U.S. District Court for the Northern District of Texas Upholds New ERISA Rules on Environmental, Social and Governance Investing

A federal district judge in the U.S. District Court for the Northern District of Texas has upheld the U.S. Department of Labor's new ERISA regulations on environmental, social and governance (ESG) investing. The case, State of Utah v. Walsh,1 had been brought by 26 state attorneys general and private plaintiffs who alleged that the new rules, which took effect on February 1, 2023 (New Rules), violated the Employee Retirement Income Security Act of 1974 (ERISA) and were arbitrary and capricious under the Administrative Procedures Act (APA). The primary concern by plaintiffs in Walsh was that the New Rules promoted ESG investing at the literal expense of retirement plan beneficiaries by allowing fiduciaries to choose an investment based on "collateral benefits," rather than requiring fiduciaries to act "with the sole motive of promoting the financial interests of plan participants and their beneficiaries" under ERISA Section 404(a)(1)(A).6 Plaintiffs also alleged that the New Rules were arbitrary and capricious under the APA because, among other things, the Labor Department ignored relevant considerations and failed to consider alternatives.7 The Court's Decision The court analyzed the New Rules under the Chevron framework applicable to administrative rulemaking and held that the New Rules were consistent with ERISA and a reasonable exercise of the Labor Department's rulemaking authority.