ESG funds have badly underperformed the market, including the very sectors they shunned: oil, gas and coal. But now Joe Biden is coming to their rescue by changing the rules, pressuring the managers of America’s retirement funds to double down on ESG. (ESG stands for “Environmental, Social, and Governance” standards favored by progressives).
It’s been called “Biden’s ESG Tax on Your Retirement Fund.” A Labor Department rule would push fiduciaries to favor climate policies over the interests of investors, altering the behavior of ERISA fund managers for the worse. An article in the Wall Street Journal by former Labor Secretary Alex Acosta, and asset manager Vivek Ramaswamy, explains this:
That may spur retirement fund managers to reconsider their commitments to ESG funds. But new ESG-favoring regulations may come to the rescue. Last year the U.S. Labor Department proposed a regulation that would tell retirement-fund managers to consider ESG factors such as “climate change” and “collateral benefits other than investment returns” when investing employees’ money.
This would encourage America’s perpetually underfunded pension plans to invest in politically correct but unproven ESG strategies. It would also violate retirees’ basic right to have their money invested solely to advance their financial interests.
Retirement and pension-fund managers are fiduciaries, legally required to make every investment decision with one purpose—maximizing retirees’ financial interests. The Uniform Prudent Investor Act, a model law adopted by 44 states, makes clear that “no form of so-called ‘social investing’ ” is lawful “if the investment activity entails sacrificing the interests of . . . beneficiaries . . . in favor of the interests . . . supposedly benefitted by pursuing the particular social cause.” This principle is built into the Employee Retirement Income Security Act itself, as the Supreme Court held in Fifth Third Bancorp v. Dudenhoeffer (2014). The Biden administration can’t change that by regulation….The Biden administration seeks to [dilute] those limits, allowing fund managers to consider ESG factors whenever they deem two investments “equally serve the financial interests of the plan.” Fiduciaries need not document the reason for the tie or how they broke it, the Labor Department explains in announcing the rule, so as to not “chill investments based on climate change or other ESG factors.” The department asserts that “two hours of labor to maintain the needed documentation” might prove too onerous for fund managers.
The new rule suggests that fund managers weigh factors such as “climate change,” “board composition” and “workforce practices.” While the drafters were smart enough not to mandate consideration of ESG factors explicitly, the draft rule’s one-sided list of examples tilts the scale in favor of ESG-linked investment selection, proxy voting and shareholder engagement.
The rule states not only that ESG factors can be considered, but that prudent investing “may often require” it. The proposed regulation thus transforms ESG from one factor that may be considered when it has a material effect on the investment to a factor that should be considered in all instances.
The new regulation may also expose fiduciaries who don’t consider ESG factors to lawsuits. Already, activist shareholders are pursuing litigation against public companies that don’t take ESG-approved steps. NortonLifeLock was sued for allegedly breaching its fiduciary duties by telling investors it was committed to “diversity” when it had no racial minorities on its board. Exxon was sued for allegedly misleading investors by failing to disclose the likely effect of climate change on its bottom line. To date, courts have generally found that no reasonable investor would make investment decisions based on board diversity or, as one judge put it, “speculative assumptions of costs that may be incurred 20+ or 30+ years in the future.”
But the Biden administration’s proposed rule, and the supplementary guidance provided with it, claims otherwise: “Climate change and other ESG factors are material economic considerations” and can play an “important role . . . in the evaluation and management of plan investments.” This language will give fresh ammunition to plaintiff lawyers seeking to wage wasteful litigation against not only American businesses but also plan fiduciaries.
An investment fiduciary must seek to advance the beneficiaries’ objectives, not the fiduciary’s own values or third-party interests. Doing so requires learning clients’ preferences. That is why the Securities and Exchange Commission requires investment advisers to make a “reasonable inquiry into the client’s objectives,” and also why a recently proposed European Union regulation requires investment firms to collect information from clients on their ESG preferences, including whether clients want to invest in or avoid such products….[Yet] drafters of the proposed rule expressly state that it doesn’t require a fund manager to consult with beneficiaries before implementing ESG investments. But the result is a plain violation of fiduciary duty, allowing politicians and fund managers to substitute their investment goals for those of American retirees…The Labor Department should scrap the rule now.
Meanwhile, Congressional Republicans hope to prevent fund managers from sacrificing the interests of investors in the name of ESG, and eliminate any federal pressure for ESG if they retake control of Congress, reports the Daily Caller:
Members of the Republican Study Committee (RSC) detailed steps to combat Environmental, Social and Governance (ESG) investing, which critics refer to as “woke capital,” during a Monday round-table discussion.
The Republicans are stressing the economic consequences of ESG-focused investing, arguing that it contributes to inflation and harms small retail investors, pensions and college funds….Reps. Andy Barr of Kentucky, French Hill of Arkansas, and Blaine Luetkemeyer of Missouri criticized the impact of ESG investing on the U.S. and worldwide economies…ESG investing and woke capital will be likely legislative targets if Republicans take back one or both chambers of Congress in the November midterms. All three members sit on the House Financial Service Committee, which regulates banking and investment firms.
Barr introduced the Ensuring Sound Guidance Act in March 2022 to require investment firms to consider only “pecuniary factors” when acting in “the best interest of the customer.” Although the legislation has not passed out of the House Financial Services Committee, Republicans plan to reintroduce it should they take over the lower chamber in the November midterms…
“ESG fees have higher fees and lower returns,” he continued, noting a Wall Street Journal report that ESG funds charge 43% more for investor fees than non-ESG funds. “When asset managers like Blackrock are selling to the retail investor community ESG, they’re making money at the expense of those retail investors. Those higher fees are cutting into returns.” RSC chairman Jim Banks of Indiana put it more simply. “It’s a scam,” he said.