What Biden’s ESG Veto means for Investor Choice

Congress tried to repeal a Labor Department rule that allowed retirement fund managers to take into account ESG factors earlier this month.

A veto override vote has been scheduled for Thursday by the House. However, since two-thirds of both chambers would have to be present in order to override the veto, Biden’s Veto will likely be the last word.

A 2022 FINRA study found that only 24% can correctly identify ESG investing.

What is ESG? ESG is a framework that evaluates the sustainability of an investment. The conservation of the natural environment is one aspect of environmental factors. Social factors look at how a company treats employees and customers. Governance factors, which are aspects of the company’s operations such as executive compensation, are also important.

2020 Labor Department ruling prohibited ESG investments in 401 (k) plans. Retirement fund managers were required to make investment decisions based on the factors that would yield the highest financial returns. Fund managers were prohibited from considering ESG criteria. ESG index funds, mutual funds, and exchange-traded funds were not allowed to be included.

It has been a contentious topic in a divided Congress since then. The Trump-era ruling was reversed by the Labor Department under Biden in November 2022. Congress responded in March by passing a bill that nullified the ESG investing policy of the Biden administration. Biden has now vetoed this Republican-backed bill.

The White House released a statement saying that the rule “reflects what successful market investors already know — there’s a large body of evidence showing that certain markets, industries and companies can be affected by environmental, social and governance factors.”

Not everyone is on the same page.

In a prepared statement, Rep. Greg Murphy (R-N.C.) stated that the Employee Retirement Income Security Act, (ERISA), is meant to protect retirement investment plans and require plan managers to take fiduciary responsibilities.

Murphy, who introduced the bill calling to ban ESG investments, stated that the legislation was intended to protect investors.

“However, the Biden administration’s proposed changes in ERISA abandon fiduciary responsibilities by allowing ‘woken’ ESG factors investment returns to dictate — putting Americans’ retirement savings at risk. ”

Biden’s veto, if it stands, ensures that consumers can continue to have access to ESG investments through their employer plans such as and 401(k),s , if they so desire, but it is not necessary.

Some financial advisors believe ESG investing should not be considered partisan.

In an email interview, Michael Reynolds, a certified financial advisor and owner of Elevation Financial, Westfield, Indiana said that “political attacks against ESG miss the point.” ESG is not just about values. It’s also about investment results. ESG factors should be considered as part of a prudent investment strategy and in line with the fiduciary’s responsibilities. ”

Fiduciary duties entitle fund managers to choose investments that are best for their clients’ interests. Without Biden’s veto “best” would have simply meant “best-performing.” ”

While “best-performing”, is certainly less subjective than “best”, when it comes down to investing, ESG investment proposals suggest that what’s considered “best” should take into account risks like climate change and financial returns.

Randell Leach CEO of Beneficial State Bank, Portland, Oregon said in an email interview that a report by the U.S. Commodity Futures Trading Commission indicated that climate change poses a significant threat to the U.S. financial system and the sustainability the U.S economy. While some legislators want to politicize any acknowledgement of the impacts of climate change, they cannot be denied. ”

ESG investors are supported by supporters who claim they have higher returns and lower risks. ESG critics on the other side claim it pushes liberal values, and costs investors more.

Both sides have evidence. ESG’s popularity grew during a global pandemic as well as a tech boom, which further complicates any evidence in support of either side.

In 2020, social issues like the Black Lives Matter movement, difficulties faced by immunocompromised individuals in navigating public spaces and health risks for those working in the hospitality and health care industries came to the forefront.

ESG investment has been around for years but the public was never so keen to take care of it.

Retail investment exploded during the pandemic. Money flowed into ESG funds at an unprecedented pace: Morningstar data shows that $51.1 billion was spent on sustainable open-end and exchange traded funds for U.S investors in 2020. This is more than double what it was in 2019.

Biden also signed legislation to support clean-energy technologies. Clean energy stocks increased significantly after Biden signed the Inflation Reduction Act (August 2022).

Leach stated that the political attacks on ESG were designed to confuse and slow down adoption.

“ESG detractors claim that ESG investments are only ideologically driven and not a consideration for risks and opportunities that have been long ignored. ”

Leach notes that investors who incorporate ESG criteria into their investment strategies will continue to do so.

Leach stated that smart investors look at the worsening climate and increasing public support for renewable energy and realize there is still a large market for ESG investment.

Statistics and studies show that ESG funds perform better than traditional counterparts. However, some investors may wonder: Is performance really the problem?

Many traditional funds perform worse that others. Many funds that have high fees can be considered for 401(k), even though there are cheaper alternatives. Many sectors experience bad years and decades, but they are still eligible for 401(k).

Does that mean that investors should not have access to oil if it performs poorly than the overall market?

Reynolds stated that ESG’s politicization is harming individual investors by restricting choice and going against what more Americans want, which is investing options that are aligned with their values.