The Biden administration and Congress are currently caught up in a tug-of-war over a new Labor Department rule regarding whether Americans’ retirement savings should be used to finance a climate and social justice agenda.
The conflict goes well beyond obscure investment rules and administrative procedures and is likely to affect the financial security of many Americans in their retirement years.
The rule was challenged under the Congressional Review Act, which is a congressional oversight mechanism that can overturn rulings by federal agencies. Biden has threatened to veto the resolution.
Rep. Andy Barr (R-Ky.), who introduced the measure in the House, said it was “a bipartisan, bicameral joint resolution disapproving of a Department of Labor rule-making that will politicize American’s retirement accounts and jeopardize their retirement security.”
In allowing pension funds to be used for ideological purposes, the Biden administration is “giving away the basic rights of American citizens, to give more power to the radical left,” Sen. Rick Scott (R-Fla.) stated.
“If you put money into a retirement plan, you expect to get the best return you can get; you expect that whoever is running it is a fiduciary to get the best return possible. What the Biden administration is saying is ‘no, you don’t have to do that ... if you have some social agenda, you can focus on your social agenda.'”
Speaking on the Senate floor, Manchin said: “The ESG rule that we’re going to vote on later today is just another example of how our administration prioritizes a liberal policy agenda over protecting and growing the retirement accounts of 150 million Americans that will be in jeopardy. Our country is already facing economic uncertainty, record inflation, and increasing energy costs to keep Americans up at night, and put a squeeze on their pocketbooks.”
The White House denounced Congress’s attempt to overturn the ESG rule, branding it a “MAGA Republican” effort. Contrary to their historical positions, Democrats are now championing the freedom of pension funds and Wall Street asset managers to make their own investment decisions, while Republicans are attempting to limit fund managers to focusing purely on monetary returns.
“Republicans talk about their love of free markets, small government, and letting the private sector do its work. The Republican bill is the opposite of that,” White House press secretary Karine Jean-Pierre said during a news briefing on March 1.
Jean-Pierre declined to elaborate when asked by The Epoch Times about the White House’s reaction to growing congressional opposition to ESG investing.
“As it relates to the dynamics of the Senate and where this is going, I leave that to Senator Schumer,” she said. “That’s something for him to speak to. What I can say is that if this bill reaches the president’s desk, he will veto it.”
“This isn’t about ideological preferences; it’s about looking at the biggest picture possible for investors to minimize risk and maximize returns,” Senate Majority Leader Chuck Schumer (D-N.Y.) stated on the Senate floor. “Why shouldn’t you look at the risks posed by increasingly volatile climate incidents?”
ERISA and Why It Matters
ERISA is a law enacted in 1974 to ensure that, among other things, those who manage company pension funds are held to the highest legal standard of fiduciary care, and that they act solely to maximize pecuniary, or monetary, returns for pensioners. That applies not only to what pension managers invest in, but also how they vote the shares they own.“The Hoffa thing was highly salient,” Robert Wright, a senior research fellow at the American Institute for Economic Research, told The Epoch Times. “Union-based funds were especially subject to malfeasance, to asset tunneling, to directing funds toward investments that aided the plan owners, the trustees, the unions as the case may be, rather than in the best interests of the employees.”
Asset tunneling is when those in control of corporate assets use them for their own purposes or personal gain.
Is ESG an Investment Strategy or an Ideology?
ESG is an umbrella term that encompasses concepts such as climate change, critical race theory, and social justice; it embraces policies such as reducing fossil fuel production, establishing diversity, equity, and inclusion programs, and implementing corporate racial and gender quotas.ESG advocates say that it isn’t an ideology but rather a risk-management tool. They argue that ESG provides appropriate criteria for investing pension money because companies that are highly rated in terms of ESG compliance perform better financially.
ESG, supporters say, is about prudent risk management and good corporate governance, taking into account the interests of customers, employees, the community, and the environment. This narrative is called “stakeholder capitalism,” and its underlying assumption is that, without ESG, companies would simply pursue an exploitive short-term profit motive that ignores these other factors.
