ERISA Lawsuits Target Environmental, Social and Governance Factors in Plan Asset Decisions

Washington, DCThe Department of Labor (DOL) has adopted a rule that would permit, but not require, ERISA retirement plan fiduciaries to consider environmental, social and governance (ESG) factors in making financial decisions. What is generally referred to as the “2022 rule” took effect on January 30, 2023.

Cue the political outrage!

In addition to a flurry of activity in Congress, two ERISA lawsuits, Utah v. Walsh and Braun v. Walsh brought on behalf of several states and a smattering of plan participants, are wending their way through federal courts. If nothing else, these lawsuits keep the issues surrounding socially conscious investment policies alive. They also suggest that plan participants may push for a far more active role in overseeing the management of plan assets.

A new twist in ERISA fiduciary guidance

ERISA requires plan fiduciaries to act prudently and for the exclusive benefit of participants and beneficiaries (and to pay reasonable expenses of the plan). That bland, general principle, however, has generated many, heated lawsuits, most recently about 401k plans and administrative costs.

Why? Consider the fact ERISA retirement plans hold roughly $12 trillion in assets. Where there’s money, there’s fire.

In 2021, at the behest of the Trump administration, the DOL published a rule (the “2021 rule”) that limited ERISA fiduciaries to making investment decisions based “solely on pecuniary factors,” and discouraged them from considering ESG objectives. In 2022 the Biden administration revisited the issue. The new 2022 rule permits fiduciaries to consider “the economic effects of climate change” and other ESG factors when making investment decisions, so long as the considerations remain rooted in the typical risk-return analysis a fiduciary would complete.

It is, at most, a change in nuance. But, given the amount of money involved, it could have an enormous effect on the fossil fuel industry.

Congressional response and a presidential veto 

On March 1, Congress passed legislation to block implementation of the 2022 rule. The vote was largely a party-line affair with Sen. Manchin of West Virginia and Sen. Tester of Montana voting with the Republicans.

Supporters of the legislation claimed that the rule would have politicized investing by allowing plan managers to pursue liberal causes, which they claim would hurt performance. Both Montana and West Virginia are major coal producing-states and both senators face potentially difficult reelection bids in 2024. President Biden vetoed the bill, exercising the first veto of his term.

Utah v. Walsh   

Meanwhile, in Utah v. Walsh, a group of 25 states, two energy companies, an energy lobbying group and one ERISA plan participant sued the Secretary of Labor, claiming that: 

“The 2022 Rule undermines key protections for retirement savings of 152 million workers—approximately two-thirds of the U.S. adult population and totaling $12 trillion in assets —in the name of promoting environmental, social, and governance (“ESG”) factors in investing, including the Biden Administration’s stated desire to address climate change.”

The lawsuit is pending in the Northern District of Texas, Amarillo Division before Judge Matthew Kacsmaryk, famous of late for suspending FDA approval of the abortion medication mifepristone.

The lawsuit advances the theory that the states may act in parens patriae, or “in the place of a parent" to protect the interests of citizens who participate in ERISA retirement plans. Whether the states have standing to challenge the 2022 rule is unclear. In general, the requirement that a plaintiff have “standing” in federal court prevents individuals or groups who are displeased with, but not injured by, a government action or law from suing.

Braun v. Walsh

The plaintiffs in Braun v. Walsh, on the other hand, are both participants in ERISA retirement plans. The basic allegation focuses on the power of the executive branch of government:

“Congress never granted President Biden the authority to override ERISA’s text and its stated objective to protect retirees in favor of progressive policy dreams like social credit scores, reducing pay for CEOs, or instituting racial quotas for corporate boards.
ESG Rule violates ERISA and exceeds the authority granted to the Secretary [of Labor] by statute. In addition, it unlawfully politicizes the retirement system and, in doing so, puts the retirement savings of millions of Americans at substantial risk in service of a policy choice not found in ERISA or otherwise enacted by Congress.”

Braun v. Walsh is pending in the Eastern District of Wisconsin.

Activist shareholders vs activist plan participants

Where this all shakes out is anybody’s guess. ESG factors long been a feature of shareholder activism. Shareholders in a publicly traded company, in some sense, “own” the company, even if in very small pieces. They pay taxes on the value of their shares. Collectively, they may be able to influence management and investment decisions – for instance, by being able to direct corporate assets away from the fossil fuel industry.

ERISA plan participants are in a different position. Because of the subtleties of trust and tax law they are generally seen as “beneficial owners.” They do not own an immediate interest in plan assets, but they own a future interest in collecting benefits. This protects them from having to pay income taxes until they retire and begin to collect a pension. But it may bar them from influencing investment decisions.

This is a developing question. Watch this space. The political interests and the money crank on.