GOP-sponsored ethical investment rule rollback may draw first Biden veto

A relatively obscure government rule to simply encourage insurance companies, retirement plans, and other financial institutions to consider ethical investments has become a focal point on the GOP’s war on “woke” capitalism and may lead to the first presidential veto of the Biden administration.

Congress this week completed a vote in both houses to roll back a Dept. of Labor rule to allow retirement fund managers to consider environmental, social, and governance (ESG) factors when deciding where to put their money. The move for ESG investing goes back decades but its implementation was slowed as noted economists and analysts proffered that social responsibility would adversely affect a firm's financial performance and that government regulation and interference would damage the economy. Philanthropy just wasn’t considered a profitable business.

That began to change more recently. The concept of “social capital” in measuring a corporation’s value has grown. Also, pressure from environmental groups and others grew and was increasingly applied to the capital markets to include environmental and social factors in their financial decision making.

In the last 20 years, the ESG movement grew from a corporate social responsibility initiative launched by the United Nations into a global phenomenon with more than $30 trillion in assets under management. In 2021, capital totaling nearly $18 trillion flowed into ESG-linked products, an almost 525 percent increase from 2015, according to Morningstar Inc.

Now, venture capital firms and other investment houses rate companies based on their ESG initiatives and use the scores as determinant factors of where to invest.

The Trump White House moved to prohibit the DOL rule from considering ESG factors, saying it would reduce the value of 401 (k) pension plans and other retirement accounts, and lead to job losses in the fossil fuel industry.

President Biden reversed the Trump administration order, which led to the showdown in Congress where the Senate voted 50-46 this week to reinstate Trump’s order, following similar passage by the Republican-controlled House of Representatives. The resolution has been sent to the Oval Office where Biden has vowed to veto it.

Republicans have attacked the ESG initiative as attempts by Democrats to force their pit social issues on big business.

“What’s happened here is the woke and weaponized bureaucracy at the Department of Labor has come out with new regulations on retirement funds, and they want retirement funds to be invested in things that are consistent with their very liberal, left-wing agenda,” Wyoming Sen. John Barrasso said.

Florida Gov. Ron DeSantis has used his powers to prevent fund managers from using ESG considerations.

But others say the government has a role to encourage companies to focus on more than just profits and returns and use ESG as leverage to include ethical decision making and management.

“It’s a sensible policy allowing retirement plan fiduciaries to consider all financially relevant information when making investment decisions,” said Bryan McGannon, managing director of the US Forum for Sustainable and Responsible Investment. “This benefits plan participants and it ends the retirement policy pendulum between administrations. These gains are undermined by the vote to kill the rule.”

McGannon pointed out that the DOL’s final rule is not a mandate, as some critics contend.

“In fact, the rule re-affirms ERISA’s long-standing principle that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on relevant risk-return factors and not subordinate the interests of participants and beneficiaries,” he said.

The White House joined in with comments supporting ESG investing with its threat to veto Congress’ action.

"The rule reflects what successful marketplace investors already know – there is an extensive body of evidence that environmental, social, and governance factors can have material impacts on certain markets, industries, and companies," the White House statement said. "Such factors also can be a deciding factor among investments that equally serve the financial interests of the plan over the appropriate time horizon and that put the interests of the plan participants and their beneficiaries first and the federal government should not restrict that choice for plan managers."

Nullifying the Biden administration's ESG rule would "unnecessarily limit the options available to retirement plan participants and investors," the statement said.

 

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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