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.'"
The Labor Department rule, which officials describe as neutral, maintains the department's position that fiduciaries may not sacrifice investment returns or assume greater investment risks as a means of promoting collateral social policy goals.
The rule came after two rules promulgated late in the Trump administration that said retirement plan fiduciaries could not invest in "non-pecuniary" vehicles that sacrifice investment returns or take on additional risk and outlined a process a fiduciary must undertake when making decisions about casting a proxy vote.
"Substantively, the current rule and the Trump administration rule are essentially the same," Iwry, former senior adviser to the secretary of the Treasury and deputy assistant secretary for retirement and health policy and currently a visiting scholar at University of Pennsylvania's The Wharton School and non-resident senior fellow at the Brookings Institution, said in the amicus brief and again on a call Sept. 22. Covington & Burling LLP served as legal counsel on the brief.
"We felt it was important to support the court in taking a clear-eyed view of the law, which it did, successfully avoiding the political, hyper-partisanship around this issue," Iwry said.
Prior legal precedent cited by Kacsmaryk states that in order 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.
"While the court is not unsympathetic to plaintiff's concerns over ESG investing trends, it need not condone ESG investing generally or ultimately agree with the rule to reach" the conclusion that the rule does not violate the APA, he added.