States sue Biden administration over ESG in retirement plans


ESG Developments This Week

In Washington, D.C.

House Democrats form new caucus to support ESG

As the new Republican House majority prepares to push back against ESG investing, some House Democrats have launched their own ESG-related caucus to counter Republicans’ efforts:

A group of House Democrats is forming a caucus to advocate for sustainable investing — a rapidly growing sector that already accounts for trillions in global investment.

Reps. Sean Casten (D-Ill.) and Juan Vargas (D-Calif.) announced Wednesday they would be co-chairing the caucus, which also includes Reps. Bill Foster (D-Ill.), Raúl Grijalva (D-Ariz.), Brad Sherman (D-Calif.) and Emanuel Cleaver (D-Mo.).

The caucus will advocate for policies sought by the sustainable investment industry, sometimes called environmental, social and governance (ESG) investment.

ESG investing has drawn broad interest in the financial sector as well as rising opposition from GOP-led states like Texas, Kentucky, Florida and West Virginia and some Republicans in Congress.

The Securities and Exchange Commission (SEC) is a particular focus of current controversy, as it is expected to release its final climate disclosure rules this spring.

“ESG impacts the health and vibrancy of our communities, workplaces, and ecosystem,” Vargas said in a statement.

“As our economy continues to grow, we must work together with the SEC to ensure that investors, asset managers, and market advocates receive the disclosures needed to make profitable and ethical decisions in our capital markets.”

Democratic members of the new caucus said they have had informal talks with moderate Republicans who they see as potential allies and plan to start formal across-the-aisle recruitment talks once the caucus is up and running. 

The U.S. currently has about $8.4 trillion invested in ESG funds, according to a December study by the Forum for Sustainable and Responsible Investment (SIF), a sponsor of the caucus.

That’s roughly 20 percent of the nearly $41 trillion invested globally in funds marketed as sustainable — an amount expected to hit $53 trillion by 2025, according to Bloomberg.


In the states

States sue Biden administration over ESG in retirement plans

Twenty-five states announced on January 26 that they had filed a lawsuit against the Biden administration alleging that, in their view, the Department of Labor’s new rule allowing for the consideration of ESG factors in Employee Retirement Income Security Act (ERISA)-governed retirement investments increased portfolio risk and violated the law:

A group of 25 states on Thursday filed a federal lawsuit against the Biden administration, arguing a recent rule allowing retirement plan managers to factor environmental and social issues into investment decisions violated the law.

The lawsuit — led by Utah Attorney General Sean Reyes and joined by 24 other states including Louisiana, Texas and Virginia — challenges a Department of Labor (DOL) rule unveiled in November and which is set to go into effect on Jan. 30. The rule would open the door for fiduciaries to factor so-called environment, social and governance (ESG) considerations into Americans’ retirement accounts, an action the states argued could significantly harm the financial interests of customers.

“The Biden administration is promoting its climate change agenda by putting everyday people’s retirement money at risk,” Reyes told FOX Business in a statement. “Americans are already suffering from the current economic downturn.”

“Permitting asset managers to direct hard-working Americans’ money to ESG investments puts trillions of dollars of retirement savings at risk in exchange for someone else’s political agenda,” he continued. “We are acting with urgency on this case because this illegal rule is set to take effect next week. It must be stopped.”

The two dozen states filed the challenge in a federal district court in Texas and asked the court for a preliminary injunction to prevent the DOL from implementing the rule until a ruling had been issued in the case.

In the lawsuit, the states allege that the DOL violated the Employee Retirement Income Security Act (ERISA) of 1974. The law safeguards the retirement income of 152 million U.S. workers, equivalent to more than two-thirds of the nation’s adult population, and covers roughly $12 trillion in assets.

In its coverage of the story, which focused specifically on Wyoming’s participation in the lawsuit, The Center Square quoted market analyst and ESG opponent Stephen Soukup, who suggested that the lawsuit could test the Biden administration’s approach to climate change and noted that a group represented by former Labor Department official Jonathan Berry had joined the plaintiff states:

According to Stephen Soukup, who’s head of the investment consulting group The Political Forum, not only will the lawsuit test the nation’s tolerance for non-pecuniary ESG investing, but it will also “test the legitimacy of the Biden administration’s ‘whole of government’ approach to climate change and the power of administrative agencies to rewrite the plain meaning of long-standing statutes.” 

“It is worth noting that, in addition to half the states filing suit, Liberty Energy has joined the plaintiffs as well,” Soukup said. “Liberty is represented in this case by Jonathan Berry of Boyden Gray & Associates and Berry is, himself, a former Labor Department official, who worked specifically on preserving the clear meaning of ERISA and preventing ESG advocates from playing politics with Americans’ retirement accounts.”

