Lauren C. Moye, FISM News
A 25-state coalition led by Utah Attorney General Sean Reyes sued the Biden administration on Thursday over a rule that would allow retirement fund managers to push money into Environmental Social Governance (ESG) investments.
The Department of Labor rule called “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” was unveiled on Nov. 22, 2022, and is set to take effect on Monday.
The rule puts around two-thirds of the U.S. population’s retirement savings at risk by considering factors that “may include the economic effects of climate change and other ESG considerations” rather than focusing on long-term stability and a return on investment before committing clients’ money. Altogether, there is $12 trillion at risk.
“The Biden Administration is promoting its climate change agenda by putting everyday people’s retirement money at risk,” Reyes stated. “Americans are already suffering from the current economic downturn. Permitting asset managers to direct hard-working Americans’ money to ESG investments puts trillions of dollars of retirement savings at risk in exchange for someone else’s political agenda. We are acting with urgency on this case because this illegal rule is set to take effect next week. It must be stopped.”
Reyes and the other states maintain that the DOL rule is a violation of the Employee Retirement Income Security Act of 1974 (ERISA), which requires fiduciaries should select the assets of a retirement plan “for the exclusive purposes of providing benefits to the participants in the plan and their beneficiaries.” These details can be found in Section 403(c) and 404(a).
Louisiana Attorney General Jeff Landry summarizes the conflict of interest in his own press release about the lawsuit, writing, “As noted in the lawsuit, the 2022 Investment Duties Rule makes changes that authorize fiduciaries to consider and promote ‘nonpecuniary benefits’ when making investment decisions. Contrary to Congress’s clear intent, these changes make it easier for fiduciaries to pursue their own political and social agendas. They also make it harder for beneficiaries to police such conduct.”
This is also a loose quotation of the complaint.
Investments should be made using sound economic principles, not woke policies. These firms have a responsibility to invest with their clients’ best financial interests in mind, rather than Biden’s disastrous agenda. #lagov
— AG Jeff Landry (@AGJeffLandry) January 26, 2023
The DOL rule was created after overturning an earlier Trump administration ruling that prevented companies from evaluating ESG factors while making investment decisions. The rule replaces a prior-existing ‘tiebreaker’ test – which was only allowed when investments were indistinguishable based on money-related reactors – by allowing a fiduciary to “conclude prudently that competing investments, or competing investment courses of action, equally serve the financial interests of the plan over the appropriate time horizon.”
While the language is written to sound like ESG investments are a positive thing, the wording opens the door to the overestimation of potential financial benefits from an ESG. This is particularly true if uncertain climate change effects are factored in as potentially boosting a company’s profitability.
“Climate change and other environmental, social and governance factors can be useful for plan investors as they make decisions about how to best grow and protect the retirement savings of America’s workers,” Assistant Secretary for Employee Benefits Security Lisa Gomez said when the rule was announced.
Investment experts gave the rule mixed reviews. One expert quoted in this Forbes article noted that consideration of ESGs is optional rather than required while making investment concerns. A different expert noted the rule would be easily challenged in court because the track record of several ESG companies has been disastrous with mass losses in recent years.
In addition to Utah, Texas, and Lousiana, the other states joining the lawsuit include Alabama, Alaska, Arkansas, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Mississippi, Missouri, Montana, Nebraska, New Hampshire, Ohio, South Carolina, North Dakota, Tennessee, Texas, Virginia, West Virginia, and Wyoming.