DOL ESG Rule Withstands Demolition of Chevron Deference

In Loper Bright Enterprises v. Raimondo, the U.S. Supreme Court knocked down Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., leaving the doctrine of Chevron deference in rubble. The doctrine stated that, when a law was ambiguous, an agency administering that law would be entitled to deference for any permissible interpretation of the ambiguity. Chief Justice Roberts ultimately focused the majority opinion on the specific wording in the Administrative Procedure Act (APA), which states that courts should “hold unlawful and set aside agency action, findings, and conclusions” when they are not in accordance with the law. Nowhere in the APA is there language requiring deference to agency interpretations.

Loper Bright has put many other court decisions that relied on Chevron deference on shaky ground. Among these cases is one involving the Department of Labor’s (DOL) environmental, social, and governance (ESG) rule under the Employee Retirement Income Security Act (ERISA).

In the final days of President Trump’s first term, the DOL promulgated a rule that essentially prohibited, as a practical matter, the use of nonpecuniary (nonmonetary) factors by ERISA plan fiduciaries in making decisions about plan investments. The rule contained a narrow carve-out permitting the use of collateral nonpecuniary factors only when a fiduciary was deciding between investments whose relative merits, based solely on pecuniary factors, were indistinguishable. This carve-out, however, was fraught with uncertainties, not least because it was unclear to what extent ESG factors could ever be considered pecuniary. Additionally, “indistinguishable” was an exceedingly high bar. The rule reflected concerns that ESG investments chosen by plan fiduciaries could violate ERISA’s duty of loyalty because they could be adverse to participants’ and beneficiaries’ financial interests.

Loyalty is a mainstay of ERISA’s fiduciary duties. To meet the loyalty standard, an ERISA fiduciary must discharge his or her “duties with respect to a plan solely in the interest of the participants and beneficiaries" and "for the exclusive purpose of ... providing benefits.” In 2022, under the Biden administration and in an effort to counteract any “chilling effect” from the confusion surrounding the Trump-era rule, the DOL finalized a revised rule. Unlike its predecessor, the 2022 rule is not ambiguous. It expressly allows consideration of nonpecuniary factors (including ESG factors) when two or more investments “equally serve the financial interest of the plan over an appropriate time horizon.” This is a lower threshold than the previous “indistinguishable” standard.

The 2022 rule has been repeatedly challenged by a coalition of 26 attorneys general from Republican-led states, oil companies, and individuals. A decision in one such case, Utah v. Micone in the Northern District of Texas, is the first decision on ERISA rulemaking since Loper Bright. The attorneys general argued, among other things, that the 2022 rule exceeded the DOL’s statutory authority, was contrary to law, and was arbitrary and capricious. Their arguments were based in part on the claim that the "sole-benefit" requirement is not met when any factors besides pecuniary benefits are considered. They also contend that the rule was designed to build out Biden administration climate change policy rather than to benefit plan participants and beneficiaries. The case was initially dismissed on summary judgment in favor of the DOL, and the coalition appealed to the Fifth Circuit. Because of the interceding decision in Loper Bright, the Fifth Circuit declined to rule on the appeal and remanded the case to the district court for reconsideration.

In February, the district judge once again dismissed the case on summary judgment, finding that the 2022 rule does not violate ERISA, because it requires fiduciaries to maximize the financial benefits to plans. He posits that, if two investments equally serve a plan’s financial interests, it does not advance non-beneficiary interests, nor is it a breach of loyalty, for a fiduciary to choose between them based on nonpecuniary factors.

The case has not yet been appealed. However, even if the 2022 rule ultimately withstands judicial scrutiny, it may still be razed as part of the Trump administration’s broader efforts to dismantle Biden-era ESG initiatives.