A legal challenge to the Biden administration’s rule allowing retirement plans to prioritize environmental, social and corporate governance policies will be one of the first tests of how courts will rule on challenges to federal regulations in the post-Chevron era.
The 5th U.S. Circuit Court of Appeals in New Orleans is scheduled to hear a lawsuit brought by 25 Republican-led states on Tuesday that targets a Department of Labor rule that allows 401(k)s and other retirement plans to use ESG factors as “tiebreakers” when deciding where to invest. The hearing comes just two weeks after the Supreme Court handed down its decision in Loper Bright Enterprises v. Raimondo, which said courts no longer have to automatically defer to federal agency expertise.
Visitors walk in front of the New York Stock Exchange in New York, Friday, Sept. 23, 2022. (AP Photo/Mary Altaffar)
Last year, U.S. District Judge Matthew Kacsmarik of Amarillo, Texas, refused to block the rule, citing a legal principle known as Chevron deference, which stems from a 1984 Supreme Court case and directs courts to uphold reasonable interpretations of the law by federal agencies.
But the Supreme Court’s 6-3 decision to overturn that precedent gives a Republican-backed lawsuit led by the state of Utah, known as “Utah v. Sue,” even stronger grounds to challenge the ESG rules, some legal and industry experts believe.
“This is likely to be the first post-Chevron test, primarily because the district court judge in his lead ruling for the government said he specifically applied the Chevron principles. [Labor Department rule]”We’re seeing a lot of growth in the market,” Will Lofland, managing director of investment distribution at GuideStone Funds, told the Washington Examiner.
The main issue for the three-judge panel is whether the Employee Retirement Income Security Act of 1974 permits retirement plans to consider investment strategies that prioritize ESG factors over financial incentives. To achieve this, a so-called tiebreaker test is required to be applied between two competing investments only if ESG factors do not adversely affect the risk/return analysis.
Republican states opposed the rule, arguing that the Department of Labor is trying to inject politically fueled climate and social agendas into investment decisions that could ultimately harm or jeopardize retirement savings. The rule targets plans that invest a combined $12 trillion on behalf of more than 150 million retirement accounts.
In a letter led by Utah lawyers just hours after the Lopar Bright ruling, the states argued that the ESG rules enacted by the Department of Labor’s Employee Benefits Security Administration are not valid under the Administrative Procedure Act. They noted District Judge Kacsmarik’s reliance on agency deference to support their argument.
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“[Labor Department’s] “ERISA’s interpretation allowing for non-pecuniary tie-breaker considerations was made long after its enactment, has become vague over time and lacked a thorough statutory analysis,” Utah’s lawyers told the 5th Circuit.
The 5th Circuit Court of Appeals is considered one of the most conservative appellate courts in the country and has recently taken a more critical view of deference to government institutions. The panel hearing the case at issue on Tuesday is made up of three justices appointed by Republican presidents.
