Texas DOL decision poses a fundamental challenge to the anti-ESG crusade

The September 21 decision of the federal court in the Northern District of Texas litigation over the U.S. Department of Labor’s (DOL) ESG rule is significant by any measure. The court rejected across the board the challenge asserted by 25 Republican state attorneys general that the 2022 Biden administration rule violated both ERISA and the Administrative Procedures Act (APA).

The judge held that the rule, which allows consideration of ESG-related factors in selecting plan investment options in some circumstances, is not inconsistent with ERISA’s requirement that fiduciaries act for the “exclusive purpose” of providing “financial benefits” to participants. In response to the states’ assertion that “the plain text of ERISA forecloses consideration of non-pecuniary factors,” the judge pointed to consistent DOL statements over many years that ESG considerations do relate to financial returns.

The import of the decision may reach well beyond ERISA and the specifics of the 2022 rule. The premise of the states’ challenge – that ESG factors are necessarily “non-pecuniary” in nature – lies at the heart of much of the anti-ESG crusade of Republican officials against asset managers:

• State AGs have issued opinions and launched investigations founded on this premise, asserting that asset managers are breaching their fiduciary duties by incorporating “non-pecuniary” ESG considerations and thus pursuing social agendas rather than client returns.
• Legislators have gone a step further, attempting to codify in state law that ESG factors are “non-pecuniary” and thus inconsistent with fiduciary duties.

The Texas decision’s reasoning directly contradicts this animating principle of the anti-ESG movement.

The inevitable appeal of the Texas ruling to the Fifth Circuit Court of Appeals will bear close attention. Another conservative court acknowledging the link between ESG factors and financial returns would further erode the intellectual foundation of anti-ESG efforts.