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A Texas judge has ruled against a challenge to Biden Administration environmental, social, and governance (ESG) rules that allow fiduciaries to consider ESG factors in selecting retirement plan investment choices. House action to roll back the rules is pending.

The lawsuit, brought by 26 attorneys general from Republican-controlled states, argued that the rules were arbitrary and capricious and “would open the door to politicization in investment decisions.” The Trump-appointed district judge, Matthew Kacsmaryk, rejected these arguments, saying the Biden Administration rule does not require consideration of ESG factors, but rather just allows such consideration under rules limiting their applicability.

The GOP-controlled House continues to object to the now-final ESG rules. There is legislation pending in the House—approved by the two committees of jurisdiction—that would undo the rules. There may be a House vote on these bills, if the House has time after resolving the Speakership race, and while negotiations on year-end government funding legislation are underway.

 Prospects: There’s little chance that the Democratic-controlled Senate would approve the House ESG legislation, or that President Biden would not veto it should it pass the Congress. And the district court ruling by a very conservative judge suggests that the courts will find that the rule withstands further court challenges. However, the issue is not yet settled, so plan fiduciaries should exercise care in considering ESG factors when choosing plan investments.

 NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; or Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org; or Michael Hedge – Senior Director – Government Relations, at mhedge@naifa.org.