Explainer-Can Republicans topple Biden's ESG investing rule in court?

[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.

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.

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

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.

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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