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Regulation and Compliance > Legislation

Anti-ESG Bill Passes Senate as Biden Threatens First Veto

By Laura Litvan and Diego Areas Munhoz

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What You Need to Know

  • The bill strikes down a Labor Department rule allowing retirement plans to weigh climate change and ESG factors.

The Democratic-led U.S. Senate voted to block a Labor Department sustainable investing rule, marking a victory for Republicans in their crusade against “woke” capitalism and teeing up President Joe Biden’s first veto.

The heavily Republican vote was 50-46 to end the Biden administration rule, which would allow retirement plans to weigh climate change and other environmental, social and governance issues in their investment decisions.

Moderate Democrats Jon Tester of Montana and Joe Manchin of West Virginia voted with Republicans to pass the resolution.

The regulation allows retirement plans to consider ESG factors if they are in the best financial interests of plan beneficiaries, reversing a Trump administration rule that required plans to invest solely on financial considerations. Republicans are attacking ESG as an attempt to push climate-change politics into Americans’ financial planning.

Congress has the authority under a 1996 law to overturn federal agency rules on a simple majority vote.

Republicans have condemned the rule, which would make it easier for plan managers to consider ESG elements when they make investments and exercise shareholder rights like proxy voting.

ESG has become a lightning rod for the GOP, as the party turns the investing form into an emblem of left-wing politics. More than a dozen Republican state attorneys general have attacked ESG financial practices, while Republicans in Congress plan to increase their scrutiny of sustainable investing.

Three Democratic senators — John Fetterman of Pennsylvania, Jeff Merkley of Oregon and Dianne Feinstein of California — were absent for the vote, which the Senate was required to hold after House passage Tuesday night.

The bill’s 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 ESG will factor into the 2024 congressional and presidential races.

Tester has already announced plans to run for reelection in 2024. Manchin is expected to face a well-funded GOP opponent for his seat if he decides to stand for reelection.

“I’m opposing this Biden administration rule because I believe it undermines retirement accounts for working Montanans and is wrong for my state,” Tester said in a statement.

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 for retirement plan customers.

The Republican-led House on Tuesday voted 216-204 to clear its version and the vote tally in both chambers indicates that Congress lacks the two-thirds majority needed to override a Biden veto.

The White House has said Biden will 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.”

“Republicans talk about their love of free markets, small government and letting the private sector do its work,” White House Press Secretary Karine Jean-Pierre said Wednesday. “The Republican bill is opposite of that. It forces MAGA Republicans’ ideology down the throats of private sector and is handcuffing investors as well.”

Most ESG-focused stock indexes underperformed in 2022. Net inflows to ESG-labeled exchange-traded funds dropped to about $2.9 billion in 2022 from a record $36 billion in 2021, data compiled by Bloomberg show. But markets also that year suffered their biggest losses since the 2008 financial crisis.

Led by Sen. Mike Braun of Indiana, Republicans have made the rule another front in the political culture wars. Senate Minority Leader Mitch McConnell said it 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 an 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.

-With assistance from Tim Quinson.

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