Congress rejects ESG in retirement plans

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.

Congress rejects ESG in retirement plans

The House of Representatives voted on February 28 to pass a Congressional Review Act (CRA) resolution to rescind the Biden Labor Department rule permitting the use of ESG investing in ERISA-governed retirement plans. Republicans then used their temporary majority and the support of two Democrats to pass the bill in the Senate on March 1:

A Republican bill to prevent pension fund managers from basing investment decisions on factors like climate change cleared Congress on Wednesday, setting up a confrontation with President Joe Biden, who is expected to veto the measure.

The U.S. Senate voted 50-46 to adopt a resolution to overturn a Labor Department rule making it easier for fund managers to consider environmental, social and corporate governance, or ESG, issues for investments and shareholder rights decisions, such as through proxy voting.

The outcome highlighted Republicans’ willingness to oppose their traditional allies in Wall Street and corporate America that adopt what party lawmakers characterize as “woke”, liberal practices.

Two Democratic senators, Joe Manchin and Jon Tester, voted with Republicans. Both face reelection in Republican-leaning states in 2024. The Republican-controlled House of Representatives passed the bill on Tuesday. …

Republicans claim the rule, which covers plans that collectively invest $12 trillion on behalf of 150 million Americans, would politicize investing by allowing plan managers to pursue liberal causes, which they say would hurt performance.

Biden promises to veto resolution, maintain ESG rule

President Biden promised to veto the CRA resolution, which will mark the first veto of his presidency. The Wall Street Journal Editorial Board called the veto announcement revealing:

The Biden rule reversed a Trump-era clarification of the 1974 Employee Retirement Income Security Act (Erisa), which required retirement plan fiduciaries to consider solely “pecuniary” factors that have a “material effect” on investment risk or return. Erisa is intended to prevent retirement funds from using savings for their own purposes.

The Biden rule protects fiduciaries from lawsuits for considering ESG factors that could be “relevant” to investment performance such as a company’s greenhouse-gas emissions or workforce diversity. This broad standard would essentially let managers invest retirement savings however they want.

The rule would also augment the power of proxy advisory duopolists Glass Lewis and Institutional Shareholder Services (ISS) by directing fiduciaries to “rely on efficient structures” such as “proxy advisors/managers that act on behalf of large aggregates of investors.” ISS and Glass Lewis are voting force multipliers on ESG shareholder resolutions. The rule would drive more savings into ESG funds that typically charge higher fees by letting retirement sponsors offer them as default options in 401(k) plans. Workers can opt out of default plans but usually don’t. Why isn’t Mr. Biden lambasting ESG funds for charging “junk fees”? …

Mr. Biden claimed in a veto threat that returning to the Trump rule “would be interfering with the market,” supposedly because asset managers want free rein to consider ESG factors. Sorry, what’s good for BlackRock isn’t always good for workers, and protecting retirement savings isn’t interfering in markets.

Senator Cruz explains the Senate’s pushback against the Labor Department rule

After the Senate vote on March 1, Texas Republican Ted Cruz went on Fox News to explain why he and 49 other senators opposed the Labor Department rule and why he believes ESG poses a threat to retirement savings and capital markets:

Sen. Ted Cruz, R-Texas, joined “Varney & Co” on Thursday to discuss what impact the Biden administration’s “politicization” efforts could have on Americans’ investments. 

“This is your retirement that Joe Biden has said his politics matters more than your retirement, and he’s perfectly happy for you to take the hit,” Cruz said. 

GOP senators discussed the legislation during a press conference Wednesday, saying the Biden administration’s move with the ESG rule had “a certain irony,” given the administration’s rhetoric of working for the American public. 

“And there’s a certain irony here, since [the Biden administration] always billed themselves as actually caring about the person who’s struggling. People are going to struggle more because of this rule,” Sen. Bill Cassidy, R-La., said during the press conference.

“This weaponizes their retirement accounts against both their future, but also their present,” he continued.

Cruz said Thursday that the ramifications on Americans’ investment accounts would be detrimental, putting politics over helping Americans.

“‘Global ESG funds have underperformed the broader market in the past five years, returning an average of 6.3% a year, compared with 8.9% for broader funds, which means an investor who put $10,000 into an average global ESG fund in 2017 would have $13,573 today, roughly $1,720 less than if they’d put it into a non-ESG portfolio,’” Cruz said, quoting an article from Bloomberg. …

“The Senate stood together with a bipartisan vote yesterday and reversed this and said you ought to be able to save for your retirement without politicians impacting and hurting your savings,” Cruz said. 

Cruz claimed that the proposed ESG rule highlights a larger trend of politicization within the Biden administration, specifically the politicization of the Justice Department.

CNBC blames wealthy conservative donors for the pushback against ESG

CNBC published a piece on March 1 arguing that wealthy GOP donors were responsible for driving the federal and state pushback against ESG investing:

More than a half dozen conservative groups have helped to drive the criticism of Wall Street’s ESG investing methods — and some have little-known ties to longtime conservative donors or lawyers who have aided Trump himself.

