Biden Issues First Veto to Save Executive ESG Investment Rule
President Biden issued his first presidential veto on Monday, blocking a bipartisan resolution of disapproval (H.J. Res. 30) that would nullify a Labor Department rule (titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights”) allowing investment managers to “include the economic effects of climate change and other ESG [environmental, social, and governance] considerations” on investment decisions.
H.J. Res. 30 passed the U.S. House (216-204) on February 28 and the U.S. Senate (50-46) on March 1.
The seven-line resolution states simply,
“Resolved by the Senate and House of Representatives of the United States of America in Congress assembled,
“That Congress disapproves the rule submitted by the Department of Labor relating to ‘Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights’ (87 Fed. Reg. 73822 (December 1, 2022)), and such rule shall have no force or effect.”
Finalized December 1, the Labor Department’s controversial rule overruled Trump-era regulations that required investment managers to make investment decisions based only upon financial considerations.
When they first proposed the rule, the Labor Department had suggested that an investment manager’s fiduciary duty “may often require” them to consider climate change and other ESG factors. However, that language was cut from the final rule after numerous public comments argued that language was biased in favor of ESG factors. The final rule took effect at the end of January.
The Labor Department’s executive rule coincides with an ongoing political controversy unfolding across the nation. More than half a dozen states, including Arizona, Arkansas, Florida, Kentucky, Louisiana, Mississippi, Missouri, South Carolina, and West Virginia, have divested roughly $5 billion in public funds from major investment firms that leverage their investments for ESG objectives.
For instance, in 2020, Blackrock, which manages a portfolio of up to $8 trillion in investments, “took voting action on climate issues against” 53 companies in which it managed client funds and put another 191 companies “on watch.” This means that Blackrock cast votes at shareholder meetings, on behalf of the shares it manages, to “hold companies accountable” for “making insufficient progress integrating climate risk into their business models.” They voted “against company directors (or boards)” or “for shareholder proposals” to force a reluctant company to take action.
In addition to loosening ESG guidelines, the rule also expanded the list of covered investments to include, among other things, employees’ 401k accounts. The new rule allows companies to establish ESG-conscious investments as the default for 401k plans, which means employee retirement savings might be used to advance green energy policies without their knowledge unless they explicitly opt out.
On February 27, the White House issued a Statement of Administration Policy (SAP) “strongly” opposing H.J. Res. 30. “There is an extensive body of evidence that environmental, social, and governance factors can have material impacts on certain markets, industries, and companies,” it argued. It also criticized the Trump-era rule, “In 2020, the previous Administration issued a rule that had a chilling effect on retirement investment advisers otherwise inclined to consider environmental, social, or governance (ESG) factors when making investment decisions, even if the advisor determined that these factors were material to investment decisions.” The statement concluded, “If the President were presented
with H.J. Res. 30, he would veto it.”
On Monday, President Biden followed through on his threat and vetoed H.J. Res. 30. “The Department of Labor’s final rule protects the hard?'earned life savings and pensions of tens of millions of workers and retirees across the country,” he said in his veto message. “This resolution would prevent retirement plan fiduciaries from taking into account factors, such as the physical risks of climate change and poor corporate governance, that could affect investment returns.”
President Biden also announced his action on Twitter, “I just vetoed my first bill. This bill would risk your retirement savings by making it illegal to consider risk factors MAGA House Republicans don’t like. Your plan manager should be able to protect your hard-earned savings — whether Rep. Marjorie Taylor Greene likes it or not.”
Senator Manchin, a member of Biden’s own party, wrote that the president’s veto “prioritizes politics over getting the best financial returns for millions of Americans’ retirement investments.” He said in a statement:
“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. The Administration’s unrelenting campaign to advance a radical social and environmental agenda is only exacerbating these challenges.”
House Majority Leader Kevin McCarthy (R-Calif.) also condemned Biden’s decision. “Biden just sided with woke Wall Street over workers. … Biden wants Wall Street to use your retirement savings to fund his far-left political causes.”
“Section 403(c) of ERISA requires that “the assets of a plan . . . shall be held [in trust] for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan.” 29 U.S.C. § 1103(c)(1) (emphasis added). Section 404(a) of ERISA likewise requires that fiduciaries act as a prudent investor would in managing plan assets “solely in the interest of the participants and beneficiaries and . . . for the exclusive purpose of . . . providing benefits to participants and their beneficiaries.” 29 U.S.C. § 1104(a)(1) (emphasis added).”
“You’ve got the Biden administration telling these fund managers … ‘No, don’t follow the law. … You can invest based on non-financial factors,’” said Texas Attorney General Ken Paxton (R), whose state is involved in the suit. “This, to me, will make Americans poorer.”
Joshua Arnold is a staff writer at The Washington Stand.