Anti-ESG legislators’ interpretation of US DOL rule “inconsistent” with its historical guidance.
Proposed Republican legislation seeing to reinstate the Trump administration’s ‘pecuniary/non-pecuniary’ rules related to the incorporation of ESG factors in pension fund investments and proxy voting will not pass the Senate, experts told ESG Investor.
Earlier this month, the House Committee on Education and Workforce introduced four bills – HR5337, HR5338, HR5339 and HR5340 – looking to amend the US Department of Labor’s (DOL) Employee Retirement Income Security Act of 1974 (ERISA). The act effectively sets minimum standards to protect users of private sector retirement plans.
“These bills seek to replace the sensible policy allowing retirement plan fiduciaries to consider all financially relevant information when making investment decisions with the ill-defined, unworkable ‘pecuniary/non-pecuniary’ framework,” said Bryan McGannon, Managing Director of investor network US Sustainable Investment Forum (US SIF).
“Our members find the pecuniary versus non-pecuniary rules to be vague and not well-suited to the realities of the investment industry. ESG data can be material to the risk and/or return of an investment.”
But it is unlikely that any of these bills will make it beyond the Republican-led House, according to Josh Lichtenstein, Partner and Head of ERISA Fiduciary Practice at law firm Ropes & Gray.
“Their journey will likely end there, as there’s virtually no chance of Senate passage for any of the four bills,” he told ESG Investor, adding that even in the event they did make it through Congress, they would “almost certainly” face a veto from the Biden administration.
McGannon shared similar sentiments, adding that the four bills “have no chance of becoming law during this Congress”.
In March, the US Senate voted to overturn the DOL’s new rule that confirms evaluating ESG factors in investment selection is consistent with fiduciary duty, only for President Joe Biden to veto the resolution.
Although the Democrats have a majority in the Senate, the previous challenge from Republicans passed as Democrat US Senators Joe Machin and Jon Tester voted in favour, and another two Democrat senators were ill.
Both said that the four bills are better understood as a “messaging exercise” used to demonstrate Republican resistance to the DOL’s current rule, which they characterise as a pro-ESG.
“Members of Congress want to be on record about issues even if they won’t become law,” said McGannon. “They want to signal to their voters and allies that they have taken a position.”
Lichtenstein said characterisation of the DOL rule as pro-ESG was inaccurate. Established by the Biden administration, the department “mandates neutrality” by fiduciaries when considering investment factors.
“It does not show favouritism towards ESG; rather, it demands neutrality,” said Lichtenstein, adding that the DOL rule and ERISA serves as a “fundamental principle”, ensuring that in all cases, the interests of pension plan participants are not subordinated to other considerations.
“Its relevance only becomes apparent if you interpret it to mean that ERISA fiduciaries must consider ESG factors,” he said, noting that such an interpretation is “inconsistent” with the historical guidance provided by the DOL.
“The department has consistently maintained the position that fiduciaries responsible for investing retirement assets have the authority to determine which factors are relevant for consideration,” he said.
Published in November last year, the ‘Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights’ rule clarifies that a fiduciary of pension plans can consider ESG as a material factor that can inform their investment and proxy voting decisions.
It follows an executive order signed by President Joe Biden in May 2021 and serves as a direct reversal of two rules issued in 2020 by the former President Donald Trump, which the DOL said “unnecessarily restrained plan fiduciaries’ ability to weigh [ESG] factors when choosing investments, even when those factors would benefit plan participants financially”.
Anti-ESG in perpetuity
According to Lichtenstein, GOP lawmakers will continue with their anti-ESG agenda. With a Republican-led House and Democratic-led Senate, it’s unlikely there will be enough support to change the law, but the next White House administration could overwrite the DOL’s current rule and reinstate Trump’s anti-ESG measures.
“In the future, hypothetical Republican administrations might take a different approach,” he said, noting that while the rule isn’t under threat right now, it doesn’t guarantee that a future administration will maintain the same stance.
Lichtenstein noted that the “most serious threat” to the DOL’s ESG rule was the litigation battle in the Northern District of Texas.
On 21 September, the court rejected across the board a challenge asserted by 25 Republican state attorneys-general that the 2022 Biden administration rule violated both ERISA and the Administrative Procedures Act (APA).
“The Federal Court decision last week in Texas by a very conservative judge to allow the DOL ESG rules to stand was a significant blow to the opponents of the rule,” said US SIF’s McGannon.
The Texas ruling is expected to be appealed to the Fifth Circuit Court of Appeals.
The continued efforts of anti-ESG movement bring uncertainty that “benefits nobody”, especially when it concerns pension assets and long-term investments, said Lichtenstein.
“In the long-run uncertainty is undesirable.”