A federal judge has upheld one of the Biden administration’s more unconventional efforts to tackle climate change.
Judge Matthew Kacsmaryk of the U.S. District Court for the Northern District of Texas in Amarillo today rejected a Republican-led challenge to a Labor Department rule that makes it easier for retirement plan sponsors to account for climate risks with environmental, social and governance (ESG) investing.
In his ruling, Kacsmaryk said the 2022 rule does not violate the Administrative Procedure Act because it is not “arbitrary and capricious,” nor does it run afoul of the federal law that sets standards for retirement plans.
“While 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,” Kacsmaryk wrote.
Dave Wallack, executive director of For the Long Term, which supports state and local treasurers, called the decision a “victory for commonsense and transparency.”
“Investors having access to information on which of their investments are managing risk is crucial to protecting value and delivering maximum returns for shareholders and for beneficiaries,” he said.
A spokesperson for Utah Attorney General Sean Reyes (R) said he was disappointed with the decision and said the states had filed the 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.”
Spokesperson Richard Piatt said the office is evaluating its next steps, including a potential appeal.
“We will continue to fight on all fronts to protect the interests of investors and all Utahns against the ESG agenda,” he said.
Texas Attorney General Ken Paxton and 24 other Republican-led states had asked the court in February to block the measure, arguing in part that oil and gas companies would be “harmed by decreased interest from investment capital” and that the states would lose tax revenue.
The lawsuit was one of several fronts Republicans have waged against ESG investing, with Paxton charging that the rule would place “the radical left’s climate and social agenda above sound financial investment principles.”
The states had drawn criticism over their decision to file the lawsuit in the Amarillo district because it increased the likelihood that the Trump-appointed jurist would get the case. Kacsmaryk had drawn controversy in April over his decision to suspend the use of a common abortion pill.
Kacsmaryk earlier this year blocked the administration’s effort to move the litigation to federal court in Washington, arguing that the federal government fell “well short” of proving that transferring the litigation would be “in the interest of justice.”
In the ruling, Kacsmaryk found the rule did not violate the federal Employee Retirement Income Security Act of 1974, which requires that a fiduciary must act “solely in the interest of the participants and beneficiaries.”
And he invoked the Chevron doctrine, a key principle in environmental law that gives deference to federal agencies in certain cases. Kacsmaryk wrote that the Labor Department’s interpretation of the rule is “supported by its prior rulemakings.”
And he added that the department has “posited that ESG factors ‘may have a direct relationship to the economic value of the plan’s investment’” since at least 2015.
The states had argued that Chevron “should be limited or overruled,” and Kacsmaryk noted their objections were “well-taken.”
But, citing another case in a footnote, Kacsmaryk added he would continue to “apply Chevron in appropriate circumstances until and unless it is overruled by our highest Court.”
The Biden rule was finalized in November 2022, rolling back a Trump-era regulation that required financial considerations to take precedence over other factors. It gives retirement plan managers the green light to account for ESG issues — alongside traditional financial factors — when making investment decisions.
The department said the Trump rule would restrict ESG investing even when it would benefit plan participants.
Former Labor Secretary Marty Walsh said at the time that “removing the prior administration’s restrictions on plan fiduciaries will help America’s workers and their families as they save for a secure retirement.”
