Biden ESG rule survives challenge from 25 red states

A federal judge sided with the Biden administration Thursday on an administration rule that would allow retirement advisers to include climate and environmental factors in their calculations.

In the ruling, Judge Matthew Kacsmaryk of the Northern District of Texas, a Trump appointee, granted the administration’s petition to dismiss a lawsuit by 25 Republican state attorneys general, led by Texas’s Ken Paxton and Utah’s Sean Reyes.

Kacsmaryk’s 14-page ruling rejects the red states’ argument that the environmental and sustainable governance (ESG) rule violates the Administrative Procedure Act and the Employment Retirement Income Security Act, which regulates retirement plans. He wrote that the Biden administration rule still complies with those statutes, because it prioritizes financial considerations over environmental ones and thus has no “overarching regulatory bias in favor of ESG strategies.”

“[W]hile the Court is not unsympathetic to Plaintiffs’ concerns over ESG investing trends, it need not condone ESG investing generally or ultimately agree with the Rule to reach this conclusion,” he wrote. 

The Biden administration had earlier sought to move the lawsuit to Washington, D.C., but the Northern District denied that motion in April.

Paxton hailed the decision at the time as “an important victory in my ongoing fight to protect Texas from an unconstitutional Biden Administration rule that exposes retirees’ savings to politically-motivated ESG investing in violation of federal law.”

ESG investing and regulations at the federal and state level have become a major target of Republicans, who have argued they violate fiduciary obligations to place financial considerations first.

Earlier this year, Congress passed a Congressional Review Act resolution undoing another Biden rule allowing consideration of ESG, with Democratic Sens. Joe Manchin (W.Va.) and Jon Tester (Mont.) joining Senate Republicans. Biden vetoed the resolution. 

“We are disappointed by the judge’s decision. Together with 25 other states, we filed this suit to ensure that the Department of Labor follows the law in requiring retirement and pension plans to make decisions for the benefit of plan participants, not social or political priorities,” a spokesperson for Reyes’ office told The Hill.

“We are evaluating next steps, including potential appeal. We will continue to fight on all fronts to protect the interests of investors and all Utahns against the ESG agenda,” they added.

The Hill also reached out to Paxton’s office for comment.