Explainer-Can Republicans topple Biden's ESG investing rule in court?
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[March 01, 2023]
By Daniel Wiessner
(Reuters) - The Republican-led U.S. House of Representatives voted on
Tuesday to block a Biden administration rule allowing employee
retirement plans to consider environmental, social and corporate
governance (ESG) factors when selecting investments. President Joe Biden
has promised to veto the bill if it passes the Senate, but
Republican-led states and the oil industry are also challenging the rule
in federal court in Texas.
WHAT DOES THE NEW RULE DO?
The U.S. Department of Labor rule, which took effect Jan. 30, lifts
barriers to ESG investing imposed by the Trump administration. A 2020
regulation had required retirement plans to consider only financial
factors in selecting investments. The new rule sets guidelines for ESG
investing, including requiring that socially conscious investments are
still financially sound.
The Labor Department said the Trump-era rule, which was criticized by
business groups and the financial industry, failed to account for the
positive impact that ESG investing can have on long-term returns. The
new rule covers plans that collectively invest $12 trillion on behalf of
150 million Americans.
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WHAT ARE THE CLAIMS IN THE LAWSUIT?
The January lawsuit by 25 Republican-led states, an oil drilling company
and an oil and gas trade group claims the rule violates the U.S. law
regulating employee benefit plans by failing to protect retirement
assets. They claim that allowing ESG investing will jeopardize the
retirement savings of millions of people and lower state tax revenue.
The states also say the Labor Department failed to justify its departure
from the Trump-era regulation, in violation of the federal law governing
rulemaking.
ARE BUSINESS GROUPS OPPOSED TO THE RULE?
The Biden administration rule has divided the business community.
Sectors that stand to lose investments, including the oil and gas
industry, oppose it while many other businesses have voiced support for
efforts to make ESG investing easier.
Some major business groups including the U.S. Chamber of Commerce, the
country's largest business lobby, opposed the Trump administration's
strict limits on ESG investing but have had a tepid response to the new
rule. The Chamber last year said the Biden administration rule was
largely unnecessary because it imposes the same standard that retirement
plans have applied for decades in deciding whether investments are
prudent.
IS THE RULE VULNERABLE TO LEGAL CHALLENGES?
The states challenging the rule could face an uphill battle in showing
it violates the employee benefits law, lawyers said, noting the rule
does not force retirement plans to consider ESG factors and still
requires plans to put financial considerations ahead of social issues.
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U.S. President Joe Biden discusses
health care costs and access to affordable health care during an
event in Virginia Beach, Virginia, U.S., February 28, 2023.
REUTERS/Leah Millis
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The case has been assigned to U.S. District Judge Matthew Kacsmaryk
in Amarillo, Texas, a conservative Trump appointee whose courthouse
has become a favored destination for Republicans challenging items
on the Biden administration's agenda. Any appeals will be heard by
the New Orleans-based 5th U.S. Circuit Court of Appeals, considered
among the most conservative federal appeals courts, and then
possibly, the U.S. Supreme Court, which has been skeptical of
agencies' attempts to set broad policy through rulemaking.
WHAT ARE THE NEXT STEPS IN THE CASE?
The states on Feb. 24 moved to temporarily block the rule pending
the outcome of the lawsuit. The administration has moved to transfer
the case to a different court, accusing the states of improperly
judge shopping by filing in Amarillo, where Kacsmaryk is the only
judge.
Any rulings by Kacsmaryk on those issues are likely to be appealed
by the losing side, which could delay the case for months or longer.
WHAT OTHER ESG RULES COULD BE CHALLENGED?
The U.S. Securities and Exchange Commission (SEC) has proposed
various rules aimed at increasing transparency related to ESG
investing.
The SEC is expected to finalize a rule soon that would require
investment advisors and companies marketing ESG-focused funds to
specify which factors drive investment strategies. A separate
proposal would require companies to report on items such as
greenhouse gas emissions, climate goals, and management of
climate-related risks.
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Republicans have criticized these efforts, saying in public comments
they go beyond the SEC's authority to regulate securities.
Previewing potential legal challenges, many states that are suing
over the Labor Department rule said in comments last year the SEC
proposals would be burdensome to businesses and unconstitutional.
(Reporting by Daniel Wiessner in Albany, New York, Editing by Alexia
Garamfalvi and David Gregorio)
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