In two years of his presidency and some changes, Biden imposed his first veto. On March 20, 2023, the president thwarted an attempt to repeal the pension investing rule, which allows fund managers to incorporate environmental, social and governance (ESG) considerations into their decision-making processes.
You are reading about it here because this veto could have a direct impact on countless investors. That is if it sticks.
We’re here to uncover what happened, why, and what it could mean for you.
Wait, what is ESG investing in?
Before we dive into the timeline leading up to this veto, let’s look at what ESG actually means.
ESG stands for “Environment, Social and Governance” and ESG investments target companies that have clear initiatives and policies in these areas.
Examples environmental factors include:
- wasted in vain
- Emissions and pollution
- Water use
- Use of natural resources
Examples Social factors include:
- Equal pay and opportunities
- Ethical Search
- Sexual harassment
- Health and safety
- Social justice education
Examples control factors include:
- Variety of Leaders
- Information transparency
- Business ethics
- Board Structure
- Anti-corruption measures
For example, a company committed to reducing its carbon footprint and using renewable energy sources to generate energy could score high in the Environment category.
ESG factors are non-financial in nature, but can often affect a company’s performance. Historically, fund managers have been able to use these factors to analyze investment opportunities, although the Trump administration has introduced rules to prevent this. The Biden administration canceled them.
When members of Congress wanted to go back to restricting the use of ESG, Biden used his executive veto.
Let’s break it down, starting with the challenged rule.
✔️ December 1, 2022: The U.S. Department of Labor releases the final version of the “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” rule. This clears up the confusion about the use of material ESG factors by investment fund managers.
This final rule allows fiduciaries to consider climate change and environmental, social and governance factors when making investment decisions or exercising shareholder rights under the Employee Retirement Security Act (ERISA).
Under the first version of this rule, proposed in October 2021, the fiduciary was required to select investments solely on “monetary considerations”. They have been defined as economic factors that directly affect the risk/return of an investment.
Many have wondered if this includes ESG factors. They may have goals that are not strictly financial, but effects that are definitely so, and it was not clear how the fiduciaries were supposed to – or were allowed to – handle this. Use ESG? Ignore it?
The rule has been revised to allow ESG considerations to be included as an appropriate risk factor if fiduciaries are acting in accordance with the objectives of their plan (i.e. reasonably) and in the best interests of their plan owners (i.e. loyally).
❗ February 7, 2023: H. J. Res. 30 submitted to the House of Representatives with the support of Representative Andy Barr by the House Education and Workforce Committee. The committee seeks to repeal the Department of Labor rule.
This bill is clearly directed against the ESG. Proponents want to end the DOL rule because they believe that fund managers should not use ESG factors in their decision making and that doing so could harm investors.
✔️ February 28, 2023: H.J.Res. 30 passes the House.
✔️ March 1, 2023: HJ res. 30 passes the Senate.
❌ March 20, 2023: Biden vetoes this resolution. The bill is not moving forward and the rule remains in effect.
Why did this happen
Regardless of how you personally feel about investing in ESG and whether it is good or bad practice, this veto can affect you.
Essentially, Biden vetoed ESG investment protection, and the message that accompanied his decision extended to that. The President stated the following:
“There is ample evidence that environmental, social and governance factors can have a significant impact on markets, industries and businesses. But a Republican-led resolution will force retirees to ignore these respective risk factors, flouting free market principles and jeopardizing the savings of working families and retirees.”
His reasoning was that investing in ESG is beneficial for investors because it is realistic. He draws attention to external factors, such as climate change, that can have a real impact on the returns of various asset classes. Ultimately, this provides protection against risk rather than increased exposure to it.
Biden’s argument is that allowing managers to make more complex choices benefits investors. This is a safer long-term approach to retirement investing as many companies may be impacted by climate change and ESG factors at some point.
Why is it important
Environmental, social and governance initiatives are unlikely to disappear anytime soon. In fact, more and more companies are joining the cause with new initiatives and increased transparency.
When it comes to long-term investing, the goal is to present the big picture and reduce risk. But this dispute has two sides.
Proponents of the “prudence and loyalty” rule, and now Biden’s veto, argue that the “big picture” should include ESG factors, even if they are not purely financial, as they can have financial implications. blows. For example, companies with social change policies can attract more customers than those that don’t and outperform them.
Opponents of the rule argue that the ESG is too politicized and promotes an anti-capitalist agenda. Preferring ESG companies when investing could crowd out other corporations and change the market, and this party is concerned that fiduciaries will focus too much on reasons over numbers (i.e., beliefs > money).
What does veto power really mean?
Fiduciaries are required to protect the money of the plan holders. By vetoing the bill, Biden argues that investing in ESG can help achieve that goal.
Can the bill still pass?
Technically, it’s not over yet. There is still a chance, however small, that the Republican Party will manage to change the rule after all.
But overriding a veto would require a two-thirds majority in Congress, which is unlikely given the heated debate over a bill to remove the rule.
We will monitor how this situation develops. We’re curious to know if Biden has any other plans for this veto handle, but political predictions are not what we’re in here for.
Will Biden support ESG initiatives in the future? Maybe, maybe not. Right now, it doesn’t look like the president is protecting anything as much as just trying to protect investors.