Since its effective date in February 2023, the Department of Labor’s (DOL’s) rule officially titled Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, and colloquially called the “ESG rule,” has been challenged in both the courts and US Congress. In September 2023, a federal district court in one of the two court challenges ruled in favor of the DOL and its authority to adopt the ESG rule.

By way of brief background, the ESG rule addresses what fiduciaries can consider when making plan investments and provides that ERISA fiduciaries may—but not must—consider ESG (environmental, social, and governance) factors when evaluating plan investments where the fiduciaries reasonably determine that those factors are relevant to a risk and return analysis. For more background, please look to our previous writing on the ESG rule.

The lawsuit decided in September, State of Utah v. Walsh, was filed in the US District Court for the Northern District of Texas. The plaintiffs were the Attorneys General of 26 states, an energy company, and three individuals. The defendant was then–Department of Labor Secretary Marty Walsh. The plaintiffs’ claim was that the ESG rule must be invalidated because it was arbitrary and capricious and outside the DOL’s authority, and thus in violation of the Administrative Procedures Act.

On cross-motions for summary judgment, the court ruled in favor of the DOL, concluding that it had not acted arbitrarily or capriciously in adopting the ESG rule. The court analyzed the administrative record related to the ESG rule and its various iterations over the last several years in coming to this conclusion, concluding that the ESG rule is not “manifestly contrary” to ERISA and deferring to the DOL’s analysis in rejecting arguments that the ESG rule is arbitrary and capricious.

None of this is to say, however, that the court necessarily likes the ESG rule. In fact, the opinion ends with the following: “And while the Court is not unsympathetic to Plaintiffs’ concern over ESG investing trends, it need not condone ESG investing generally or ultimately agree with the Rule to reach this conclusion.”

This decision may be appealed, and there is still another district court case yet to come, Braun v. Walsh, in the Eastern District of Wisconsin (filed in February 2023). Members of Congress continue to seek to repeal the rule legislatively. As such, while there is no reasonable way to predict smooth sailing for the ESG rule, surviving this challenge is notable.

We will continue to monitor developments in this case, the other federal district court case, and the efforts in Congress to repeal the ESG rule.