Members of the State Financial Officers Foundations are all powerful state Republican officials, many of whom have scrutinized ESG practices or pulled back billions of dollars from investing firms. They include Oaks, who last year announced he would move $100 million in state funds from BlackRock to other money managers, and Florida’s GOP Chief Financial Officer Jimmy Patronis, who in December said the state treasury would pull out $2 billion in assets previously managed by BlackRock.

A representative for the State Financial Officers Foundation did not return a request for comment.

Behind the scenes, a larger network of conservative interest groups is helping to fund the organization’s events or send representatives to attend.

Conservative leaning groups including the 1792 Exchange, the Heritage Foundation, Consumers’ Research, American Legislative Exchange Council and Mercatus Center, were among the attendees of the private February meeting of the State Financial Officers Foundation in New Orleans, according to the attendee list reviewed by CNBC.

Some of those organizations participated in a similar State Financial Officers Foundation gathering in Washington D.C. in November 2022, according to an agenda. The meeting in D.C. focused, in part, on pushing back on ESG investment standards. The foundation announced at the time a targeted ESG campaign that features a website and an initial six-figure digital marketing effort. …

A growing list of Republican donors, including other Trump allies, along with a massive donor advisory fund have helped to provide funding for the anti-ESG fight. …

Marble Freedom Trust is led by former Trump judicial advisor Leonard Leo, who helped to coordinate campaigns to confirm the former president’s Supreme Court nominees. The group received a $1.6 billion donation in 2021 from Barre Seid, an electronics manufacturing mogul, according to The New York Times.

In the states

Idaho House votes three times against ESG

The Idaho House of Representatives passed three bills on March 2 intended to restrict the use of ESG investments:

House lawmakers Thursday gave the green light to a trio of bills allowing the state to boycott businesses and financial institutions which follow environmental, social and governance standards, known as ESG.

The standards are guidelines that companies adopt for the way they conduct themselves, or who they choose to do business with. In the financial sector, the standards can guide decisions on where investments may or may not be made.

The bills sailed through on a wide margin, with Democrats and a handful of Republicans voting no on each. Rep. Barbara Ehardt (R-Idaho Falls) sponsored two and fought back against arguments that the legislation allows the state to pick winners and losers.

“We are not telling businesses how to run their business,” she said on the house floor. “There’s nothing remotely in here that says that, that would be a misdirection, a false narrative.”

Nationwide, Republicans have attacked these standards as ‘woke ideology.’ Ehardt says the state needs to protect its industries targeted by ESG reforms. …

The three bills now head to the Senate.

On Wall Street and in the private sector

Journalist alleges continued anti-Israel bias at Morningstar/Sustainalytics

The Washington Free Beacon published an article by senior writer Adam Kredo last month arguing that the financial company Morningstar is not living up to a promise it made to purge anti-Israel bias from its Sustainalytics ESG ratings service. Morningstar has been under increasing pressure from state attorneys general regarding this matter:

The financial ratings giant Morningstar has failed to follow through on promises to eradicate anti-Israel bias from its corporate ratings system and is still blacklisting companies that work with Israel.

Morningstar subsidiary Sustainalytics—which rates companies based on Environmental, Social, and Corporate (ESG) governance guidelines—placed at least two companies on its investment watchlist for their work with Israel’s security sector: Motorola Solutions and Elbit Systems, both of which provide counterterrorism surveillance technology that helps the Jewish state combat terrorism, an issue that is taking on renewed importance as Israel faces a new wave of Palestinian violence.

Sustainalytics has faced accusations that it promotes the anti-Semitic Boycott, Divestment, and Sanctions (BDS) movement, which wages economic warfare on Israel, by downgrading companies that work with Israel. Media attention on the issue, including a series of reports by the Washington Free Beacon, forced Morningstar to announce a sweeping number of reforms that it claimed would combat anti-Israel bias. But several months after this announcement, Middle East experts and former U.S. officials are concerned that Sustainalytics is penalizing companies for the work they do to prevent terrorism in Israel. Sustainalytics’s ratings serve as a guide to investors concerned about social issues, and any company placed on its watchlist can suffer as a result….

While Morningstar said last year that it initiated a company-wide process to eradicate anti-Israel bias, Motorola Solutions and Elbit Systems remain on the watchlist for their work with Israel’s security sector, according to an analysis reviewed by the Free Beacon that summarized Morningstar and Sustainalystics’s updated ratings….

“Morningstar says Motorola has a human rights problem because its technology is used to track Palestinian movements. What the company leaves out is that the technology is tracking the movement of Palestinian terrorists attempting to infiltrate Jewish areas, like the terrorists who murdered the Fogel family back in 2011,” said Richard Goldberg, a former White House National Security Council official who serves as a senior adviser at the Foundation for Defense of Democracies think tank. “Morningstar’s position is that Motorola should withdraw its operations and let terrorists stab more Jewish children to death.”

Goldberg, who was one of the first analysts to expose alleged anti-Israel bias at the company, said Sustainalytics continues to bolster the BDS movement as it tries to penalize companies for working alongside Israel. A Morningstar spokeswoman would not answer Free Beacon questions about why these two companies remain flagged.