Republican state finance officials from 18 states have urged the acting heads of the U.S. Securities and Exchange Commission (SEC) and U.S. Department of Labor (DOL) to adopt regulations for asset managers and retirement plan sponsors banning the use of environmental, social and governance (ESG) or diversity, equity and inclusion (DEI) factors. The officials pointed to a recent legal loss by American Airlines as indicative that consideration of ESG or DEI factors is a breach of the fiduciary duty of loyalty required under the Employee Retirement Income Security Act of 1974 (ERISA).
The officials joining in the letter to the SEC and DOL include those from Alabama, Alaska, Arizona, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, South Carolina, South Dakota, Utah, and Wyoming. These state auditors, comptrollers, and treasurers all are members of the Republican-led State Financial Officers Foundation. They seek "comprehensive guidance" concerning fiduciaries' loyalty requirements concerning ESG and DEI factors.
The officials also express fears that retirement plan assets are being used to further ESG and DEI-related goals. Thus, they are calling for rulemaking prohibiting plans from utilizing retirement plan assets to advance political or social agendas. They also want SEC and DOL to increase agency oversight of and take enforcement action against plan managers who incorporate ESG and DEI factors into their investment decisions. Finally, they want to increase disclosure requirements for plan managers concerning the financial impact and legal liability initiatives related to ESG and DEI.
In support of their position, the financial officials cite a Texas federal district court judge's recent ruling that American Airlines breached the duty of loyalty required by ERISA in failing to keep its corporate interests separate from BlackRock, which administered company retirement plans. The judge stated that the varying ESG policies of American Airlines and BlackRock resulted in "impermissible cross-pollination of interests and influence" on plan administration. Still, the judge also held that American Airlines had not violated its fiduciary duty of prudence under ERISA. The Republican financial officials accuse fiduciaries of using ESG activism to influence financial decision, thus subverting their fiduciary duties and imperiling the financial security of plan participants.
However, other retirement plan and legal experts have questioned the judge's ruling in the American Airlines case. A spokesperson for American Airlines stated that BlackRock's only role was to manage passive index funds in its company retirement plans, and the company offered no ESG investments.
Before Trump's inauguration in January 2025, the SEC and DOL had been defending ESG-related regulations. It is widely expected that the Trump administration will withdraw the SEC's climate-risk disclosure rule, thus short-circuiting pending litigation, although public companies still will be subject to related rules passed by California and the European Union. Furthermore, the DOL has been involved in litigation over its rule allowing retirement plan fiduciaries to use ESG factors as a tiebreaker between two or more "absolutely equal" options, where investment in both or all would be imprudent. That rule is likely to meet the same fate as the SEC rule.
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