Texas Judge Upholds Labor Agency’s ESG 401(k) Investing Rule (1)

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 that leaned heavily on agency deference in allowing the rule to stand.

The sustainable investing rule fell victim to the GOP-backed challenge amid a nationwide partisan rebuke of ESG investing, despite the Biden administration’s insistence that its regulation was meant only to “level the playing field.” ESG factors can only be considered under the rule when those considerations are determined to be economically significant and indistinguishable from other “substantially similar” investments.

ERISA requires plan fiduciaries to put participants’ and beneficiaries’ economic best interests above all else, but if ESG factors just so happen to qualify, there’s nothing that should bar plans from ignoring them to break a tie, Kacsmaryk ruled.

“Just as a driver, duty-bound to choose the fastest route to his destination, may choose the most scenic of two routes that each bring him to his destination at the same time, so too can a fiduciary choose a preferable investment option between two that will equally satisfy his duty of loyalty. When the driver takes the most scenic of the two fastest, he does not act for a different purpose than taking the fastest route—he did choose the fastest route,” the judge wrote.

Kacsmaryk’s first ruling upholding the regulation in 2023 sent shock waves across the employee benefits industry. A Trump appointee, he had a history of undoing the Biden administration’s federal actions on issues ranging from birth control to LGBTQ+ bias.

The litigation against the Labor Department’s Employee Benefits Security Administration had been viewed as a test case for how the Supreme Court’s Loper Bright Enterprises v. Raimondo ruling would broadly impact federal agencies’ rulemaking abilities. The Fifth Circuit has been a popular venue for lawsuits targeting Biden administration rulemaking, with multiple rulings favoring plaintiffs who aim to strike down agency rules.

The Biden rule replaced a pair of regulations President Donald Trump’s administration had promulgated during his first administration. Although those rules didn’t explicitly ban ESG considerations, it appeared to steer fiduciaries away from “collateral benefits” in favor of the “pecuniary” economic concerns. In both his rulings, Kacsmaryk found little meaningful distinctions between the two rules. Neither, he said, permitted a fiduciary devalue participants’ and beneficiaries financial benefits.

Still, the regulatory ping-pong match could continue with Trump back in office. It’s unclear whether the Employee Benefits Security Administration intends to appeal the ruling once more attempt another round of ESG-themed rulemaking.

Flow Law Firm PLLC represents the states along with the offices of the plaintiff attorneys general.

The case is Utah v. Su, N.D. Tex., No. 2:23-cv-00016, opinion and order issued 2/14/25.