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Senate Set to End Labor's ESG Rule

By Laura Litvan and Diego Areas Munhoz

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The U.S. Senate is on a path Wednesday to block a Labor Department sustainable investing rule, marking a victory for Republicans in their crusade against “woke” capitalism that is expected to spark President Joe Biden’s first veto.

Moderate Democrats Jon Tester and Joe Manchin said they’ll vote with Republicans to end the rule, which would allow retirement plans to weigh climate change and other environmental, social and governance issues in their investment decisions. Three Senate Democrats are absent and others could join Tester and Manchin in supporting the GOP-led effort.

The bill’s expected passage marks a rare loss for Biden in the Senate, where Democrats now enjoy a one-seat majority. It also underscores how the politics of so-called ESG efforts will factor into the 2024 congressional and presidential races.

Tester, from Republican-leaning Montana, has already announced plans to run for reelection in 2024. Manchin, who is also up in 2024, is expected to face a well-funded GOP opponent for his West Virginia seat if he decides to run again.

Arizona’s Kyrsten Sinema, an independent who caucuses with Democrats but often votes with Republicans, also is up for reelection and has not said how she’ll vote on the bill.

“At a time when working families are dealing with higher costs, from health care to housing, we need to be focused on ensuring Montanans’ retirement savings are on the strongest footing possible,” Tester said in a statement. “I’m opposing this Biden Administration rule because I believe it undermines retirement accounts for working Montanans and is wrong for my state.”

The GOP-led House on Tuesday voted 216-204 to clear a similar measure. Republicans have blasted the rule, which would make it easier for plan managers to consider so-called ESG elements when they make investments and exercise shareholder rights like proxy voting.

The Congressional Review Act resolution needs just a simple majority of votes in the narrowly divided Democratic Senate. Three Democratic senators — John Fetterman of Pennsylvania, Jeff Merkley of Oregon and Dianne Feinstein of California — are expected to be absent for the vote.

The White House on Monday said Biden would veto the measure, with the administration arguing the rule protects workers by ensuring “that fiduciaries have the fullest set of available tools to protect their life savings and pensions.”

The regulation allows plans to consider ESG factors if they are in the best financial interest of plan beneficiaries, reversing a Trump administration rule that required plans to invest solely on financial considerations.

Led by Indiana GOP Senator Mike Braun, Republicans have taken aim at the rule as a latest front in the political culture wars. Senate Minority Leader Mitch McConnell said the rule would allow the administration to endanger Americans’ retirement savings “for political causes they may not even support” and would water down investment managers’ fiduciary obligation to get the best returns for clients.

“In effect, they’re talking about letting financial companies garnish the retirement savings of workers without their permission in order to pursue unrelated liberal political goals,” McConnell said on the Senate floor.

In his own remarks and in a new op-ed, Senate Majority Leader Chuck Schumer fired back, pointing out that the rule does not impose a mandate that ESG considerations weigh into investment decisions. More than 90% of companies listed on the S&P 500 already publish ESG reports, he said, and the GOP should “let the market work.”

“If the market naturally leads to consideration of ESG factors, then Republican should practice what they’ve long preached — get out of the way,” Schumer said.

The Labor Department’s rule is backed by several major Wall Street asset managers, including BlackRock Inc. and State Street Corp., who seek to tailor “green” investment products tailored for retirement plan customers.

(Image: Bloomberg)

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