- DOL’s new retirement rule facing litigation. The DOL’s new rule that allows plan fiduciaries to consider climate change and other ESG factors when they select retirement investments and exercise shareholder rights is being challenged by 25 states.
- Points of contention. There are multiple oppositions to the DOL rule, including the belief that it is inherently inconsistent with ERISA fiduciary duties.
- Tone of the rule. Legal analysts note that the reality is that the most significant differences in that back and forth have had more to do with tone — attempts to encourage or discourage considering ESG factors — than any significant change in the applicable legal standard.
- More ESG shakeups on the horizon. Employers will need to follow the DOL rule’s fate in addition to other ESG developments, including the Securities and Exchange Commission considering a tweak to its ESG reporting requirements.
In November, the U.S. Department of Labor (DOL) announced a final rule that allows plan fiduciaries to consider climate change and other environmental, social and governance (ESG) factors when they select retirement investments and exercise shareholder rights, such as proxy voting.
With the 60-day comment period ended and the rule in force since Feb. 1, 2023, there has been serious pushback, primarily in the way of litigation from attorneys general in 25 red states looking to reverse the Biden administration’s rule change.
According to Ron Pierce, counsel in Fisher Phillips LLP’s Denver office, the strong reaction to the rule primarily results from the complete philosophical shift from the much less onerous proposed ESG rule issued in 2020. Pierce says other related factors include:
- The significant economic boost ESG-focused investment alternatives will receive through an infusion of 401(k) funds;
- The related furtherance of plan sponsors’ corporate citizenship ideals and plan participants’ passion for advancing ESG goals;
- And, finally, the genuinely held belief by many experts that this new rule is inherently inconsistent with ERISA fiduciary duties.
“While long ago I got out of the litigation prediction business, I do think the intersection of established ERISA principles with the recent emphasis on ESG will make for a unique and interesting contest,” Pierce said.
“However, plans will want to proceed carefully given the numerous pending legal challenges to the rule,” he added, noting that certain provisions related to proxy voting will not take effect until Dec. 1, 2023.
Dominic DeMatties, a partner in Thompson Hine LLP’s Chicago office, said consideration of ESG factors in making investments has become a topic of extreme interest for people on both sides of the political spectrum and is not a new legal phenomenon.
“We saw that play out in the large number of comments on the proposed rule that DOL considered while they were in the process of finalizing the rule,” he said. “There has been a back and forth between Democratic and Republican administrations regarding ESG considerations related to retirement plan investments for over 30 years.”
DeMatties explained that the reality is that the most significant differences in that back and forth have had more to do with tone — attempts to encourage or discourage considering ESG factors — than any significant change in the applicable legal standard.
Regarding the litigation from attorneys general in 25 red states, DeMatties said it’s difficult and far too early to make predictions about whether the lawsuit will be successful. However, he adds, the fact that the plaintiffs filed suit at the U.S. District Court for Northern District of Texas increases the likelihood of success, as the track record of that court and the judge who has been assigned to the case, Judge Matthew Kacsmaryk, are known for killing Biden rules.
“In light of that track record, DOL filed a motion seeking to transfer the case to another venue,” DeMatties noted.
Employers Should Remain Vigilant
In addition, the Securities and Exchange Commission is considering easing the ESG climate risk disclosure rule.
Jurgita Ashley, co-chair of Thompson Hine’s public companies group and co-chair of the ESG collaborative, said the SEC is weighing whether to pull back some of the proposed climate disclosure requirements, based in part on a large volume of comment letters.
She noted that of particular interest is if so-called “Scope 3” disclosures (i.e., greenhouse gas emissions of customers and suppliers) will remain in the final rule and if financial reporting thresholds — proposed at 1% — will be eased to make the rules more workable.
“Companies are closely monitoring these requirements as they prepare for the implementation of the rules,” Ashley said, noting that even if Scope 3 is pulled back, a number of other initiatives (such as EU rulemaking and ISSB proposals) include Scope 3, meaning that all companies — private companies included — should still implement an ESG program to be able to provide ESG data to their public company customers, among others.
“It goes directly to the bottom line,” she said.
DeMatties added that since the rule is now in effect, organizations should be aware of, understand, and consider the impact of the new rule on the selection and monitoring of ERISA plan investments.
“If at some point the rule is vacated, an analysis regarding the path forward would need to be made at that time based on the specifics of the case,” he said.
And regardless of the ultimate fate of the rule, Pierce said the debate serves as a reminder that considering outside factors, such as ESG, should never result in sacrificed investment returns or increased investment risks. Additionally, employers reviewing a plan’s investment lineup under the guidance of a trusted investment advisor on a regular basis — at least quarterly — needs to be a priority.
“Properly documenting the prudent decision-making process in committee minutes will be key to any successful defense against a breach of an ERISA duties claim,” he said
Editor’s Note: Additional Content
For more information and resources related to this article see the pages below, which offer quick access to all WorldatWork content on these topics:
