Appeals Court Tells Texas Judge to Revisit ESG Rule

On Thursday, a U.S. appeals court ordered a Texas judge to reconsider his decision upholding a Biden administration rule that permits socially conscious investing by employee retirement plans, in light of a recent significant Supreme Court ruling.

A coalition of 25 Republican-led states and the oil drilling company Liberty Energy are suing to block the U.S. Department of Labor rule. In September, U.S. District Judge Matthew Kacsmaryk in Amarillo, Texas, refused to block the rule, leading to an appeal by the states and Liberty.

Kacsmaryk’s decision was based on a 40-year-old legal doctrine known as Chevron deference, which required courts to defer to agencies’ interpretations of ambiguous laws they enforced. However, the U.S. Supreme Court recently eliminated Chevron deference, stating that courts should instead use their independent judgment in determining the validity of agency rules, thereby significantly reducing federal agencies’ rulemaking power.

On Thursday, a three-judge panel of the 5th U.S. Circuit Court of Appeals instructed Kacsmaryk to reconsider the case without relying on Chevron deference but allowed the rule to remain in place for now.

The rule, effective since February 2023, permits 401(k) and other retirement plans to use environmental, social, and corporate governance (ESG) factors as a “tiebreaker” when choosing between two or more financially comparable investment options. It replaced a Trump administration rule that prohibited plans from considering any non-financial factors.