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Twenty-Five States Challenge ESG Initiatives

In November 2022, the U.S. Department of Labor finalized a rule that allows retirement plan fiduciaries to consider environmental, social, and governance factors (ESG). ESG refers to a framework under which companies consider environmental, social, and governance impacts as a potential measure of value. Companies disclose ESG issues in their corporate disclosures, and investment firms may suggest funds based on ESG strategies. Often companies consider ESG as it relates to climate change issues or impacts on local communities. The new rule leaves in place the requirement that fiduciaries may not give up investment returns or take on increased risks to promote social policy goals.

Twenty-five states, led by Texas and Utah, are suing to stop the Labor Department’s ESG rule. They argue the rule undermines important protections for retirement savings and oversteps the department's authority under the Employment Retirement Income Security Act (ERISA). Their statement asserts: "DOL does not adequately justify its decision to permit fiduciaries to consider non-pecuniary factors when making investment decisions or exercising shareholder rights."

Conservative lawmakers have also been challenging these initiatives. Five U.S. Senators warned 50 law firms to advise their corporate clients against participating in "climate cartels" or organizations advancing ESG efforts. To back up their warning, the Senators said they would use their oversight powers to investigate antitrust violations occurring in the pursuit of ESG. Baker and Hostetler LLP suggests companies do not violate antitrust laws when they discuss potential best practices or create non-binding codes of conduct or certifications standards. The firm says companies cannot share confidential information, and companies without monopoly power may also take unilateral action.