Lawsuit vs. ESG investing in 401(k) plans marks courts’ first test after Chevron ruling

A lawsuit challenging a Biden administration rule permitting socially conscious investing by employee retirement plans will test the courts' approach to federal regulations following a pivotal Supreme Court decision.

The New Orleans-based 5th US Circuit Court of Appeals will hear arguments from 25 Republican-led states opposing the Department of Labor's rule on Tuesday, reported Reuters.

The rule in question allows 401(k) and other retirement plans to consider ESG factors as a "tiebreaker" in investment decisions. At the heart of the case is whether the Employee Retirement Income Security Act of 1974 permits retirement plans to factor in non-financial considerations. The Labor Department contends that the law does not explicitly prohibit considering ESG factors, provided that financial interests are prioritized.

Conservatives have criticized the rule, arguing that incorporating a political agenda into investment decisions jeopardizes workers' retirement savings. The regulation impacts plans managing $12 trillion on behalf of over 150 million workers and retirees.

In 2022, US District Judge Matthew Kacsmaryk in Amarillo, Texas, declined to block the rule, invoking the Chevron deference doctrine. This 1984 Supreme Court precedent directed courts to uphold agencies' reasonable interpretations of the laws they enforce.

However, the Supreme Court overturned Chevron in a significant June decision, requiring judges to exercise independent judgment when evaluating agency rules. This shift is expected to broadly affect the federal government's ability to enact rules through various agencies.

The upcoming case provides the 5th Circuit with an opportunity to interpret the Supreme Court's directive on independent judicial review and establish a framework for assessing challenges to agency rules.

The 5th Circuit, considered the most conservative US appeals court, has frequently disregarded the Chevron doctrine in recent years, blocking several Biden administration regulations. Notably, all three judges on the panel set to hear the case on Tuesday were appointed by Republican presidents.

Katherine Kohn, a Washington, DC-based lawyer at Thompson Hine specializing in employee benefits, noted that the Supreme Court's recent decision could influence the outcome.

"If the 5th Circuit is inclined to vacate the rule, there is probably a path for that even if we were still living under Chevron, although the Loper Bright decision certainly makes it simpler for the 5th Circuit to side with the states," she told Reuters, referring to the Supreme Court ruling from June.