The challenged rule went into effect on January 30 as planned:

Starting Monday, retirement plan managers will be able to factor in a company’s environmental, social, and governing (ESG) positions when making investment decisions, as a Biden administration rule goes into effect – despite the objection of 25 Republican-led states.

The lawsuit was filed Thursday in federal court in Texas. The court has yet to issue a ruling on the request for an injunction.  If granted, the rule would be blocked for the duration of the case, depending on any subsequent appeal.


West Virginia continues ESG pushback, turns attention to proxy advisory services

West Virginia State Treasurer Riley Moore (R), one of the first state officials to push back against ESG investing in general and asset management giant BlackRock in particular, did an interview last week with The Epoch Times in which he discussed his state’s next steps to oppose ESG through legislation aimed at proxy advisory services:

In a Jan. 25 interview with The Epoch Times, West Virginia Treasurer Riley Moore outlined a new state bill intended to ensure that proxy voting for shareholders isn’t a vehicle for environmental, social, and governance (ESG) principles that undercut the interest of those shareholders.

“ESG is obviously a nonsensical investment strategy that has been distorting the free market for quite a while,” Moore said.

He spoke to The Epoch Times after telling Fox News’ Maria Bartiromo about that proxy voting legislation, intended to counteract the top-down push for ESG through new requirements for the state’s investment boards.

“This is going to mandate that our shares are voted in the best financial interests of our pension beneficiaries,” Moore said in a Jan. 24 interview on Bartiromo’s program, “Mornings with Maria.”

The announcement comes just days after West Virginia Attorney General Patrick Morrissey expressed concern over ESG to the twin titans of proxy advisory services, Glass Lewis and International Shareholder Services (ISS).

The two are believed to control more than 90 percent of the U.S. market share for voting advice.

Morrissey wrote that the two firms “appear intent to punish American companies for being out of step with net zero.”

The West Virginia legislation, House Bill 2862, is meant to keep proxy advisories from using their power to advance left-wing political goals on hot-button topics ranging from fossil fuel production to diversity, inclusion, and equity (DIE).

Moore told The Epoch Times the new bill would also improve transparency by requiring the West Virginia Investment Management Board to publicize every shareholder vote from either the board or its fiduciaries.


On Wall Street and in the private sector

Private-sector leaders also criticize proxy advisory services

Treasurer Moore’s comments about proxy advisory services came the same week as two private-sector critics of ESG also spoke out about the companies: Elon Musk, CEO of Tesla, and Vivek Ramaswamy, author of Woke, Inc. and co-founder and executive chairman of Strive Asset Management:

Elon Musk likes to attack circles of power. It’s as if he’s on a mission….

During the past few weeks, the Techno King, as he’s known at Tesla  (TSLA) – Get Free Report, has lashed out at Anthony Fauci, the immunologist who was the face of America’s response to the Covid-19 pandemic….

Musk then attacked the World Economic Forum, the last convention of which has just concluded in Davos, Switzerland. The billionaire accused the forum of acting like an unpopular world government….

But while his attacks on Davos are still hot, the global CEO is targeting two other entities that also symbolize power. 

These are the two largest proxy-advisory firms: Institutional Shareholder Services and Glass-Lewis. For Musk, ISS and Glass Lewis are the real masters of the stock market. In his eyes, their power is disproportionate. 

The two firms provide advice to shareholders on executive compensation and the voting for board members. Their advice is both considered and ignored.

“Far too much power is concentrated in the hands of ‘shareholder services’ companies like ISS and Glass Lewis, because so much of the market is passive/index funds, which outsource shareholder voting decisions to them,” Musk criticized on Jan. 24. 

As a result, “ISS and Glass Lewis effectively control the stock market.”…

According to Jim Woodrum, clinical professor of executive education at the Kellogg School of Management at Northwestern University, muted criticism of ISS and Glass Lewis can be heard in the boardrooms….

But boardrooms have become dependent on ISS and Glass Lewis, Woodrum warned.

The most popular boardroom conversation is, he says, “‘What does ISS think about that?’

“This has also led to a homogenization of boardroom practices, as more and more companies come into compliance with the latest edict from ISS and/or Glass Lewis,” the professor said.

Musk’s comments came in response to a tweet posted by Ramaswamy:

I’ve traveled the country to meet with state pension funds, treasurers, and corporations. It is *staggering* how much influence BlackRock & ISS have wielded over these institutions. They captured the system in red & blue states alike. Time to bring new alternatives to the table.