Under President Joe Biden, the US Department of Labor put in place a rule that would allow managers of retirement plans to weigh climate change and other environmental, social and governance (ESG) issues in their investment decisions. The move undid an effort under then-President Donald Trump to block such investments. The rule has become a focus in a fight over what proponents call sustainable investing and opponents call “woke capitalism.” With the help of conservative Democratic senators, Republicans in Congress passed a measure to repeal the rule, but the White House said Biden would keep the rule in place by vetoing the congressional measure.
1. How did this start?
In 2020, the Labor Department proposed a new rule that would change the Employee Retirement Income Security Act of 1974 (ERISA) to require those overseeing pension and 401(k) plans to always put economic interests ahead of what it called “non-pecuniary” goals.
2. Why did it do that?
The agency, led at the time by Trump appointee Eugene Scalia, said the change was intended to provide clear regulatory guideposts for plan fiduciaries “in light of recent trends” in ESG investing. (A fiduciary is someone with a legal responsibility to make financial decisions in the best interest of beneficiaries.) “Private employer-sponsored retirement plans aren’t vehicles for furthering social goals or policy objectives that aren’t in the financial interest of the plan,” Scalia said. The proposal acknowledged that ESG considerations can be “pecuniary factors,” meaning having a bearing on investment returns. But it said that would be allowed only if those factors presented economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories. The proposal, which had not taken effect when Trump left office, also had requirements for more documentation when fiduciaries choose among truly economically “indistinguishable” investments.
3. What happened under Biden?
The Biden administration reversed Trump’s plan and in November finalized a rule that permits retirement plans to consider ESG factors as long as they are in the best financial interest of plan participants and beneficiaries. The Department of Labor rule also provides options for workers and retirees who want to ensure the fund managers of their pensions consider climate risks and provide options to invest in sustainable businesses.
4. What’s the argument in favor of that?
The administration’s position is that the rule protects workers by ensuring “that fiduciaries have the fullest set of available tools to protect their life savings and pensions.” Democrats also have argued that the rule doesn’t impose a mandate requiring that investments take ESG issues into consideration, but just allows them to. Senate Majority Leader Chuck Schumer, a Democrat, said that more than 90% of companies listed on the S&P 500 already publish ESG reports, adding that Republicans should “let the market work.”
5. What do critics say?
Republicans have taken aim at the rule as a latest front in a rapidly expanding political-cultural-financial war. Some state where Republicans control the legislature, governor’s office or both have already passed laws or adopted rules seeking to limit ESG investing. Mitch McConnell, the leader of Senate Republicans, said the Labor Department’s rule would allow the administration to endanger Americans’ retirement savings “for political causes they may not even support” and would water down investment managers’ fiduciary obligation to get the best returns for clients.
6. What happened in Congress?
The Republican-led House voted 216-204 in favor of a resolution against the rule. The vote came under the provisions of the Congressional Review Act, which allows majorities in both houses of Congress to block a regulation adopted by the executive branch. In the Senate, Democrats Joe Manchin of West Virginia and Jon Tester of Montana joined with Republicans to pass a similar resolution by a vote of 50-46. The White House had said earlier that Biden if the measure passed Biden would issue a veto, his first. Overruling a Biden veto would require a two-thirds vote in both houses of Congress, both of which are narrowly divided.
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