Texas court upholds Biden administration’s rule on ESG Investing for ERISA fiduciaries

This case, State of Utah et al. v. Micone et al.¹, was initially decided in favor of the defendants, but was vacated and remanded by the Fifth Circuit for reconsideration in light of the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo², in which the court abandoned the so-called “Chevron doctrine” of judicial deference to agency interpretations of ambiguous statutory provisions.

The 2022 Rule, which replaced a rule from the first Trump administration that prohibited fiduciaries from considering nonpecuniary factors in investment decisions, permits fiduciaries to consider ESG, and related factors when they are relevant to the financial performance of the plan. It also allows fiduciaries to use collateral benefits, such as social or environmental impacts, as tiebreakers when choosing between competing investment options that equally serve the financial interests of the plan, as long as they do not sacrifice investment return or take on additional risk.

The court held that the 2022 Rule does not run contrary to ERISA’s duty of loyalty, which requires fiduciaries to act solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to them. The court explained: “The 2022 Rule’s tiebreaking provision does not violate ERISA’s text because it never permits fiduciaries to deviate from exclusively achieving financial benefits for the beneficiaries alone.” The court explained that when fiduciaries face a tie between investment options that all maximize the financial benefits of the plan, they do not violate their duty of loyalty by choosing one based on collateral factors. The court compared this to a driver who chooses the most scenic of two routes that both bring him to his destination at the same time. The court elaborated: “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.”

The plaintiffs also argued that tiebreaking based on ESG is in tension with ERISA diversification rules because they claimed that ERISA already requires fiduciaries to choose both investments when possible, unless clearly imprudent, and that considering collateral benefits other than financial returns would violate the duty of loyalty to act solely and exclusively for the beneficiaries’ interests. The court rejected this argument on the premise that ERISA already provides a default answer of diversification, and that ERISA’s drafting history and congressional action show that ‘social investing’ is prohibited. The court noted: “ERISA’s text plainly says diversification is not required when it is clearly prudent not to do so.”

The court’s decision is a significant victory for proponents of ESG investing, who argue that ESG factors can enhance the long-term value and sustainability of retirement plans. It is also a setback for opponents of ESG investing, who contend that ESG factors are subjective, unreliable, and detrimental to the financial interests of plan participants and beneficiaries. Interestingly, the decision seems to contrast the same district court’s (but a different judge’s) recent ruling in Spence v. American Airlines³.

The American Airlines decision, which was focused on proxy voting, underscored the importance of ERISA fiduciaries acting solely in the financial interests of plan participants and beneficiaries, without being influenced by ESG considerations, which the American Airlines court viewed as inconsistent with the financial interests of the plan participants and beneficiaries. The American Airlines ruling highlighted the potential conflicts and financial underperformance the court found to be associated with ESG investing, and criticized the defendants for allowing ESG factors to influence the management of the retirement plan. It remains to be seen how these two decisions may impact other pending or potential lawsuits challenging the 2022 Rule in other jurisdictions.

The Utah v. Micone plaintiffs may appeal the decision to the Fifth Circuit Court of Appeals, which could lead to a circuit split or a Supreme Court review. Given the Trump administration’s previous stance against considering nonpecuniary factors in investment decisions, it seems unlikely that it would support the 2022 Rule in subsequent appeals.

Footnotes

1. Utah v. Micone, No. 2:23cv-00016-Z (N.D. Tex., Feb. 14, 2025)

2. Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024)

3. Spence v. American Airlines, Inc., No. 4:23-cv-00552 (N.D. Tex. Jan. 10, 2025)