Congressional Republicans recently attempted to block a new rule from the U.S. Department of Labor that allows retirement plan fiduciaries to consider environmental, social and governance (ESG) factors when choosing investments.
The ESG rule, formally known as the Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, went into effect on Jan. 30, following an executive order signed by President Joe Biden in May 2021.
“The intensifying impacts of climate change present physical risk to assets, publicly traded securities, private investments, and companies — such as increased extreme weather risk leading to supply chain disruptions,” the executive order stated. “In addition, the global shift away from carbon-intensive energy sources and industrial processes presents transition risk to many companies, communities, and workers.”
A failure to “appropriately and adequately account for and measure these physical and transition risks,” the order continued, “threatens the competitiveness of U.S. companies and markets, the life savings and pensions of U.S. workers and families, and the ability of U.S. financial institutions to serve communities.”
Biden’s executive order came in response to the Trump administration’s own rule change in 2020 to the Employee Retirement Income Security Act (ERISA), the law that governs a broad range of retirement and health benefit plans.
The Trump rule required fiduciaries making 401(k) investment decisions to only consider things such as the risk and return of investments rather than outside considerations like social good or environmental impact.
Supporters of the Biden administration’s rule, meanwhile, not only argue that it allows for more farsighted protections but it also allows for greater choice among beneficiaries who can choose to opt into plans that offer ESG-related investments.
Those plans have become more popular as policyholders want their money to reflect their own values and not contribute to companies they see as doing the wrong thing.
Opponents of the rule, however, argue that it could hurt beneficiaries’ investments and muddy the waters of fiduciary responsibilities with social activism.
“The Biden administration’s proposed changes to ERISA abandon fiduciary responsibility by allowing ‘woke’ ESG factors to dictate investment returns — putting Americans’ retirement savings at risk,” Rep. Greg Murphy (R-N.C.) said in a press release announcing legislation to counteract the rule.
In October 2022, Murphy, along with Reps. Carol Miller (R-W.Va.), David Schweikert (R-Ariz.) and Lloyd Smucker (R-Pa.), introduced the Safeguarding Investment Options for Retirement Act. That bill would amend ERISA to require that plan fiduciaries act in the best interests of the beneficiaries by making investment decisions solely based on financial risk and reward.
To back their argument, the lawmakers pointed to research that found large-cap funds with higher ESG ratings saw a loss of 13%, on average, over a 12-month period ending in June 2022. That’s compared with a 4% loss of large-cap funds with lower ESG ratings.
“This bill would put in critical guard rails to prevent far left schemes from robbing people of the full returns on their investments that they deserve,” West Virginia Attorney General Patrick Morrisey (R) stated in a press release announcing his support for the Republican bill.
Morrisey is one of nearly two dozen Republican state attorneys general who sent a letter to 50 U.S. asset managers in March 2023, stating concerns that these managers could become caught between their legal duties of ensuring the largest financial return for their clients and social policy aims.
“You are not the same as political or social activists and you should not be allowing the vast savings entrusted to you to be commandeered by activists to advance non-financial goals,” the letter states.
Republican attorneys general from 25 states also sued the Biden administration in January of this year in an attempt to block the new Labor Department rule. The case is pending in federal court.
The Senate on March 1 passed the Safeguarding Investment Options for Retirement Act to curb the Biden rule, with two Democrats from conservative-leaning states joining with all Republicans. Biden, however, vetoed the bill, and it is unlikely the Senate will garner enough support to overturn that, meaning ESG considerations are likely to remain in place while he is still in office.
For more background, see the January 2010 issue of Congressional Digest on “Consumer Financial Protection.”
