In this weekend’s news and commentary, Republican states challenge the Department of Labor’s new ESG investing rule and a lawsuit challenging prison slavery in Arizona is now before the Ninth Circuit.
On January 26, Republican attorneys general from 25 states filed a lawsuit in a federal district court in Texas to stop the Department of Labor’s new ESG rule from going into effect. The rule allows retirement plan fiduciaries to consider climate change and other ESG factors when selecting investments and exercising shareholder rights such as proxy voting. DOL rolled back two rules issued in 2020 by the Trump Administration which retrained fiduciaries’ ability to weigh ESG factors when choosing investments even when those factors would benefit plan participants financially. The Biden rule was considered a healthy compromise between the financial services industry and plan sponsors because it only permitted, rather than mandated, consideration of ESG factors. “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,” said Assistant Secretary for Employee Benefits Security Lisa M. Gomez. The final rule was published on December 1, 2022, and is set to go into effect on January 30, 2023. Morningstar plans to launch an ESG Pooled Employer Plan with an investment lineup that would consider financially material ESG factors early this year, and other new offerings are likely to follow in the coming months.
However, Republican attorneys general, led by Ken Paxton of Texas and Sean Reyes of Utah, are seeking a preliminary injunction against the rule. They argue that the Department’s rule undermines key protections for workers’ retirement savings, oversteps statutory authority from ERISA, and is arbitrary and capricious. “DOL goes not adequately justify its decision to permit fiduciaries to consider non-pecuniary factors when making investment decisions or exercising shareholder rights,” the lawsuit stated. “By formally injecting ESG concepts into the ERISA prudent duty regulations, DOL has ventured into territory that Congress explicitly rejected when it drafted ERISA.” Other plaintiffs participating in the lawsuit include Liberty Energy Inc. and the Western Energy Alliance, a non-profit trade association of oil and natural gas companies. The lawsuit argued that Liberty, a plan sponsor, will “expend additional time and resources monitoring and reviewing recommendations from its investment advisers, without the benefit of record keeping requirements or clearer fiduciary duty regulations, to ensure they are focusing explicitly on pecuniary considerations and not collateral ESG factors.”
On January 27, the Ninth Circuit Court of Appeals agreed to hear a lawsuit by the NAACP against the Arizona Department of Corrections over the state’s use of private prisons and immigration detention centers. The NAACP claims that Arizona is violating the Eighth Amendment’s ban on cruel and unusual punishment and the 13th Amendment’s prohibition of slavery. The suit argues the use of private prisons involves “substituting a prisoner-corporation relationship for a state-prisoner relationship by relegating prisoners to the status of human inventory and making prisoners slaves to the private prison corporations; attenuating government protection, oversight, safety, and wellbeing of prisoners within the private prisons; and creating financial incentives to design and operate facilities that incarcerate more people for longer periods of time.” The NAACP is appealing a decision by District Judge Douglas Reyes to throw out the lawsuit. Judge Reyes wrote that “[p]laintiffs have not alleged any facts showing the Arizona Department of Corrections, Rehabilitation and Reentry prisoners in private prisons are forced to perform labor akin to traditional notions of slavery or involuntary servitude,” the judge wrote. Instead, he said, the plaintiffs “present a novel legal theory that mere confinement in a private prison reduces a prisoner to a commodity.”
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