The Senate voted on Wednesday to revoke a Labor Department rule that allows retirement fund managers to consider various factors, including climate change and good corporate governance while investing on behalf of pension plan participants. The final vote in the Senate was 50-46, with two Democratic senators breaking ranks to support the repeal bill: Sen. Joe Manchin of West Virginia and Sen. Jon Tester of Montana. Both are facing elections next year in conservative-leaning states.
On Tuesday, the House approved this bill with unanimous Republican support and one Democrat (216-204), and it subsequently moved quickly to the Senate.
President Joe Biden has declared that he will veto the Senate bill if it reaches his desk. This would be the first veto of his presidency.
Effective January 30th, the new rule permits ERISA fiduciaries to take into account ESG factors while making investment decisions. However, the Labor Department has maintained its stance that fiduciaries must prioritize investment returns and avoid taking on excessive risks while promoting social policy objectives. This rule has reversed two previous rules issued by the Trump administration, which prohibited retirement plan fiduciaries from investing in non-pecuniary instruments and laid out a framework for making proxy vote decisions.
Following their success in the midterm elections held in November, Republicans are emboldened to use their increased power in Washington to target “woke capitalism.” Their initial focus is on a full-scale attack on ESG investment policies. These policies are aimed at appealing to socially conscious investors by providing portfolios of companies that do not contribute to climate change or exhibit good corporate governance practices.
Critics from the Republican party are asserting that the Labor Department’s latest regulation weakens the 401(k) retirement funds by permitting investment managers to prioritize ideological matters like climate change over investment gains. Manchin described the Biden rule as “another example of how our administration prioritizes a liberal policy agenda over protecting and growing the retirement accounts of 150 million Americans.”
Majority Leader Chuck Schumer, D-N.Y., spoke on the Senate floor to defend the Labor Department rule that became effective in November of last year. Democrats pointed out that the rule was voluntary and did not impose any obligations on fund managers.
“This isn’t about ideological preference — it’s about looking at the biggest picture possible for investors to minimize risk and maximize returns,” said Schumer. “Why shouldn’t you look at the risks posed by increasingly volatile climate incidents?”
Instead, the new rule lifted the restrictions that were imposed during the Trump administration, which prevented managers of federally governed pension funds from considering factors other than generating the highest returns.
The White House stated, “The rule simply makes sure that retirement plan fiduciaries must engage in a risk and return analysis of their investment decisions and recognizes that these factors can be relevant to that analysis.”
Advocates of ESG argue that adhering to these principles not only enables individuals to generate profits but also facilitates a favorable influence on the environment while mitigating potential financial hazards arising from climate change.