Learn about ESG investing and the ongoing debate in Congress over its inclusion in retirement fund managers’ investment decisions. Find out what President Biden’s recent veto means for consumers and the potential legal challenges it faces.
Questions Answered in this Article
- What is ESG investing? Answer: ESG is a set of principles used to assess an investment’s sustainability, encompassing three key factors: environmental, social, and governance.
- What was the controversy surrounding ESG investments? Answer: ESG investing has been the subject of intense debate in Congress since a 2020 Labor Department ruling restricted access to ESG investments in 401(k) plans.
- What did President Biden’s veto mean for consumers? Answer: President Biden’s veto preserves the option for consumers to access ESG investments through their employer-sponsored plans, such as 401(k)s, even though it is not mandatory.
- Why do some lawmakers want to ban ESG investments? Answer: Representative Greg Murphy of North Carolina introduced the bill to ban ESG investments and argued that the proposed changes to the Employee Retirement Income Security Act (ERISA) relinquished fiduciary responsibility, thereby putting Americans’ retirement savings at risk.
- Is performance the only factor to consider when including investment options in a 401(k) plan? Answer: No, including 401(k) funds, plans should not be solely based on performance. According to Michael Reynolds, a certified financial planner, and owner of Elevation Financial, the politicization of ESG limits investment choices that align with investors’ values.
Biden’s Veto Upholds Consumers’ Rights to Access ESG Investments
President Joe Biden’s veto, which upholds consumers’ rights to access environmental, social, and governance (ESG) investments, remains in place. The House of Representatives still needs a two-thirds majority vote to override on March 23. However, two legal challenges in the U.S. District Court for the Northern District of Texas and the U.S. District Court for the Eastern District of Wisconsin may complicate efforts to keep the veto intact. The dispute over ESG investments began in early March when Congress tried overturning a Labor Department rule that permitted retirement fund managers to consider ESG factors. Financial advisors can still include ESG investments in employer-sponsored plans, such as 401(k) plans, but they are not required.
What is ESG Investing? A Comprehensive Overview
The 2022 FINRA study revealed that only 24% of investors understand ESG investing accurately. ESG is a set of principles used to assess an investment’s sustainability. The framework encompasses three key factors: environmental, social, and governance. The ecological aspect focuses on preserving the natural environment, while the social element examines how a company treats its stakeholders, including employees and customers. Lastly, the governance factor considers a company’s operational aspects, such as executive compensation.
The Debate Over ESG Investing: How It Got Here
ESG investing has been the subject of intense debate in Congress since a 2020 Labor Department ruling restricted access to ESG investments in 401(k) plans. The ruling mandated retirement fund managers to base their investment decisions solely on financial returns, effectively prohibiting the consideration of ESG factors. As a result, ESG index funds, exchange-traded funds, and mutual funds were excluded from consideration.
The polarizing issue prompted the Biden administration’s Labor Department to reverse the Trump-era ruling in November 2022, which Congress responded to by passing a bill to nullify the new policy on ESG investing. President Biden vetoed the Republican-backed measure, and the House failed to override the veto. The White House argued that environmental, social, and governance factors could significantly impact markets, industries, and companies, citing an extensive body of evidence.
However, not everyone agrees with the Biden administration’s stance. Representative Greg Murphy of North Carolina introduced the bill to ban ESG investments and argued that the proposed changes to the Employee Retirement Income Security Act (ERISA) relinquished fiduciary responsibility, thereby putting Americans’ retirement savings at risk. ERISA protects retirement investment plans by making plan managers subject to fiduciary duties.
Biden’s Veto on ESG Investing: What It Means for Consumers
President Biden’s veto preserves the option for consumers to access ESG investments through their employer-sponsored plans, such as 401(k)s, even though it is not mandatory. Some financial advisors argue that ESG investing should not be a partisan issue since it is primarily about investment results and aligns with the fiduciary responsibilities of fund managers.
Fiduciary duty requires fund managers to make investment decisions that are in the best interest of their clients. The previous Labor Department ruling limited this responsibility to investments with the highest financial returns. However, ESG investments propose that the “best” investment decision should consider other factors, such as climate change and financial returns. According to Randell Leach, CEO of Beneficial State Bank, a report by the U.S. Commodity Futures Trading Commission highlights climate change as a significant risk to the financial system and sustainability of the U.S. economy. Despite efforts by some lawmakers to politicize the issue, these risks cannot be ignored.
Evaluating ESG Performance: Difficulties and Opportunities
ESG investments have been both praised and criticized by supporters and detractors. While supporters claim that ESG investments increase returns and decrease risks, detractors argue that it promotes liberal values and costs investors more. Evidence on both sides of the argument exists, further complicated by the fact that ESG’s popularity surged during the pandemic and tech boom, factors that can skew data. In 2020, social issues like Black Lives Matter, difficulties faced by immunocompromised individuals in public spaces, and health risks for healthcare and hospitality workers brought ESG investing to the forefront of public attention. This led to an unprecedented inflow of money into sustainable open-end and exchange-traded funds available to U.S. investors, reaching $51.1 billion in 2020. Biden signed legislation that boosted clean energy technologies, leading to significant jumps in pure energy stocks after signing the Inflation Reduction Act in August 2022. While ESG detractors claim that ESG investments are solely ideologically driven, rather than considering risks and opportunities, most investors who integrate ESG criteria in their approaches will continue to do so, according to Randell Leach, CEO of Beneficial State Bank in Portland, Oregon.
Should ESG Investments Be Solely Based on Performance?
Is performance the only factor to consider when including investment options in a 401(k) plan? This question arises when it comes to ESG funds, which studies show can perform better and worse than traditional funds. However, including 401(k) funds, plans should not be solely based on performance. Many traditional funds perform poorly, have high fees, or experience poor market conditions yet remain eligible for 401(k) plan consideration.
So, should investors be denied access to a particular sector or asset class simply because it may not perform well? According to Michael Reynolds, a certified financial planner, and owner of Elevation Financial, the politicization of ESG limits investment choices that align with investors’ values.
Biden’s veto protects consumers’ investment options, regardless of their fund manager’s decision.
Summary
- President Biden’s veto upholds consumers’ rights to access environmental, social, and governance (ESG) investments, but two legal challenges may complicate efforts to keep the veto intact.
- ESG investing is a set of principles used to assess an investment’s sustainability based on environmental, social, and governance factors.
- The Biden administration’s Labor Department reversed the 2020 Labor Department ruling that restricted access to ESG investments in 401(k) plans, which Congress responded to by passing a bill to nullify the new policy on ESG investing.
- Representative Greg Murphy of North Carolina introduced the bill to ban ESG investments, arguing that it relinquished fiduciary responsibility, putting Americans’ retirement savings at risk.
- Biden’s veto preserves the option for consumers to access ESG investments through their employer-sponsored plans, such as 401(k)s, even though it is not mandatory, and some financial advisors argue that ESG investing should not be a partisan issue.
- ESG investments have been both praised and criticized by supporters and detractors, and evaluating their performance can be difficult due to their popularity surging during the pandemic and tech boom.
- Including 401(k) funds should not be solely based on performance, and investors should not be denied access to a particular sector or asset class simply because it may not perform well.
- Biden’s veto protects consumers’ investment options, regardless of their fund manager’s decision.
