A group of 25 Republican attorneys general sued Labor Secretary Marty Walsh and the Labor Department over a Biden administration regulation that gives retirement plan sponsors more freedom to consider environmental, social and governance factors when selecting investments.

The final rule, which went into effect this week, remains in force during the legal challenge, as the financial services industry ramps up an effort to offer ESG-focused retirement plans to more Americans.

The complaint, filed Jan. 26, argues that the department’s rule, released in November, undermines key protections for retirement savings and oversteps the department’s statutory authority under a 1974 law known as the Employee Retirement Income Security Act, which governs a broad range of retirement and health benefit plans.

The lawsuit asked the court to toss the ESG rule, calling it “arbitrary and capricious” and a violation of both ERISA and the Administrative Procedure Act.

“The 2022 Investment Duties Rule contravenes ERISA’s clear command that fiduciaries act with the sole motive of promoting the financial interests of plan participants and their beneficiaries,” according to the lawsuit, filed in the U.S. District Court for Northern District of Texas, Amarillo division.

“DOL does not adequately justify its decision to permit fiduciaries to consider nonpecuniary factors when making investment decisions or exercising shareholder rights,” the lawsuit continued. “By formally injecting ESG concepts into the ERISA prudent duty regulations, DOL has ventured into territory that Congress explicitly rejected when it drafted ERISA.”

The plaintiffs include Texas, Florida and West Virginia, as well as oilfield services firm Liberty Energy; Western Energy Alliance, an oil and natural gas trade association; and James R. Copland, a senior fellow at the Manhattan Institute who is a participant in a retirement plan subject to ERISA.

A spokesperson for the Labor Department referred CQ Roll Call to the Justice Department, where a spokesperson declined to comment.

The rule reverses a Trump administration change in 2020 to the implementation of ERISA. The Biden administration, investors and other ESG proponents had said the Trump administration changes created a “chilling effect” on investors that wanted to include sustainable investments in retirement plans.

The legal action marks the latest move from Republicans to shrink ESG’s role in financial decision-making, under the argument that factors such as climate change are immaterial and politically motivated.

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