Members of Congress and state attorneys general have launched a two-front attack against the Bident administration’s rule promoting ESG investing.
In the U.S. Senate, every Republican, as well as West Virginia Democratic Sen. Joe Manchin (D-W.Va.), is backing legislation to roll back Biden’s Labor Department rule announced in November titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” to allow 401(k) managers to direct their clients’ money to ESG (Environmental, Social, and Governance) investments. The rule took effect on Jan. 30.
The premise of ESG investing is that social justice, not potential profits, should guide investment decisions. Industries like fossil fuel production or companies that don’t practice aggressive DEI (diversity, equity, and inclusion) hiring are rejected despite their profitability.
“Federal law has long required fiduciaries to place their client’s financial interests at the forefront, and that is something that should not change,” New Hampshire Attorney General John Formella, an opponent of the new Biden administration rule, told NHJournal during a recent podcast interview.
House Republicans could easily pass the companion bill to the Senate’s version, and with 50 senators on board it would only take one other Democratic senator — perhaps from New Hampshire? — to pass. However, Congress has to act within 60 days of the regulation taking effect.
It comes after 25 Republican state attorneys general, including Formella, sued to reverse the rule.
“With respect to Pennsylvania’s energy-producing economy, the value of its fossil fuels has been validated in recent months as the global demand for them has increased,” Gordon Tomb, a senior fellow at the Commonwealth Foundation, a free market think tank in Pennsylvania, told InsideSources. “There will always be ups and downs in the market, but coal, oil, and natural gas will be essential to the well-being of people and the planet for many decades.”
ESG funds generally gain a 6.3 percent return compared to an 8.9 percent return for the average market, according to a Bloomberg analysis. So, Tomb said, the market might sort out the regulation.
“As for public monies – such as pension funds of state employees and tax dollars generally – traditional fiduciary factors, not ideological agendas, should be the basis for investments,” Tomb added. “ESG funds have underperformed funds that focus on long-term financial performance. This suggests to us that the issue likely will sort itself out as long as people know what is going on with their money.”
Formella’s decision to join the lawsuit may reflect New Hampshire’s status as a retiree-friendly state.
“This action is all about protecting the hard-earned retirement savings of Granite Staters and of Americans all across the country,” Formella said in a statement. “Asset managers should not have an automatic green light to just start directing trillions of U.S. retirement dollars into ESG investments without their clients’ directing them to.”
“Dollars and cents should be driving crucial and potentially risky investment decisions for people, and the [political] policy objectives of an asset manager should not play a role,” New Hampshire’s attorney general added.
Spokespersons for New Hampshire’s two Democratic Sens. Maggie Hassan and Jeanne Shaheen did not respond to inquiries for this story. However, Hassan embraced increased oil and natural gas production during her 2022 re-election campaign, putting her at odds with the premise of ESG investing.
The attorneys’ general lawsuit contends the Biden ESG rule affects about two-thirds of American retirement savings accounts or $11.7 trillion in assets. It further claims the rule violates the strict laws placed on the Employee Retirement Income Security Act requiring fund managers to focus on return on investments.
“[T]he 2022 Investment Duties Rule makes changes that authorize fiduciaries to consider and promote ‘nonpecuniary benefits when making investment decisions,’” they wrote, adding: “Contrary to Congress’s clear intent, these changes make it easier for fiduciaries to act with mixed motives. They also make it harder for beneficiaries to police such conduct.”
The Labor Department rule follows President Joe Biden’s Executive Order 14030, signed in May 2021, that directs the federal government to implement policies to safeguard Americans from “climate-related financial risk.”
“Today, the Department of Labor is issuing a rule that reflects what successful marketplace investors already know, and recognizes the meaningful impact that environmental, social and governance factors can have on retirement investments,” then-Labor Secretary Marty Walsh said in a statement in November.
“The new rule allows retirement plan investors to take those factors into account as appropriate,” Walsh said. “This rulemaking weighed the comments and feedback we received, and takes the department’s thumb off the scale against the use of ESG factors in investment decision-making so it is clear that those factors can be considered to the same extent as any other factor.”
Sen. Mike Braun (R-Ind.) is sponsoring the Senate version while Rep. Andy Barr (R-Ky.) is sponsoring the House version of the bill.
“Retirement plans should be solely focused on delivering maximum returns, not advancing a political agenda,” Barr said in a statement. “If Congress doesn’t block the Department of Labor’s rule greenlighting ESG investing in retirement plans, retirees will suffer diminished returns on the investment of their hard-earned money.”
Like Barr, Manchin — the only Democrat to back the bill — is from one of the largest coal-producing states in the nation.
“At a time when our country is already facing economic uncertainty, record inflation, and increasing energy costs, it is irresponsible of the Biden administration to jeopardize retirement savings for more than 150 million Americans for purely political purposes,” the West Virginia senator said in a statement. “I’m proud to join this bipartisan resolution to prevent the proposed ESG rule from endangering retirement incomes and protect the hard-earned savings of American families.”