The new DOL/EBSA rules allowing ESG investments and reiterating the fiduciary obligation of exercising share ownership rights, including proxy voting, is being challenged in court by 25 Republican Attorneys General and fossil fuel companies. The rule was set to take effect January 30, 2023.

The lawsuit, filed in the U.S. District Court for the Northern District of Texas, also was brought by oil-service companies Liberty Energy and Liberty Oilfield Services, advocacy group Western Energy Alliance and retirement plan participant James R. Copeland. The forum selection here is highly strategic, as Texas courts are less expert in the intricacies of the Administrative Procedure Act and more likely to be favorable to fossil fuel companies. 

The lawsuit claims the rule oversteps the Department of Labor’s statutory authority under the Employment Retirement Income Security Act of 1974 and seeks a preliminary injunction against it. The plaintiffs are also asking the court to grant “permanent relief in the form of a declaration that the ESG Rule violates the [federal Administrative Procedure Act] and ERISA and is arbitrary and capricious.”

The rule clarifies that fiduciaries may consider ESG factors in investing without violating their fiduciary duties but does not require it.  The rule as adopted clarifies how the fiduciary duties of prudence and loyalty under ERISA apply to selecting investments and investment courses of action, including selecting qualified default investment alternatives; exercising shareholder rights such as proxy voting; and the use of written proxy voting policies and guidelines.

The state attorneys general bringing the suit represent Alabama, Alaska, Arkansas, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, New Hampshire, Ohio, South Carolina, North Dakota, Tennessee, Texas, Utah, Virginia, West Virginia and Wyoming.

Under normal circumstances, this lawsuit would be unlikely to succeed. Traditionally, courts deferred to the expertise of regulatory agencies on substance as long as procedural requirements were met, and EBSA and DOL were meticulous in promulgating this rule, which the staff for the Trump-era previous rule was not. And this rule would be applauded by traditional conservatives committed to classic free-market theory. It removes regulatory burdens; the previous rule imposed them and created subsidies for fossil fuel companies. But a recent wave of anti-government rulings and an avalanche of dark money have distorted the way courts look at federal regulation, so it is not at all certain how this will be decided.