate-risk disclosure rule would be on the chopping block. Last month, the SEC moved to stop defending the rule in court.
