New Lawsuit Calls ESG Unlawful “Investing Fad”

The Wisconsin Institute for Law and Liberty, a conservative nonprofit law firm, brought a lawsuit Tuesday in the District Court for the Eastern District of Wisconsin challenging the Department of Labor’s recently enacted rule permitting the use of environmental, social and governance investment strategy in retirement plans. The complaint alleges that the rule “unlawfully politicizes the retirement system.”

The plaintiffs in the lawsuit are two defined contribution plan participants in Wisconsin: Richard Braun, an operations manager for SWAT Environmental, and Frederick Luehrs III, a maintenance supervisor at Petron Corporation.

Like a similar lawsuit brought against the DOL in January, this one alleges that ESG is a “non-pecuniary” factor which prioritizes political considerations over risk and return, at the expense of retirees’ finances and to the benefit of political causes.

Different from the first lawsuit filed against DOL on this issue, verbiage indicating general disregard for ESG appears throughout the complaint. ESG is dismissed as an “investing fad” and said to be designed to promote “left-leaning political causes.” In a statement regarding this lawsuit from Kate Spitz, one of the WILL attorneys representing the plaintiffs, Spitz said “By injecting highly partisan issues—like climate change and racial justice—into investment strategy, the Biden Administration is jeopardizing the retirement income of over 140 million Americans.”

This complaint also emphasizes the removal of documenting requirements. A previous DOL rule from 2020 under President Donald Trump’s administration said that non-pecuniary factors could only be considered as a tiebreaker between two investments if those investments were otherwise indistinguishable and if the plan documented why pecuniary factors were insufficient. The new rule allows non-pecuniary factors to be used if two investments would both equally serve the interests of the plan—seen by investment managers and ERISA attorneys as a lower bar—and has no documentary requirement.

The plaintiffs allege that dropping this documentary requirement allows plans to justify politically-informed investing choices using hindsight if they ever face litigation, rather than rely on their documented reasoning at the time the decision was made. This would have the effect of making it harder for participants to sue sponsors who use ESG considerations in investment selection, they argue, because there would be no paper trail documenting the plan’s decisionmaking, allowing for post hoc justifications.

The complaint ultimately requests that the court temporarily suspend the rule and then permanently enjoin the DOL from enforcing it and promulgating similar ones in the future.

WILL also signed on to a coalition letter earlier this month. The letter likewise dismisses ESG as a political agenda masquerading as an investment strategy. The letter states: “Rather than prioritize the financial well-being and stability of retirees, ESG seeks to advance ideological goals related to environmental policy and other divisive subjects.”

Among other signatories, the letter was signed by members of the fossil fuel industry—including four state coal alliances—and a number of nonprofits financed in part by the Koch brothers, including the Leadership Institute and Americans for Prosperity.