Biden Issues 1st Veto, Blocks Anti-ESG Investment Measure

The president's action, according to ESG critics, will help undermine asset managers' fiduciary duty

President Joe Biden speaks in irvine, Calif., on Oct. 14, 2022. John Fredricks/The Epoch Times

President Joe Biden issued his first veto on March 20, rejecting a bipartisan measure that would have blocked a Labor Department rule that allows pension fund managers to consider social factors and climate change in investment decisions—a rule that Republicans say is a “woke” policy that will harm retirees’ pocketbooks.

The president posted a video to Twitter defending his veto, saying it “made sense” because Congress’s resolution would “put at risk the retirement savings of individuals across the country.”

“There is extensive evidence showing that environmental, social, and governance factors can have a material impact on markets, industries, and businesses,” he said in a White House statement.

“But the Republican-led resolution would force retirement managers to ignore these relevant risk factors, disregarding the principles of free markets and jeopardizing the life savings of working families and retirees.”

The resolution was approved by the House on a 216–204 vote, while the Senate voted 50 to 46 to overturn the rule, with Sens. Joe Manchin (D-W.Va.) and Jon Tester (D-Mont.) crossing party lines to vote with Republicans. A two-thirds majority is needed in each chamber to override a veto.

The measure targeted Biden’s “Final Rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” which became effective at the end of January.

That rule involved the Employee Retirement Income Security Act of 1974 (ERISA), a key pension reform measure.

ERISA and Why It Matters

According to critics, the president’s move is likely to have an impact on many Americans’ financial security in their retirement years.

ERISA was enacted 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 the financial returns for pensioners.

That law was enacted because companies weren’t honoring their pension obligations to employees and because pension managers were misappropriating retirement funds, in extreme cases using them as their own personal banks.

One of the goals of ERISA was to prevent asset tunneling, which occurs when those in control of corporate assets use them for their own purposes or personal benefit. ERISA set strict standards of fiduciary care.

Increasingly, however, pension funds are today being used to support the ESG ideology, based on the premise that it will increase returns for retirees while simultaneously solving environmental and social issues.

However, analysts argue that a closer examination of how ESG originated and what it has produced to date raises concerns about these claims.

ESG is an umbrella term that includes 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.

Critics assert that fund managers can’t credibly demonstrate higher returns from ESG investments, or even define ESG criteria with precision.

“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,” Robert Wright, a senior research fellow at the American Institute for Economic Research, told The Epoch Times in an early March interview.

“Problem No. 1 is we just don’t know what these things are measuring,” Wright added. “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.

“That on its face doesn’t seem to be following fiduciary responsibility that you should be investing for the highest net return for pensioners.”

Several academic studies have also shown that, rather than boosting investment returns, ESG actually lowers returns.

A 2020 study by the Boston College Center for Retirement Research found that ESG investing reduced pensioners’ returns by 0.70 to 0.90 percent annually, with the majority of the difference attributable to higher management fees for ESG funds.

McCarthy Responds to Veto

House Speaker Kevin McCarthy (R-Calif.) responded to the president’s veto in a statement.

“President Biden’s first veto is against a bipartisan bill that protects retirement savings from political interference,” McCarthy said.

“It is clear that President Biden wants Wall Street to use your hard-earned money not to grow your savings, but to fund a far-left political agenda. That will hurt seniors and workers, especially after President Biden’s reckless spending caused record inflation and rapid interest rate hikes.”

Manchin (D-W.Va.) issued a statement following the veto saying: “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.

“West Virginians are under increasing stress as we continue to recover from a once in a generation pandemic, pay the bills amid record inflation, and face the largest land war in Europe since World War II ... 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.”

Rep. Mike Flood (R-Neb.) described the veto as “disappointing.”

“[Americans] want our retirement plans to be safe, not governed by the types of environmental social governance issues that President Biden and the woke Democrats keep bringing up,” Flood told The Epoch Times’s sister media outlet NTD at the House GOP retreat in Florida on March 20.

Anti-ESG Advocates Criticize Veto

Advocates against the ESG movement were swift to denounce the president’s veto.

“This veto by Joe Biden goes directly against the interests of the American people,” Will Hild, executive director of Consumers First, wrote on Twitter on March 20.

“The bipartisan group of Senators and GOP House members deserve high praise for doing their job in protecting the American people by passing a bill to stop President Biden from allowing Wall Street elites to use ESG as a weapon to force a partisan agenda,” Hild added in a comment to The Epoch Times.

Republican presidential candidate Vivek Ramaswamy speaks during CPAC at the Gaylord National Resort Hotel And Convention Center in National Harbor, Md., on March 3, 2023. Anna Moneymaker/Getty Images

To ESG skeptics, the new rule’s softer language undermines asset managers’ fiduciary duty.

“Any move to supplant or dilute the fiduciary duty would undercut the foundations of our economic freedom and harm the American worker,” Derek Kreifels, CEO of the State Financial Officers Foundation, said in a statement to The Epoch Times.

“The fact that Biden’s first veto is about promoting ESG reveals the problem: this isn’t the invisible hand of the ‘free market,’” Vivek Ramaswamy, a prominent anti-ESG investor and GOP presidential candidate, wrote on Twitter. “It’s the invisible fist of government.”

He argued in a March 2 video commenting on the joint resolution that language in the rule appeared to contradict fund managers’ arguments that the consideration of ESG factors actually helped the bottom line over the long haul.

The new rule lets fiduciaries take “collateral benefits other than investment returns” into account in a wider range of contexts.

“If it really was about long-run value creation, then the Biden administration wouldn’t have to change the rules to expressly say they had to take into account collateral benefits other than investment returns,” he said.

Celebration Elsewhere

Meanwhile, Democrats and ESG advocates celebrated the veto.

“This veto was totally appropriate. For House Republicans to tell American companies they cannot pursue profits and societal goals when they wish to would be counterproductive and un-American,” Senate Majority Leader Chuck Schumer (D-N.Y.) wrote on Twitter.

Senate Majority Leader Chuck Schumer (D-N.Y.) speaks to reporters during a news conference at the U.S. Capitol on July 28, 2022. Drew Angerer/Getty Images

“The veto will allow #Retirement marketplace actors to continue fulfilling their #FiduciaryDuty to plan participants and meet the growing demand for #Sustainable offerings,” the Forum for Sustainable and Responsible Investment wrote on Twitter.

“Workers must have the right to protect their retirements from corporate greed, corruption, and negligence,” the Teamsters Union wrote on Twitter.

“This bill was a direct attack on the free market,” Gregory Wetstone, president and CEO of the American Council on Renewable Energy, said in a statement. “The Labor Department rule at issue here reflects the reality that ESG considerations are financially material.”

Steve Lance of NTD contributed to this report.