DOL Reconsidering Biden-Era ESG Considerations Rule

“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,” the DOL stated in an April 21 filing to the U.S. 5th Circuit Court of Appeals in which it is seeking to delay the appeal of 2023 litigation filed by 26 state attorneys general and others challenging the legality of the ESG rule.

The original case, Utah et al v. Walsh, was dismissed at trial in September 2023 and appealed by the states a month later.

According to the DOL’s motion this week, pausing litigation in the case “will greatly conserve the litigants’ and the court’s resources, because the Department’s reconsideration and potential rescission of the challenged rule could obviate the need for further litigation.”

The DOL’s motion is the latest challenge to the Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights Rule finalized in 2022.

The month the rule went into effect, the group of 26 Republican attorneys general and several conservative interest groups challenged the rule in the U.S. District Court for the Northern District of Texas, Amarillo Division, arguing the rule ran afoul of the department’s authority under the Employee Retirement Income Security Act of 1974.

That challenge was denied twice, most recently in February in by U.S. District Judge Matthew Kacsmaryk.

Kacsmaryk initially upheld the rule in September 2023, granting the DOL cross-motion summary judgment, to which the plaintiffs later filed an appeal to the U.S. 5th Circuit Court of Appeals in January 2024.

In July 2024, the 5th Circuit remanded the case back to the district court following the U.S. Supreme Court’s decision to overturn Chevron deference, a standard directing federal judges to defer to regulators’ interpretations of ambiguous laws.

Kacsmaryk’s latest ruling held that the rule is not contrary to ERISA, despite the overturning of the Chevron doctrine, and further held that the rule does not violate ERISA because it still requires fiduciaries to achieve the highest investment returns possible.

Under the ESG rule implemented during the administration of former President Joe Biden, achieving the highest rate of return needs to be the main consideration for fiduciaries when making investment decisions for an ERISA retirement plan, but when two options offer equivalent return rates, a plan sponsor can use ESG considerations as a “tiebreaker.”

Under the previous rule, implemented during President Donald Trump’s first term, fiduciaries needed to consider only “pecuniary factors” when considering investment plans.

The DOL’s motion this week is the latest move by the new administration to change a Biden-era rule.