ESG 401(k) Rule Targeted by GOP in Push to Override Biden Veto

Congressional Republicans say they will attempt to override the Biden administration’s first presidential veto, which rescued a highly politicized US Labor Department regulation that permits socially conscious retirement investing.

The House is scheduled to vote Thursday to override President Joe Biden’s veto of the Congressional Review Act resolution that sought to nullify the ESG rule, according to House Majority Leader Steve Scalise’s (R-La.) office.

In blocking the resolution Monday, Biden said canceling the DOL rule would “put at risk retirement savings of individuals across the country.”

The veto override would require a two-thirds majority in both chambers of Congress, a high bar Republicans who narrowly passed the resolution in the House and Senate this month aren’t expected to cross. But even if the effort fails, the rule remains under threat, including in two federal court lawsuits.

Moderate critics are painting the newly scheduled vote as political gamesmanship aimed at amplifying conservative talking points about “woke capitalism” in environmental, social, and corporate governance investing and forcing lawmakers to reveal their positions.

“It seems to me the case for pursuing a veto override is political in terms of highlighting the issue and making members take votes on the record yet again,” said Brad Campbell, a former George W. Bush administration appointee who headed the DOL’s Employee Benefits Security Administration.

Many Republicans opposed to the Labor Department rule are turning their attention instead to the courts, where more than two dozen red state attorneys general are suing the administration, alleging the rule violates federal benefits law and administrative procedure.

“There’ll be a district court that probably gets involved, then a circuit, and maybe the Supreme Court will get involved with it,” said Sen. Mike Braun (R-Ind.), who led the effort to overturn the rule in the Senate.

The Labor Department is attempting to convince a Trump-appointed district court judge in Amarillo, Texas, to move that lawsuit elsewhere, arguing targeted lawsuits in single-judge jurisdictions undermine the appearance of judicial independence.

Meanwhile, plan participants in several Wisconsin 401(k)s are suing the department on similar grounds to the Texas suit.

Right Debate, Wrong Rule

The rule from EBSA, a little-known Labor Department agency that regulates private-sector pension plans, may appear an unlikely setting for bipartisan rebuke and Biden’s first veto, but it underscores how ESG investing has become a political battleground.

EBSA’s rule doesn’t actually favor ESG consideration; it allows retirement plan decision-makers to consider financially material socially conscious factors. Financial materiality in the best interest of plan participants and beneficiaries is a tenet of the Employee Retirement Income Security Act, which sets minimum standards for private-sector retirement plans.

But it’s the first chance a newly Republican controlled House has had to weigh in on Biden’s climate investing agenda. The Securities and Exchange Commission is working on additional rules that would up the ante for companies reporting on ESG investment criteria.

“Even if this is the right debate, this is actually the wrong rule on which to have it,” Campbell said.

Joe Manchin (D-W.Va.),along with Montana Democrat Jon Tester broke with his party in the Senate vote on the CRA. He has opposed the DOL rule for allowing investments to be moved away from the fossil fuel industry, which he says puts US energy independence in check.

“This administration continues to prioritize their radical policy agenda over the economic, energy and national security needs of our country, and it is absolutely infuriating,” Manchin said in a statement Monday. “Despite a clear and bipartisan rejection of the rule from Congress, President Biden is choosing to put his administration’s progressive agenda above the well-being of the American people.”

Together, efforts to pick away at the department’s interpretation of retirement plan officials’ standards of conduct reflect a divergence between private-sector retirement plans and public pensions.

Several Republican-controlled states have adopted anti-ESG policies that break with long-standing ERISA-mirrored rules for teachers, police officers, and firefighters.

“The more public action we see from Republican members of Congress, Republican governors, and Republican attorneys general against that DOL interpretation, the more likely it is that they can convince people that the Labor Department did something radical,” said Josh Lichtenstein, a partner at Ropes & Gray LLP. “The truth is, they did not do anything radical at all.”