In the increasingly escalating battle over the use of environmental, social and governance (ESG) factors in determining retirement investments, congressional Democrats are pushing back.
The latest salvo comes from Sen. Tina Smith (D-MN) who reintroduced legislation—the Freedom to Invest in a Sustainable Future Act (S. 523)—to provide legal certainty to workplace retirement plans that choose to consider ESG factors in their investment decisions or offer ESG investment options.
“Sustainable investment options are good for retirees and good for our environment—that’s a win-win,” Sen. Smith said in a statement. “I’m putting forth this legislation because we know there’s a growing demand for sustainable investing, and Congress should act now to provide the legal certainty necessary to make sure workplace retirement plans are able to offer these options to workers across the country.”
Smith contends that one of the primary issues hindering plans that want to offer sustainable investment options is an uncertain and regularly changing legal environment. Under the Trump Administration, the Department of Labor (DOL) issued a rule that imposed limits on the consideration of ESG factors by workplace retirement plans. That rule was rescinded and replaced last year under the Biden-led DOL with a rule that allows plan fiduciaries to consider ESG.
That rule, however, is currently subject to a legal challenge and is the target of a Congressional Review Act resolution, but more on that in a second.
Sen. Smith’s legislation seeks to put an end to this uncertainty. More specifically, S. 523 would amend ERISA to:
- Make clear that plan fiduciaries may consider ESG factors in their investment decisions when they are expected to have an impact on investment outcomes, provided plans consider them in a prudent manner consistent with their fiduciary obligations (Smith emphasizes that this is the same legal standard that ERISA already applies to non-ESG investment factors a plan would typically consider); and
- Provide that plans may consider ESG factors as tiebreakers when deciding between otherwise comparable options.
Like the DOL’s rule, the bill would not mandate but would give plan fiduciaries the option to consider ESG factors when making investment decisions for workplace retirement plans. “These plans must be operated for the exclusive benefit of its participants—an inherently pecuniary focus as the Trump rule ostensibly sought—and this bill would not change that requirement. This bill codifies neutrality to investments—a tenet that has existed since ERISA was adopted,” Smith explains in a fact sheet.
The bill, which was referred to the Senate Health, Education, Labor and Pensions Committee, is cosponsored by Sens. Patty Murray (D-WA), Dianne Feinstein (D-CA), Richard Blumenthal (D-CT), Dick Durbin (D-IL), Elizabeth Warren (D-MA), Bernie Sanders (I-VT), Ron Wyden (D-OR) and Ed Markey (D-MA).
CRA Vote?
Meanwhile, the Senate may vote on a Congressional Review Act resolution[1] to nullify the DOL’s ESG rule shortly after the chamber returns from its President’s Day recess. Sen. Mike Braun (R-IN), according to a report by Bloomberg, has vowed to bring the measure he introduced (S.J. Res. 8) up for a vote and the chamber is only one vote shy to pass the measure.
Currently, it has the support of every Republican Senator (49), along with Sen. Joe Manchin (D-WV). Bloomberg notes that Sens. Angus King (I-ME) and Jon Tester (D-MT) haven’t decided on how they will vote and are mulling their options. That said, even if the resolution passes both the House and Senate, it will likely be vetoed by President Biden, which would be his first while in office.
Rep. Andy Barr (R-KY) has introduced companion legislation (H.J. Res. 30) in the House of Representatives.
Meanwhile, as part of the Democrats’ pushback, Senate Majority Leader Charles Schumer (D-NY) took to the Senate floor on Feb. 16 in defense of the ESG regulation. Pointing to Republican efforts to undo the DOL rule, as well as various State legislatures trying to prevent State investment funds from using ESG factors when making investment decisions, Schumer stated, “Nothing in the DOL rule that they seek to repeal imposes any requirement on anyone. In fact, it goes out of its way to make sure decision-making remains solely in the hands of the fiduciary.” The Senate Majority Leader went on to add that, “Republicans love to talk about small government and letting the private sector do its work. But their obsession with eliminating ESG would do just the opposite.”
The DOL has also stepped up its efforts to defend the rule, with Labor Secretary Marty Walsh and Assistant Secretary Lisa Gomez appearing together at a recent webinar hosted by Ceres where they defended the rulemaking effort.
In addition, Tim Hauser, who is Deputy Assistant Secretary for Program Operations of the DOL's Employee Benefits Security Administration (EBSA), recently spoke with the American Retirement Association CEO Brian Graff, where they took a deep dive in discussing the implications of the new rule.
As part of the larger Republican effort against ESG, a coalition of 24 states in late January filed suit to stop the Labor Department’s ESG regulation just days before it went into effect.
And in early February, Rep. Patrick McHenry (R-NC), Chairman of the House Financial Services Committee, announced that formation of a Republican ESG Working Group—led by Oversight and Investigations Subcommittee Chairman Bill Huizenga (R-MI) to “combat the threat to our capital markets posed by those on the far-left pushing environmental, social, and governance (ESG) proposals.”
“This group will develop a comprehensive approach to ESG that protects the financial interests of everyday investors and ensures our capital markets remain the envy of the world,” Chairman McHenry stated.
For additional NAPA coverage concerning the use of ESG factors in investing, visit our ESG Investing resource page.
[1] The CRA provides an expedited way for lawmakers to overturn an agency rule and only take a simple majority to pass.
