House to vote this week on Department of Labor’s ERISA/ESG rule

ESG Developments This Week

In Washington, D.C.

House to vote this week on Department of Labor’s ERISA/ESG rule

Fox News reported on February 24 that the U.S. House will vote this week on a measure opposing the Labor Department’s rule allowing ESG consideration in ERISA-governed retirement funds:

House Republicans will vote on legislation next week to kill the Biden administration’s controversial rule that allows private retirement plan fiduciaries to consider environment, social and governance (ESG) factors when making investment decisions for their clients.

The Department of Labor’s controversial rule, which took effect in February, has been derided by Republicans and dozens of trade associations as an effort to impose a social agenda on the more than 140 million Americans whose retirement plans are governed by standards set by the federal government.

For decades, those standards have said investment decisions must be guided by the goal of maximizing the return on those investments. However, the rule from Biden’s Labor Department said investment plan fiduciaries can consider companies that prioritize climate change and other social issues as they invest.

House Republicans will use the Congressional Review Act next week to try and stop Biden’s ESG rule. That law lets Congress reject any federal rule if the House and Senate can pass a resolution that says Congress disapproves of it.

Rep. Andy Barr, R-Ky., introduced a resolution to that effect in early February, and the House Rules Committee is scheduled to meet on Monday to set that resolution up for a vote on the House floor as early as Tuesday….

The Labor Department has defended its decision to allow retirement plan managers to consider investing in companies that are “committed to positive environmental, social and governance actions.” While the Labor Department acknowledges those goals are not aimed at maximizing returns, the department also insists that the rule change would help plan fiduciaries “safeguard the savings of America’s workers” by allowing ESG-based investment decisions.

House passage of the bill disapproving of the ESG is all but assured in the GOP-led House, and while it is not clear Democrat leaders in the Senate will take it up, the bill is supported by at least half of the upper chamber. In early February, all 49 Republican senators and Sen. Joe Manchin, D-W.Va., proposed a Senate version of Barr’s legislation.

Former President Trump joins opposition to ESG

Former President Donald Trump (R) released a video on February 24 confirming his opposition to ESG. In the video, Trump said he wanted to see what he views as political considerations kept away from Americans’ retirement investments:

Donald Trump is seizing on growing objections among Republicans to investments based on environmental, social and governance principles, with a campaign video posted Friday opposing so-called ESG strategies.

The former president, who’s making his third White House run, complained in the video about Wall Street and employers using “radical-left garbage” when investing retirement accounts. He vowed to sign an executive order, if he returns to office, “to support a law to keep politics away from Americans’ retirement accounts forever.”

During the final months of his presidency, Trump pushed to ban private-sector workplace retirement plans from considering ESG principles when selecting or monitoring investments.

Trump’s expected top rival for the nomination, Florida Governor Ron DeSantis, has also carved out a lane for himself with outspoken opposition to ESG, and other potential candidates including former Vice President Mike Pence have also opposed it.

In the states

Utah legislators discuss plans to oppose ESG

Utah legislators last week voiced their frustrations with ESG investment tactics and pledged to oppose what Rep. Ken Ivory (R) described as “an effort to weaponize capital”:

Utah legislators took aim this week at companies they fear are distorting financial markets with their environmental and social agendas, but the legislation they rolled out doesn’t appear to affect how Utah currently does business.

“What we’ve seen lately is an effort to weaponize capital,” said Rep. Ken Ivory, R-West Jordan, who is sponsoring one of the anti-ESG bills. ESG stands for environmental, social and governance, and it has become widely used in the financial and corporate worlds to gauge companies on their approach to climate change, social justice and other factors. More than 90% of S&P companies do some kind of ESG reporting.

Ivory’s bill and others reflect a broad effort from Republican-controlled states to counter lenders and asset managers they say are abandoning fossil fuels and other industries for political reasons instead of following their fiduciary duty to maximize financial returns. Fossil fuel-producing states like Texas and West Virginia already have similar laws and have identified financial firms the state won’t do business with. The firms counter that it would be financially irresponsible to ignore ESG considerations.

The bills are the culmination of months of legislative effort. There were more than 35 bill requests for anti-ESG legislation, but only four made it to introduced bills.

In addition to Ivory’s bill, Sen. Chris Wilson, R-Logan, is sponsoring SB96 and SB97, companion bills intended to ensure any government investments are managed to those fiduciary goals and to limit government contracts to companies who will commit to not boycotting fossil fuel companies, gunmakers and others.

Marlo Oaks, Utah’s state treasurer who has been a leader in the anti-ESG charge, praised the legislation in committee hearings on Capitol Hill, but he said in an interview that, in terms of how Utah government entities currently invest funds and contract for services, not much will change if these bills pass….

