Biden, Congress Set to Clash Over ESG Considerations in Retirement Funds

The nation’s split Congress and President Joe Biden are set to clash over whether and how much pension fund managers can take social and environmental issues like the climate crisis into account when making investments. 

On Wednesday, the Senate voted 50 to 46 to reverse a Department of Labor (DOL) ruling allowing fiduciary retirement fund managers to consider Environmental, Social and Governance (ESG) factors when placing money, following a similar House vote Tuesday, as CNBC reported. Biden has already promised to veto the bill, but climate advocates are concerned about the implications of this latest front in the culture war.

“Attacks on ESG principles have deep roots in the fossil fuel industry and are aimed at trying to ensure coal, oil and gas companies can continue expanding production of their climate-destroying products at the expense of the public,” Dr. Rachel Cleetus, policy director in the Climate and Energy Program and lead economist at the Union of Concerned Scientists, said in a statement emailed to EcoWatch. “President Biden must move quickly to veto this resolution, as he has promised to do. That would affirm what scientists, economists, and forward-looking asset managers know to be true: climate change is a serious risk to our economy and acknowledging that fact is the first step to making better choices to protect people’s futures and livelihoods.” 

ESG refers to a set of standards that companies can use to report on factors beyond simple profitability such as sustainability, equity and employee welfare. Investors can then use this reporting to put their money where their values are. Republicans have decried the practice as “woke capitalism,” according to CNBC. Yet there are solid financial reasons why a company should take action on climate, for example. 

“It is widely accepted in the investment community that factors like worsening climate impacts pose a significant risk to our financial and economic systems and taking that reality into account is simply good fiduciary practice,” Cleetus explained. “As billion-dollar extreme weather and climate-related disasters mount, it is commonsense to align responsible investment choices with what science shows is necessary to limit risks to people and the economy. Moreover, climate-conscious investing will also best serve the interests of people whose retirement accounts and other investments would otherwise face exposure to climate risks.”

The current row over ESG began with former President Donald Trump, whose DOL issued a rule in 2020 that everyone managing pensions or 401(K)s would have to prioritize profitability over “non-pecuniary” goals, as Bloomberg News explained. Biden’s DOL then reversed this ruling and passed a new rule in December 2022 that allowed retirement fund managers to consider ESG factors if they impacted the risk or potential profitability of an investment.  

“DOL issued the final rule after receiving extensive feedback from the public that revealed that the previous Administration’s rules in this area created problematic impediments for plan fiduciaries seeking to act in the best interests of America’s workers when making investment decisions,” the Biden administration wrote in a policy statement Monday.

The House and Senate bills passed this week would now reverse the new rule. However, in the same statement, Biden vowed to veto the House version as it stood Monday. 

The House bill passed 216 to 204, with one Democrat joining every Republican, according to CNBC and Bloomberg News. In the Senate, Democrats Joe Manchin of West Virginia and Jon Tester of Montana crossed the aisle to see it pass. It is unlikely that Congress will be able to summon the two-thirds necessary to overturn Biden’s promised veto, as The New York Times noted. However, the disagreement over how to invest in the age of climate change is likely to persist. Florida Governor and likely Republican presidential candidate Ron DeSantis has been vocally opposed to so-called “woke capitalism,” according to Reuters.

At the heart of the debate seems to be a question of what constitutes undue interference in investment decisions. 

“The last thing we should do is encourage fiduciaries to make decisions with a lower rate of return for purely ideological reasons,” lead Senate sponsor of the bill Mike Braun of Indiana said, as CNBC reported. 

But Senate Democratic leader Chuck Schumer argued that the anti-ESG Republicans were the ones “forcing their own views down the throats of every company and every investor,” as Reuters reported further. 

There is also evidence that the fossil fuel industry is partly behind the kerfuffle, as many of the Conservative advocacy groups pushing the anti-ESG agenda have connections to both wealthy Republican donors and fossil fuel companies, as CNBC reported.