US Republicans file lawsuit over ERISA ESG rule

January 26th, 2024

A group of 26 US Republican attorneys general filed an appeal in their legal challenge to a rule over pension funds’ ability to consider ESG factors when selecting investments.

The lawsuit was first filed in January 2023 over the Department of Labor’s rule, Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, an amendment to the Employee Retirement Income Security Act (ERISA), which allows retirement plans fiduciaries to consider ESG factors when making investment decisions.

The lawsuit argued the rule undermines key protections for retirement savers, oversteps the department’s authority under ERISA and is arbitrary and cannot be applied consistently.

In September, a judge ruled in favour of the Labor Department that the rule was fair and within the department’s remit, but the attorneys general have now filed an appeal with the Fifth Circuit Court of Appeals in New Orleans to review the decision, Pensions and Investment reports.

The appeal focuses on the rule’s tiebreakers standard, which allows fiduciaries to consider ESG factors when deciding between two investments where both options would serve the plan’s economic interests equally well, plan fiduciaries can use ESG considerations as the deciding factor.

The attorneys general argued the standard violates ERISA, which requires fiduciaries to solely provide financial benefits to plan participants.

Republican states including North Carolina introduced new laws last year to prohibit state agencies and state pension plan fiduciaries from considering ESG measures when making investment decisions.

Similarly, Florida governor Ron DeSantis signed an anti-ESG bill last April requiring the Florida State Board of Administration to make investment decisions based “solely on pecuniary factors”.