“We’re generally in a good position,” Oaks said. “This bill is reiterating what we’re already doing in the state. We’re focused on our fiduciary responsibilities.”

He also said net-zero pledges or anti-gun statements signed by companies are not by themselves evidence that firms should be excluded. He said Utah government entities have a responsibility to get the best terms they can get on an investment or contract, and that could mean working with a company that has signed such pledges. “I have a fiduciary obligation to get the best deal that I can given all the circumstances.”

Texas comptroller sends letter to state money managers over ESG concerns

Texas State Comptroller Glenn Hegar (R) sent a letter last week to state money managers arguing that they were not doing enough to distance themselves from ESG asset management companies (AMCs) and directing them to cut ties with institutions on the state’s boycott list:

Texas Comptroller Glenn Hegar is stepping up his battle against so-called sustainable investing, telling state money managers that they haven’t done enough to cut ties with BlackRock Inc. and other financial firms that he says boycott the oil and gas industry.

Hegar sent letters late Wednesday to five Texas government-employee pension funds and an entity that manages money for the public school systems, “strongly” encouraging them to sever all relationships with companies on his office’s divestment list, according to copies of the missives seen by Bloomberg News. The move follows a 2021 law that requires state entities to sell their shares in financial companies or investment funds that limit business with the fossil-fuel industry. In August, Hegar released a list of 10 companies including BlackRock and UBS Group AG and more than 300 individual funds that he says discriminate against oil and gas.

The demands laid out by Hegar increases pressure on state agencies that manage hundreds of billions of dollars in assets to completely cut off the firms on the boycott list. While the state firms indicated they didn’t own direct stakes in the financial companies, Hegar said that an examination of their holdings and business relationships showed some still had investment funds issued by the companies or were paying the firms for services such as analytics or risk management.

His findings indicate some uncertainty about what exactly is required to comply with the law, which carves out exceptions for some private-equity investments and allows the state funds to seek an exemption if severing the ties would violate their fiduciary duty to pensioners.

“We can play all the nuances we want – that keeps the lawyers in their job,” Hegar, a Republican serving his third term, said in an interview. “But the simple matter is that entities that boycott oil and gas should not be doing business with the state of Texas.”

Bloomberg reported Wednesday that the Teacher Retirement System of Texas uses BlackRock to manage about $4 billion of its assets — or about 2.2% of the $179.7 billion total. A TRS spokesman said then that the money manager was following state law about the proper divestments.

Kentucky pension plan employee pushes back against ban on ESG considerations in public investments

Kentucky State Treasurer Allison Ball (R) and Attorney General Daniel Cameron (R) led the state’s opposition to ESG investing in state investment and pension plans last year. The governor signed a law following Ball and Cameron’s lead, requiring the elimination of ESG considerations from state portfolios. An employee of the County Employees Retirement System, however, claims that the new law would cause pension plan trustees to violate their fiduciary duty, according to The New York Times:

In October, Kentucky’s attorney general ordered some of the nation’s biggest banks and investment firms to turn over piles of documents that had the word “climate” or “environmental” in them. The bankers went to court to fight him.

Like a growing number of states, Kentucky has a new type of law on the books targeting financial institutions that “boycott” companies that don’t get past some kind of an E.S.G. screening….

Our Bluegrass State tale begins with a bill that Kentucky legislators passed last year. The legislation ordered the state treasurer to keep a list of financial firms that “have engaged in energy company boycotts.” If those firms don’t respond appropriately to warnings, state governmental entities can, in most instances, no longer own the firms’ securities. Moreover, state entities can’t do business with those financial firms in most instances, either.

The banks were wary enough about all of this. But then, seemingly out of nowhere, Daniel Cameron, the state attorney general, got involved.

In October, he issued subpoenas and civil investigative demands. He targeted Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo. His office announced that it planned to examine “documents relating to the companies’ involvement with the United Nations’ Net-Zero Banking Alliance.” The information requested, the office said, “centers on suspected financial discrimination against companies that do not align with the United Nations’ ‘net-zero’ climate agenda.”

In response, the Kentucky Bankers Association sued, calling the attorney general’s 24 demands for information and 20 separate demands for documents an “amazing” overreach.

In effect, according to the bankers’ legal filing, the demands were “creating an ongoing state surveillance system.” The bankers further claimed that the attorney general was violating their right to free speech and freedom to associate. …

The Kentucky bill does contain a loophole. The legislators, knowing that they shouldn’t force state employees to violate their duty to act in the best interest of constituents, gave those employees a kind of waiver. And on Feb. 13, Betty Pendergrass of the County Employees Retirement System sent the state treasurer, Allison Ball, a matter-of-fact note letting her know that she’d be exercising that fiduciary duty.

Does Ms. Ball sue Ms. Pendergrass now?