Anti-ESG Measure Ditching Biden 401(k) Rule Wins House Approval

The House has passed a measure that would tank the US Labor Department’s new ESG retirement investing rule, teeing up a vote in the Senate and buoying a bill that could force President Joe Biden to use his first veto.

The GOP-led Congressional Review Act measure passed 216-204 Tuesday, on a mostly party-line vote with Rep. Jared Golden (D-Maine) being the sole Democratic defection. It would block the department from enforcing the rule, which allows retirement plan decision makers called fiduciaries to consider environmental, social, and corporate governance implications when selecting and monitoring investments.

But the rule has met fierce resistance from Republicans at the state and federal level who have characterized it as “woke” political interference in private-sector workplace retirement plans. It faces pressure from multiple fronts, including two federal lawsuits, one of which is led by 25 Republican state attorneys general.

“Congress must act to block the Biden administration’s recent rule that green lights so-called ESG investing in millions of Americans’ retirement plans, plowing them into less diversified, higher fees, and lower performing portfolios at precisely the time that we need to maximize financial security for Americans approaching retirement,” said Rep. Andy Barr (R-Ky.), the resolution’s sponsor, during floor debate Tuesday.

The ESG rule permits plans to consider ESG factors as long as they are in the best financial interest of plan participants and beneficiaries. It undoes a Trump-era rule that restricted plans to “pecuniary,” or strictly financial factors when investing or designing plans on behalf of workers.

Sen. Mike Braun (R-Ind.), who was on the House floor during the vote, hopes to bring an identical resolution to the Senate floor as early as Wednesday with the support of one or more Democratic caucus members.

Sens. Jon Tester (D-Mont.), Angus King (I-Maine), or Kyrsten Sinema (I-Ariz.) could offer the 51st vote needed for the resolution to pass. King said Tuesday he’s leaning toward voting against Braun’s resolution, while Tester told reporters he remains undecided and Sinema’s office hasn’t responded to request for comment. All three are up for reelection in 2024.

The White House issued an administrative policy statement Monday opposing the House resolution and pledging to veto it if it passes the House and Senate. The rule allows fiduciaries to consider “corporate accountability and transparency, climate, and liability risks if they find them relevant to the analysis of an investment’s risk and return, in the same way that they would prudently consider other relevant factors,” according to the statement.

“To be clear, the 2022 rule is not a mandate,” the statement reads. “It does not require any fiduciary to make investment decisions based solely on ESG factors. The rule simply makes sure that retirement plan fiduciaries must engage in a risk and return analysis of their investment decisions and recognizes that these factors can be relevant to that analysis.”

Playing Politics

Republicans have accused the DOL of politicizing retirement accounts. Under the Employee Retirement Income Security Act of 1974, Rep. Virginia Foxx (R-N.C.) said, fiduciaries should act solely in the financial interests of beneficiaries to maximize return on their investments.

“The Left is using ESG investment criteria as a political tool to cudgel companies into accepting leftist policies. This is how the Left always operates. This is just the first step,” said Foxx, chairwoman of the Education and Workforce committee, on the floor Tuesday ahead of the vote. “If we let this continue, the left will use ESG investing to push non-compliant companies out of the marketplace.”

But Democrats shot back, saying the rule neither requires nor recommends the use of ESG and that fiduciaries can’t sacrifice investment returns to pursue ESG goals. Rep. Bobby Scott (D-Va.), the top Democrat on the panel Foxx leads, said fiduciaries should have the capacity to consider factors such as a transition to cleaner energy in the next decades.

“Let’s be clear, consideration of ESG factors is not at odds with making a profit,” he said on the floor. “If a company has negative externalities, such as a carbon intensive business practice, had liability risks, and a record of poor corporate governance or mistreating workers, its stock could suffer in the long term.”

Senior Labor Department officials have said backlash to the rule represents a “misunderstanding” about its effect, which is neutral on the validity of ESG investments but allows them to be scrutinized for financial materiality.

The rule has won the support of several major Wall Street asset managers, including BlackRock Inc. and State Street Corp., that believe it’s a pathway for green investment products tailored for retirement plan customers, a largely untapped market in a financial services industry that’s adopted ESG considerations in day-to-day trades.