Economy and Society, February 21, 2023: Will Congress block Biden’s ESG retirement plan rule?

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG Developments This Week

In Washington, D.C

Will Congress block Biden’s ESG retirement plan rule?

According to Bloomberg Law, Republicans in the Senate have been trying to garner commitments from their colleagues to prevent the Biden Labor Department from implementing its rule permitting ESG considerations in retirement plans or to force the president to veto their efforts. Every Republican in the Senate and Sen. Joe Manchin (D-W.Va.) expressed they would support a resolution under the Congressional Review Act opposing the rule, meaning one more vote would be necessary to block it. Sen. Angus King (I-Maine), who caucuses with Democrats, and Sen. Jon Tester (D-Mont.) have said they have not decided how to vote:

The fate of a Republican push to overturn a Biden administration rule on socially conscious retirement investing hinges on a single vote in the Senate as moderate lawmakers up for reelection in 2024 evaluate their options.

Sen. Mike Braun (R-Ind.) has pledged to bring a resolution to the floor under the Congressional Review Act to block the rule after next week’s recess. The resolution would overturn the Department of Labor regulation that permits retirement plans to consider environmental, social, and corporate governance factors on behalf of plan participants.

Braun’s resolution already has the support of every Republican senator, plus West Virginia Democrat Joe Manchin. Independent Sen. Angus King (Maine), who caucuses with Democrats, and Jon Tester (D-Mont.) said this week they haven’t decided how they’ll vote.

If both the Senate and House pass the resolution, it could force President Joe Biden to use the administration’s first veto, and amplify a debate that has already spilled over into the courts and equated ESG with “woke” liberal politics. Moderate critics say that sets a dangerous precedent for economic evaluations, and ultimately could put millions of American retirement savers at a disadvantage. …

Resolutions under the CRA to overturn executive action require only a simple majority, allowing Republicans to circumvent the usual 60-vote filibuster-proof margin required to pass most legislation in the Senate. Democrats can’t afford a single extra detraction if they want to uphold the Biden’s administration rule and avoid a Republican win on the issue.

“We got every Republican and Joe Manchin on it, so we’re looking for one more Democrat,” Braun said. “We’re working on that, but we won’t know for sure until it hits the floor.”

King said Tuesday he needed more time to consider the issue. Last week, he expressed some concerns about ESG investment in retirement plans. Those plans have a fiduciary duty to maximize return, he said.

“If people want to make their own decisions about how they invest, that’s one thing. But if it’s a fund of other people’s money, I think their role is maximizing return, not affecting social policy,” King said.

Tester said he still needs to look into the DOL rule for clearer understanding of whether it requires or recommends the ESG consideration. That distinction, he said, “makes a big difference.”

Senator Manchin explains his opposition to the Labor Department’s ESG investing rule

As noted above, West Virginia Sen. Joe Manchin is the only Democrat so far who has joined Republicans in opposing the Labor Department’s ESG retirement investment rule. Manchin explains that he dissented from his Democratic colleagues because, in his view, focusing narrowly on ESG investing criteria threatens energy production and security:

Sen. Joe Manchin III is offering a word of caution for enthusiasts of environmental, social and governance investing, or ESG, saying that the practice of considering climate change and other political matters in investments could threaten energy security amid geopolitical risks from Russia.

The Russia-Ukraine war, the conservative West Virginia Democrat said, underscores the need to have a balance between investing in both clean energy and fossil fuels, rather than leaning on ESG, which conservatives call a form of “woke capitalism.”

“Colleges, universities, you have different investment firms — they’re looking only at ESG and not geopolitical risks. They’re not being reasonable [or] practical,” Mr. Manchin told The Washington Times. “If you hang your hat on one thing, without the geopolitical risks — just ask Europe what they’ve gone through.”

He emphasized that he is “not criticizing ESG and the overall consideration of ESG and [our] responsibilities” to address climate change.

Rather, Mr. Manchin said both ESG and geopolitical risks “should be considered when we’re making decisions on the energy of our country and energy that our allies need [and] how we’re going to produce that.”

Mr. Manchin’s remarks came as the Senate Energy and Natural Resources Committee, which he chairs, examined the state of global energy security roughly one year after Russia invaded Ukraine. His concerns also came amid a multibillion-dollar campaign by Republican-led states to divest public funds from investment firms such as BlackRock that practice ESG.

He questioned European Commission Director-General for Energy Ditte Juul Jorgensen during a hearing held by his panel Thursday whether she felt Europe has put too many of its eggs in the ESG basket by being heavily reliant on Russian oil and natural gas.

She responded that while ESG will remain prevalent, the war has forced them to refocus more financing on overall energy security, regardless of its climate impact.

In the states

Florida governor proposes legislation prohibiting discrimination based on social credit, opposing ESG in state and local governments

Florida Governor Ron DeSantis (R) announced a legislative proposal on February 13 that would prohibit banks from discriminating against individuals based on social credit factors (such as political support for fossil fuel production or gun ownership), among other provisions opposing ESG considerations in state and local governments:

Today, Governor Ron DeSantis was joined by Senate President Kathleen Passidomo and House Speaker Paul Renner to announce comprehensive legislation to protect Floridians from the woke environmental, social, and corporate governance (ESG) movement that continues to proliferate throughout the financial sector. More on today’s proposal can be found here. To watch the full press conference, click here.

“Today’s announcement builds on my commitment to protect consumers’ investments and their ability to access financial services in the Free State of Florida,” said Governor Ron DeSantis. “By applying arbitrary ESG financial metrics that serve no one except the companies that created them, elites are circumventing the ballot box to implement a radical ideological agenda. Through this legislation, we will protect the investments of Floridians and the ability of Floridians to participate in the economy.”

