Anti-ESG 401(k) Bill to Amend ERISA Introduced by Republicans

House Republicans have renewed their attack on “woke” retirement investing with the introduction of new legislation that would explicitly ban ESG considerations in the primary federal law governing workplace retirement plans.

The Ensuring Sound Guidance (ESG) Act, introduced Wednesday by House Financial Services Committee member Andy Barr (R-Ky.), would amend the Employee Retirement Income Security Act of 1974 (Pub. L. No. 93-406) to mandate that retirement account managers consider only financial factors when investing and explicitly rule out environmental, social, and corporate governance.

ESG investing in employer-sponsored pensions has been a target of GOP lawmakers since President Joe Biden‘s Labor Department issued a new rule late in 2022 (87 Fed. Reg. 73822) that permits their consideration. A narrow Republican majority in the House and several key Democratic flips in the Senate forced Biden to veto his first piece of legislation earlier this year, defending the rule against an attempted congressional block.

Capitol Hill Republicans have mounted a full-fledged war on socially conscious investing principles that has spilled into the courts, where the Biden rule faces an uncertain future. A conservative federal judge in Texas is set to rule on a challenge against the policy brought by more than two dozen GOP state attorneys general and a handful of energy companies and their retirement plan participants.

The Barr bill’s pecuniary-only approach borrows from a set of rules former President Donald Trump‘s administration promulgated in late 2020 that cast ESG investing in a negative light. The Employee Benefits Security Administration under Biden halted those rules shortly after the inauguration, claiming they had a “chilling effect” on ESG factors that are materially relevant.

Financial Benefits

The financial relevancy of considering the effects of climate change, corporate culture, or executive strategy on a particular investment is the key point of contention on which the new ESG rule hinges. ERISA has long held plan officials to a strict fiduciary standard of care that only allows a careful analysis of factors that are in the financial best interest of plan participants.

“This effort is about taking politics out of investing, it’s about depoliticizing asset allocation,” Barr told Bloomberg Law. He said that while the bill faces a tough road in the Democratic Senate, it shouldn’t be a partisan issue.

Barr said the month of July will be dedicated to ESG legislation at the Financial Services Committee. His bill, along with other legislation on the issue, would be marked up at the end of the month right before the yearly August recess.

Barr has said he worked with House Committee on Education and the Workforce Chair Virginia Foxx (R-N.C.) and former Trump Labor Secretary Eugene Scalia to update and strengthen the bill first introduced last legislative session (H.R. 7151).

In a letter to his Republican colleagues Wednesday, Barr called for additional GOP support, telling lawmakers the bill doesn’t “prescribe the manner in which an investor allocates his or her capital.”

“You need to do that eyes wide open, and so the default rule for a fiduciary should be to maximize investment returns,” Barr said. “A lot of investors are, we believe, unknowingly investing in ESG because their asset managers, their investment advisors, and their employer-sponsored plan is putting them in ESG without them knowing it.”

Key Differences

Unlike its predecessor, the bill provides for circumstances under the Investment Advisors Act of 1940 (Pub. L. No. 91-547) and ERISA when individual retirement account holders or investors in self-directed 401(k)s could expressly permit ESG investing.

The bill would require IRA advisers to describe to their clients the expected effects of ESG-themed investments and provide regular cost comparisons against other potential securities.

It also provides a legal carve out for ESG considerations in employer-sponsored plans via a “tiebreaker test” between otherwise identical investments. There, too, fiduciaries would be required to document their decisions carefully.

But the bill would also expressly prohibit ESG investments from being considered as default investments in plans that automatically enroll their participants.

The bill would also require the comptroller general and the Securities and Exchange Commission to conduct a series of studies that examine the effects ESG factors have on unfunded state and local pension plans and municipal bonds. One such study would examine states that have booted out ESG-friendly money managers from public coffers, suggesting GOP support for axing companies such as BlackRock Inc. from federal funds.

“Unfortunately, woke asset managers and retirement plan sponsors coerced by vocal left-wing activists have joined public pension authorities in blue states to politicize the allocation of capital at the expense of retail investors,” Barr wrote.