Senate GOP One Vote Shy of Blocking ESG 401(k) Investing Rule

The fate of a Republican push to overturn a Biden administration rule on socially conscious retirement investing hinges on a single vote in the Senate as moderate lawmakers up for reelection in 2024 evaluate their options.

Sen. Mike Braun (R-Ind.) has pledged to bring a resolution to the floor under the Congressional Review Act to block the rule after next week’s recess. The resolution would overturn the Department of Labor regulation that permits retirement plans to consider environmental, social, and corporate governance factors on behalf of plan participants.

Braun’s resolution already has the support of every Republican senator, plus West Virginia Democrat Joe Manchin. Independent Sen. Angus King (Maine), who caucuses with Democrats, and Jon Tester (D-Mont.) said this week they haven’t decided how they’ll vote.

If both the Senate and House pass the resolution, it could force President Joe Biden to use the administration’s first veto, and amplify a debate that has already spilled over into the courts and equated ESG with “woke” liberal politics. Moderate critics say that sets a dangerous precedent for economic evaluations, and ultimately could put millions of American retirement savers at a disadvantage.

“It defies logic,” said Robert Eccles, a visiting professor of management practice at the Oxford University Saïd Business School. “If Republicans can somehow tell pension fund managers to override their fiduciary duty for returns and to not take account of material environmental and social factors, these returns are going to suffer.”

Sen. Mike Braun (R-Ind.) speaks with reporters.

Photographer: Zach Gibson/Getty Images

‘One More Democrat’

Resolutions under the CRA to overturn executive action require only a simple majority, allowing Republicans to circumvent the usual 60-vote filibuster-proof margin required to pass most legislation in the Senate. Democrats can’t afford a single extra detraction if they want to uphold the Biden’s administration rule and avoid a Republican win on the issue.

“We got every Republican and Joe Manchin on it, so we’re looking for one more Democrat,” Braun said. “We’re working on that, but we won’t know for sure until it hits the floor.”

King said Tuesday he needed more time to consider the issue. Last week, he expressed some concerns about ESG investment in retirement plans. Those plans have a fiduciary duty to maximize return, he said.

“If people want to make their own decisions about how they invest, that’s one thing. But if it’s a fund of other people’s money, I think their role is maximizing return, not affecting social policy,” King said.

Tester said he still needs to look into the DOL rule for clearer understanding of whether it requires or recommends the ESG consideration. That distinction, he said, “makes a big difference.”

“I’m all about capitalism. I think that if the federal government starts laying down laws saying, ‘You can’t invest here because I tell you that you can’t’ and you want to or don’t want to?” Tester said. “That’s an issue.”

Sen. Kyrsten Sinema‘s office hasn’t responded to requests for comment on the rule and Braun’s resolution. Arizona’s Sinema is also a moderate Independent senator whose term ends in 2024.

The No. 2 Republican in the Senate, John Thune (S.D.), said in a floor speech Thursday that only the maximum possible returns should be considered in retirement investments.

“The Biden administration announced that its top goal is not giving Americans a secure retirement, it’s giving them a retirement that supports the Biden administration’s environmental agenda,” he said.

Last week, Rep. Andy Barr (R-Ky.) also introduced a CRA resolution to overturn the rule as House Republicans wage an all-out offensive against sustainable investing. House Financial Services committee Chair Rep. Patrick McHenry created a working group focused on investigating ESG.

An ESG ‘Misunderstanding’

Labor regulators say their rule is neither a requirement nor a recommendation. It undoes a pair of Trump-era regulations that restricted retirement plan decision-makers called fiduciaries to only using “pecuniary” or financial factors in investment choices.

Considering the financial impact of investments is a key tenet of the Employee Retirement Income Security Act of 1974 (Pub.L. 93-406), but the Biden administration feared the Trump rules would have a “chilling effect” on investors who considered the material financial effects of ESG factors as well.

The new rule, which took effect last month, strikes a “neutral tone,” said Assistant Labor Secretary Lisa M. Gomez, who took over DOL’s Employee Benefits Security Administration in October.

“The intent was to level the playing field and make it clear that fiduciaries can look at those factors, but, at the end of the day, they cannot sacrifice risk or return,” Gomez told attendees at an American Bar Association webinar this week. “Those are the basic concepts of prudence and loyalty.”

Suggesting that the regulation is a mandate on ESG investing represents a fundamental “misunderstanding of the rule,” she said.

The rule is also facing a federal lawsuit by 25 Republican attorneys general who claim it’s an overreach of agency purview. Many of the states fighting the Labor Department over its private-sector ESG retirement investing rule have banned their own public-sector pension fund managers from considering do-good investing as well.

Key Democratic lawmakers have jumped to the agency’s defense on the ESG rule. Majority Leader Chuck Schumer (D-N.Y.) told colleagues on the Senate floor Thursday that climate change can offer real financial risks and rewards that are worth considering.

“Nothing in this DOL rule imposes any requirement on anyone,” he said. “In fact, it goes out of the way to ensure the decision-making remains solely in the hands of the fiduciary.”

CRA resolutions in the Senate also go through a fast-track process that curbs some of Schumer’s powers to block it from coming to the floor. Braun or any other senator can bring the resolution to the floor for a procedural vote within 60 days of continuous session after the rule was finalized.