Dive Brief:

• Republican finance officials from 18 states sent a letter to the acting leaders of the Securities and Exchange Commission and Department of Labor last week, urging the agencies to adopt regulations for asset managers and retirement plan sponsors that prohibit the use of environmental, social and governance factors or diversity, equity and inclusion goals.
• The Jan. 28 letter to Acting SEC Chair Mark Uyeda and Acting Secretary of Labor Vince Micone was signed by 22 Republican state finance officials, who asked that the agencies develop rules and guidance that explicitly say that making investment decisions or proxy votes based on ESG or DEI objectives is “inconsistent with fiduciary duties.”
• Experts have previously tabbed the SEC’s climate-risk disclosure rule and the Labor Department’s rule allowing fiduciaries to consider ESG factors in a tiebreaker as some of the most endangered Biden-era ESG-related rules. 

Dive Insight:

The Republican finance officials include state auditors, comptrollers and treasurers from Alabama, Mississippi, Oklahoma and Utah, among others. They asked the SEC and Labor Department’s acting leaders to “issue comprehensive guidance” around fiduciaries’ loyalty requirements under the Employee Retirement Income Security Act of 1974, with respect to ESG and DEI factors. 

The officials also asked the agencies to initiate rulemaking to prohibit plans from using assets to “advance political or social agendas” and increase oversight and enforcement of asset and retirement plan managers who incorporate such factors in their investment decisions. The finance officials, who are all members of the Republican-led State Financial Officers Foundation, said they have “serious concerns” that retirement plan assets are being used to advance ESG or DEI goals. 

“The duty of loyalty requires a fiduciary to act ‘solely in the interest of participants and beneficiaries.’ Therefore, a fiduciary that incorporates any motive besides the beneficiaries’ best financial interest, is encumbered by ‘mixed motives’ and has breached its fiduciary duty of loyalty,” the officials wrote. 

Finance officials from Alaska, Arizona, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Missouri, Nebraska, North Carolina, South Carolina, South Dakota and Wyoming also joined the letter. The agencies are urged to affirm through guidance that issues like “reducing greenhouse gas emissions or establishing board quotas” run afoul of ERISA and enhance disclosure requirements for asset managers on “the financial impacts and legal liability of ESG and DEI initiatives.”

The letter also cites a federal judge’s recent ruling against American Airlines in a lawsuit over the management of its retirement plans, where Judge Reed O’Connor found that the airline had breached its fiduciary duty to loyalty by failing to keep its own corporate interests separate from BlackRock’s, who managed its retirement plans. 

Both companies have their own ESG policies, which O’Connor said resulted in “impermissible cross-pollination of interests and influence” on the plan’s management. In the same ruling, he said American Airlines had not violated its fiduciary duty to prudence that its plan processes were “consistent with and, in many aspects, exceeded the processes of other fiduciaries.”

“Judge O’Connor’s opinion reaffirms the fundamental principle that fiduciaries must act solely in the financial interests of plan members,” the letter said. “Allowing ESG activism to influence investment decisions subverts this duty and compromises the financial security of American families.”

While the officials cite O’Connor’s ruling as evidence that ESG and DEI considerations are leading to fiduciary breaches of loyalty, other retirement plan and legal experts previously expressed concerns of their own with the ruling’s conclusions. An American Airlines spokesperson also told ESG Dive that BlackRock’s role was limited to the management of passive index funds, and the airline has “never offered ESG investments” in its 401(k) plan.

Prior to Trump’s inauguration, the Biden administration’s SEC and Labor Department were in the process of defending ESG-related regulations they had promulgated.

Experts expect that companies will no longer be required to comply with the SEC’s climate-risk disclosure rule, though regulations in other jurisdictions like California and the European Union will still require public companies to disclose their climate risks. The agency approved the rule last March, but stayed implementation in April in the wake of legal challenges.

The Labor Department had been defending a rule allowing retirement plan fiduciaries to utilize ESG factors in the case of a tiebreaker between two or more “absolutely equal” options, where it would not be prudent to invest in both or all of them. The fiduciary rule has been in effect since January 2023, and the lawsuit against it was initially dismissed by a federal judge and made its way to appeal.

The appeals judges remanded the case to district court to seek an opinion on whether the agency rule can be squared with ERISA, without relying on the now-overturned Chevron doctrine.

The Department of Labor in Trump’s first presidency was “not very favorable” to a variety of agency initiatives, with ESG being an area that saw the most focus, Josh Lichtenstein, a Ropes & Gray partner who leads the firm’s ERISA and benefits practice, previously told ESG Dive. 

Prior to the election, Lichtenstein said he expected a Republican-led agency would stop defending the rules and go back to a 2020 fiduciary rule. That rule was written so broadly, according to Lichtenstein, that ERISA-governed plan sponsors were concerned they would be accused of having considered ESG factors, even if they included non-sustainability focused index or target funds.

“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,” he said at the time.