/>iLast week, a federal district judge in the Northern District of Texas upheld a rule promulgated by the Biden Administration's Department of Labor enabling ESG-focused investing. Specifically, the court determined that the rule was in accordance with ERISA as it “allowed fiduciaries to consider collateral benefits when deciding between competing investment options that each equally served the beneficiaries' financial interests.” In other words, it is lawful to “consider[] nonpecuniary factors when making investment decisions” when “[a] fiduciary . . . chooses between investment options that all are valid options because they each maximize the beneficiaries' financial benefits.” Notably, this decision does not enable the consideration of ESG principles--or any other non-pecuniary factors--at the expense of financial metrics when making an investment.
This decision was surprising to many in the legal and investment community, as although it is in accord with the judge's prior judgment upholding the Department of Labor's ESG-investing rule, many commentators had anticipated that ruling would be overturned after the Supreme Court's Loper Bright decision eliminated Chevron deference to agency decision-making--a legal principle that had featured heavily in the prior decision. As such, this case also serves as a demonstration of the potentially limited impact of Loper Bright and the demise of Chevron deference.
Additionally, this decision could also be seen to be in tension with the recent ruling by another federal district judge in the same district (N.D. Tex.) that held that ESG-focused investing violated ERISA. A careful evaluation of both decisions, however, demonstrates that they are consistent with one another, as each prioritizes financial considerations on the part of a fiduciary--the difference between the rulings can be attributed to distinctions in how ESG was used in making investments in each specific scenario.
In any event, although the decision is fairly narrow--ESG principles can only be used as a “tiebreaker” between equally valid investments (when evaluated based upon financial considerations)--it is nonetheless significant that a court has approved the use of ESG principles, albeit in a limited context.
A Biden-era Labor Department rule permitting sustainable 401(k) investing was upheld by a Texas federal judge, a loss for red-state attorneys general whose challenge to the regulation had been sent back to the district court by the Fifth Circuit. The appeals panel had called for Judge Matthew Kacsmaryk of the US District Court for the Eastern District of Texas to consider the impact of a US Supreme Court ruling that overturned the Chevron doctrine on the DOL environmental, social, and corporate governance rule. The doctrine had long allowed judges to defer to reasonable agency interpretations of statutes that are silent or ambiguous. Kacsmaryk on Friday found that ESG investment decisions don’t inherently harm participants and beneficiaries, despite the government’s position and in light of the Chevron ruling, marking a return to his September 2023 decision . . . .