Later in the week, The Bond Buyer explained how the legislation could affect issuers of municipal bonds:

The municipal bond market has always operated at the intersection of politics and finance, but lately politics seem to have taken center stage.

The latest salvo comes from Florida Gov. Ron DeSantis’ announcement this week that The Sunshine State would move to ban local and state issuers from consideration of environmental, social and governance factors when floating bonds. That includes a “contract prohibition on ratings agencies whose ESG ratings negatively impact the issuer’s bond ratings,” the governor’s office said in a press release.

“We’re going to make sure that ESG is not infecting other decisions at both the state and local governments,” DeSantis said Monday at a press conference with state legislative leaders….

State attorneys general continue the pushback against ESG

Bloomberg Law argued on February 13 that state attorneys general are the new players in the state-level pushback against ESG after state financial officers (like treasurers and auditors) dominated most of the state-level pushback in 2022:

New state attorneys general have quickly found themselves in the ESG wars, with many officials deploying their broad investigative and enforcement powers just weeks on the job.

New Republican attorneys general in Iowa, Arkansas and several other states already are challenging environmental, social and governance investing with a lawsuit against the Labor Department and a letter that assailed proxy advisory firms Institutional Shareholder Services Inc. and Glass, Lewis & Co., among other actions. On the Democratic side, Arizona’s new attorney general, Kris Mayes said Monday her state would exit ESG investigations into big banks and other financial firms that her Republican predecessor probed.

The speed in which new Republican attorneys general have jumped on ESG isn’t surprising given how public and polarizing the topic has become, said Jason Downs, a co-chair of the state attorneys general and ESG groups at Brownstein Hyatt Farber Schreck LLP. Attorneys general can fight ESG in ways that even a House with a new Republican majority can’t, he said.

“State attorneys general hold the most power because of their enforcement authority,” Downs said.

Republicans have repeatedly warned the Securities and Exchange Commission, asset manager BlackRock Inc. and others that their ESG investing policies and rules may violate state and federal laws. ESG is a top-of-mind issue for Republican attorneys general when they talk, said Iowa Attorney General Brenna Bird, who ousted a Democratic incumbent….

In January, Republican attorneys general from 21 states challenged Glass Lewis and ISS over the firms’ voting advice to shareholders considering proposals on climate change, board diversity and other ESG issues at companies’ annual meetings. The letter says the firms’ recommendations aren’t material to investors and “may threaten the economic value” of their states’ investments and pensions. Both firms have disputed the claims from the attorneys general.

Arkansas’ Tim Griffin was among the six new attorneys general who signed the letter. It went out a week after Griffin became attorney general.

ESG awareness is growing among his constituents, who are worried, Griffin told Bloomberg Law. ESG can hinder a company’s ability to operate efficiently and innovate, he said.

“I’ve heard all the arguments about, well, no, this is another way to reach value, right? This is another way of viewing value as opposed to ‘values,’” Griffin said. “I don’t buy it.”

Republican attorneys general teamed up again on a lawsuit to block a Labor Department retirement investment rule that enables private-sector employers to consider ESG factors when choosing pension investments. The lawsuit, filed in the US District Court for the Northern District of Texas in January, alleges that the rule prioritizes “ill-defined” ESG concepts. A senior Labor Department official said the rule isn’t an investment mandate and only was intended to clarify that ESG factors were as important as any other material risk-return consideration, but not more so.

In the spotlight

Activists sue individual corporate directors for failing to meet ESG goals

The activist organization ClientEarth has started suing individual corporate directors for failing to live up to ESG ideals and promises. MLT Akins, a Canadian law firm, recently documented and described the shift of ESG support into the sphere of personal litigation:

In March 2022, ClientEarth – a group of environmental lawyers who are shareholders of energy giant Shell plc – threatened to take legal action against Shell’s directors, alleging they were personally liable for the company’s failure to set meaningful emissions targets.

ClientEarth has now made good on that threat. On February 9, 2023, ClientEarth announced it had filed a lawsuit against Shell’s 11 directors, marking the first time shareholder activists have sought to hold the directors of a company personally liable for an allegedly unrealistic net zero plan. Notably, the group has the support of institutional investors holding more than 12 million shares in Shell.

ClientEarth says Shell’s directors breached their duties under the UK’s Companies Act by failing to create an energy transition strategy that aligns with the Paris Agreement. Specifically, ClientEarth alleges that Shell’s net zero plan lacks short- and medium-term targets to reduce Scope 3 emissions, which account for more than 90% of Shell’s emissions. ClientEarth also claims Shell will cut its emissions by only 5% by the year 2030, despite being ordered to slash emissions by 45% by a Dutch court in 2021.

ClientEarth is asking the High Court of England and Wales to order Shell’s directors to implement a climate strategy that meets the requirements of the Companies Act and satisfies the Dutch court order.

It’s not just directors who run the risk of facing personal liability – corporate officers may also be held personally liable for ESG oversights following a recent landmark ruling in the U.S.

In January, the Delaware Court of Chancery ruled that shareholders of McDonald’s can sue former chief people officer David Fairhurst over allegations that he turned a blind eye to sexual misconduct by the company’s former CEO, thereby allowing sexual harassment to spread through the workplace.

According to Reuters, Fairhurst argued he couldn’t be sued because Delaware judges had always held that oversight obligations resided with directors, not officers. But the Court found it was “illogical” to assume that officers have no duty of oversight.