Origins of ESG, UN Sustainable Development Goals
The concept of ESG was originally developed at the United Nations Environmental Programme Financial Initiative two decades ago, as a way to implement its sustainable development goals (SDG) through its principles for responsible investing. It was a way to engage the private sector as a complement to laws and regulations being implemented by governments.For investment managers who accepted these principles, it was essential that ESG be characterized, not as an ideology, but rather as a way to manage risk and boost investment returns, lest they be liable for violating their fiduciary duty to shareholders.
ESG has been sold to investors as a profitable way to support goals such as sustainability and social justice. An industry of ESG rating agencies, accountants, consultants, lawyers, and proxy agents has since emerged to track and assist companies with ESG compliance.
The biggest profits, however, may go to asset managers, who can charge higher fees for managing ESG funds because they are actively managed, versus low-fee passive index funds that simply buy all companies in an index such as the S&P 500. Meanwhile, critics contend that asset managers can’t credibly demonstrate higher returns from ESG investments, or even clearly explain what ESG criteria are.
“ESG has not been shown to be much of anything at this point,” Wright said. “It’s just a label that’s slapped on, and it’s not clear that ESG scores are related to actual improvements of any sort—environmental or social justice or the quality of governance.
“Problem No. 1 is we just don’t know what these things are measuring,” he said. “There have been several studies that have shown that funds that have highly rated ESG companies in them do not outperform funds with lower ESG scores; they simply just charge more for the ESG label.
Does ESG Really Boost Investment Returns?
Several academic studies have shown that, rather than boosting investment returns, ESG actually lowers returns.“Today’s rule clarifies that retirement plan fiduciaries can take into account the potential financial benefits of investing in companies committed to positive environmental, social, and governance actions as they help plan participants make the most of their retirement benefits,“ Labor Secretary Marty Walsh stated when originally announcing the rule in November 2022. ”Removing the prior administration’s restrictions on plan fiduciaries will help America’s workers and their families as they save for a secure retirement.”
Lisa M. Gomez, assistant secretary of labor for the Employee Benefits Security Administration, added that the rule “will make workers’ retirement savings and pensions more resilient by removing needless barriers, and ending the chilling effect created by the prior administration on considering environmental, social and governance factors in investments.”
If returns are reduced as pension managers chase ESG funds, Wright said, asset managers may profit, but “the pensioners suffer. It kind of defeats the whole purpose of ERISA.”
The problem with Biden reinterpreting ERISA to allow for ESG is that, in combination with other policies such as the Securities and Exchange Commission’s requirement that all listed companies report their CO2 emissions and plans to reduce them, it could appear to be government advocacy for ESG criteria.
According to a White House statement, Biden’s new ERISA ruling “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.”
“It’s almost like they are saying, it’s now your duty to invest in ESG funds, and that’s highly problematic,” Wright said.
Drawing a parallel to Biden’s executive order to force companies to fire employees who refused the vaccine, Wright said if corporate leaders and fund managers “have independent reasons to doubt the veracity or rationality of what they’re being told to do, is their responsibility to follow the government dictates or is their responsibility to follow the spirit of the statute, in this case ERISA?”
Indeed, representatives from two of the world’s largest asset managers have recently stated that there is no financial benefit to ESG investing. Vanguard CEO Tim Buckley stated in February that “our research indicates that ESG investing does not have any advantage over broad-based investing”; Vanguard pulled out of the Net Zero Asset Managers initiative in December 2022.
“We believe that an orderly transition to a low carbon economy is much more beneficial for our clients’ portfolios. A disorderly transition can cost the global economy about a 25 percent reduction in GDP [gross domestic product].”
Will ESG Investing Open Up Fund Managers to Lawsuits?
The statements from State Street and Vanguard undermine the case that ESG is good for retirees. And if asset managers can’t show that the pro-ESG thesis is credible, or if it turns out that investing in higher-fee ESG funds reduces pensioners’ returns, there may be legal ramifications.In 2005, betting on the transition to renewable energy, the Obama administration provided $535 million in loan guarantees for Solyndra, a solar panel manufacturer that soon went bankrupt, leaving U.S. taxpayers on the hook for those lost funds. If asset managers, by contrast, are seen to have misused bets on ESG criteria, retirees may have someone to go after to recoup lost funds.
Wright said, “I imagine there are corporate lawyers in places like Davis Polk [an international law firm] who are just salivating over this, because there are sure to be lawsuits.”
