Key Takeaways:
- In a surprise to many observers, on September 21, 2023, the federal district court for the Northern District of Texas issued a ruling upholding an Environmental, Social, and Governance (ESG) investing rule for ERISA plans promulgated by the Biden Administration Department of Labor (DOL) (the Biden Rule).
- Covington submitted the only amicus brief in the case and advanced arguments not made by any of the parties in an effort to reshape the partisan debate over the Biden Rule and its predecessor Trump rule (the Trump Rule), which the Biden Rule had replaced.
- The court adopted Covington’s arguments to reach its decision—and based its opinion on a Supreme Court case that Covington had previously argued and won, Fifth Third BankCorp v. Dudenhoeffer. The outcome in the Texas case provides a breath of fresh air of solid legal analysis in the midst of the partisan hyperbole that has characterized the debate over ESG investing in retirement plans.
- While the Texas district court ruling provides welcome clarity for ERISA plans, we expect significant turbulence in the coming months for non-ERISA plans covering state and local government employees, as fiduciaries of those plans contend with state and local laws and pending bills that would limit the fiduciaries’ ability to select investment products that maximize financial returns because of the products’ perceived relationship to ESG factors, either pro or contra.
Overview
Earlier this year, two high-profile lawsuits filed in Texas (Utah v. Walsh, N.D. Tex., No. 2:23-cv-00016) and Wisconsin (Braun v. Walsh , E.D. Wis., No. 2:23-cv-00234) federal district courts sought to vacate the Biden Rule governing ESG investing in ERISA plans and replace it with the Trump Rule (that the Biden Rule itself had replaced). Both suits charged that the Biden Rule violated ERISA by impermissibly encouraging ERISA fiduciaries to select ESG investments for collateral or nonfinancial purposes.
Covington filed the only amicus brief in these cases, on behalf of Mark Iwry, a senior regulator and policy maker whose public service, including in the Treasury Department, has spanned four presidential administrations.
Focusing on a nonpartisan technical legal analysis of the governing law and the actual language of the Trump and Biden Rules, the Covington brief demonstrated that because the requirements of ERISA and controlling Supreme Court precedent with respect to appropriate investing considerations are quite strict, the two final rules issued by each administration are not materially different from one another, despite partisan attempts on both sides to pitch them as such.
Consistent with arguments made by Covington, the Texas district court concluded that the Biden Rule changed little of substance from the Trump Rule and prior guidance. Determining that the Supreme Court's Dudenhoeffer decision controlled the issue, the district judge held that, when making investment decisions, ERISA plan fiduciaries have the freedom to consider ESG factors (along with any other relevant financial factors) for the sole purpose of maximizing risk-adjusted financial returns. Quoting from the Covington brief, the ruling made clear that where a fiduciary reasonably determines that an investment strategy will maximize risk-adjusted returns, a fiduciary “may pursue the strategy, whether pro-ESG, anti-ESG, or entirely unrelated to ESG.”
Mark Iwry’s goal as amicus was to bypass the partisanship that has beset this topic and to clarify the governing law. There has been confusion among some fiduciaries and observers as to the standards governing consideration of ESG factors in ERISA plan investment decisions, among other reasons, because of some media reports describing the Trump and Biden Rules as being diametrically opposed.
The Texas ruling reflected Mark Iwry's goals as articulated in the Covington brief. While an appeal in this case or a different result in the Wisconsin case (which is still pending) are always possible, the persuasive authority created by the Texas court’s clear opinion that tracks the ERISA statute and Supreme Court precedent should not be understated—particularly given the fact that the Northern District of Texas has not been shy about enjoining federal administrative action with which it has disagreed.
If you have any questions concerning the material discussed in this client alert, please contact the members of our Employee Benefits and Executive Compensation, Public Policy, and ESG practices.
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