The American Retirement Association and Ceres Inc. have joined in asking a federal judge to reject a lawsuit by Republican attorneys general and some energy companies that seeks to kill a proposed Department of Labor rule allowing fiduciaries to consider ESG factors when selecting investments.
“ERISA is agnostic with respect to particular types of investment opportunities and risks,” said the two organizations in an amicus brief filed Oct. 23 in the case of State of Utah et al. vs. Julie A. Su et al. in a U.S. District Court in Amarillo, Texas.
“Nowhere does ERISA declare that particular investment opportunities are more promising than others, or that some investment risks are more serious than others, or that certain risks are inconsequential,” the document said. “Likewise, nowhere does ERISA bestow such prophetic powers on the DOL.”
The plaintiffs contend retirement plans shouldn’t consider environmental, social and governmental issues in preparing their investment lineups. The DOL and the organizations filing the amicus brief say ESG is a factor that plan sponsors may consider.
“Rather than cataloging specific risks and opportunities, Congress took a different path — adopting a framework that requires fiduciaries to consider the ‘totality of the circumstances’ regarding a potential investment,” said the amicus brief.
The ARA is an umbrella organization with five affiliate groups representing retirement plans and retirement services. Ceres advocates sustainable investing policies among more than 220 institutional investors.
The plaintiffs sued in the Amarillo federal court in January 2023, but U.S. District Court Judge Matthew Kacsmaryk ruled for the DOL in September 2023.
In July 2024, a three-judge panel for the 5th U.S. Circuit Court of Appeals, New Orleans, sent the complaint back to the federal court, citing a recent U.S. Supreme Court decision that overturned its own 1984 ruling that judges should defer to regulators under certain circumstances when rules are ambiguous or unclear.
“Given the upended legal landscape, and our status as a court of review, not first view, we vacate and remand so that the district court can reassess the merits,” said Judge Don R. Willett, who wrote the decision for the appeals court, referencing the so-called Chevron deference ruling by the Supreme Court.
However, during oral arguments before the appeals court, attorneys for both sides downplayed the role – if any – the Chevron deference decision would play in this lawsuit.
“No deference to the agency’s interpretation of ERISA was required for the court to reach the correct conclusion in its prior ruling, and none is needed now,” the amicus brief said.
Plaintiffs have argued that the proposed rule’s “tiebreaker” provision violates ERISA.
The tiebreaker provision says a fiduciary must conclude “prudently” that competing investments, or competing investment courses of action, "equally serve the financial interests of the plan over the appropriate time horizon," according to the DOL.
In such cases, the DOL says, the fiduciary can select the investment or investment course of action based on “collateral benefits,” meaning benefits other than investment returns.
In their amicus brief, ARA and Ceres noted that the tie-breaker provision “expressly bars fiduciaries from selecting investments with lesser returns in order to promote any collateral goals,” including ESG.
They also warned that an “outright bar or across-the-board limitation on considering environmental, social or governance factors even as part of a risk-return analysis — urged by plaintiffs — flouts the letter and spirit of ERISA and have far-reaching consequences.”
