In a Sept. 21 ruling, Judge Matthew J. Kacsmaryk said the commonly referred to "ESG rule" — officially the Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights rule — which took effect Jan. 30 and allows ERISA fiduciaries to consider ESG factors, does not violate the Employee Retirement Income Security Act, nor is it arbitrary and capricious.
In January, Republican attorneys general from 26 states filed a lawsuit — State of Utah et al. v. Su et al. — in U.S. District Court in Amarillo, Texas, arguing that the Labor Department's rule undermines key protections for retirement savers, oversteps the department's authority under ERISA and is arbitrary and capricious.
But in his decision, Kacsmaryk disagreed.
"The 2022 rule 'provides that where a fiduciary reasonably determines that an investment strategy will maximize risk-adjusted returns, a fiduciary may pursue the strategy, whether pro-ESG, anti-ESG, or entirely unrelated to ESG,'" he wrote, citing an April amicus brief filed in support of the Labor Department by retirement expert J. Mark Iwry. "And like prior rules, the 2022 rule allows consideration of collateral factors to break a tie. Thus … the court cannot conclude that the rule is 'manifestly contrary to the statute.'"
Prior legal precedent cited by Kacsmaryk states that to avoid violating the Administrative Procedures Act, all that is necessary is a minimal level of analysis from which the agency's reasoning can be discerned. The Labor Department provided that in this case, Kacsmaryk said.
"The department is pleased with the judge's decision upholding its rule as consistent with ERISA and the Administrative Procedures Act," a Labor Department spokesman said in an email when asked for comment.
In February, the department filed a motion to move the case to Washington and accused the plaintiffs of "forum shopping" to get Kacsmaryk to hear the case. Kacsmaryk in March denied that motion and the case proceeded.
In a statement to Pensions & Investments, Utah Attorney General Sean Reyes said he and his co-plaintiffs are disappointed by the judge's decision and may pursue additional legal avenues. "We are evaluating next steps, including potential appeal," he said. "We will continue to fight on all fronts to protect the interests of investors and all Utahns against the ESG agenda."