In late June, U.S. Rep. Andy Barr (R-KY) and Rep. Rick Allen (R-GA) did a favor to the millions of Americans who are invested in the stock market when they decided to reintroduce the Ensuring Sound Guidance (ESG) Act in the U.S. House of Representatives.
In short, the ESG Act would prohibit large asset managers such as BlackRock, State Street, and Vanguard as well as institutional investors from considering “non-pecuniary” environmental, social, and governance (ESG) metrics when making investment decisions on behalf of their clients.
Moreover, the bill would reverse the Biden administration’s recent Department of Labor (DOL) rule, which says, “retirement plan fiduciaries can take into account the potential financial benefits of investing in companies committed to positive environmental, social and governance actions as they help plan participants make the most of their retirement benefits,” according to DOL Secretary Marty Walsh.
“Asset managers should be in the business of maximizing returns for investors, not pushing their own political agenda at the expense of everyday Americans. Our proposed legislation safeguards the savings efforts of hardworking Americans. This critical legislation not only guarantees that advisers make prudent investment choices based on financial factors, but also empowers savers to decide how their money is invested,” said Rep. Barr. “We must take significant action to protect retail investors and retirees from the cancer within our capital markets that is ESG, which prioritizes higher-fee, less diversified and lower return investments.”
“Retirement plan sponsors have a duty to invest their clients’ hard-earned money in a manner that maximizes returns and minimizes risk. Yet, President Biden’s DOL is desperately clinging to its flawed rule that would allow financial advisors to invest Americans’ retirement savings in climate-related ESG funds, which are proven to carry higher risk and charge steeper fees,” said Rep. Allen.
In late 2020, the Trump administration finalized two DOL rules to ensure that retirement plan fiduciaries solely consider financial factors when making investment decisions and proxy voting by plan fiduciaries focus only on financial performance.
This seems like commonsense. Moreover, most Americans agree that “only financial factors” should be taken into account by retirement fund managers when making decisions about potential investments, according to Gallup.
Incidentally, despite Biden’s new rule, the U.S. Department of Labor states, “The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must act prudently and must diversify the plan’s investments in order to minimize the risk of large losses.”
In simple terms, this means that fiduciaries – whether they be a mom-and-pop investment firm or a gigantic asset management company like BlackRock – must, according to the letter of the law, manage the investments they oversee with one, and only one, guiding principle: maximizing shareholder returns.
Clearly, Biden’s new rule violates this age-old practice.
Perhaps most importantly, as noted by the Harvard Business Review, “ESG funds certainly perform poorly in financial terms. In a recent Journal of Finance paper, University of Chicago researchers analyzed the Morningstar sustainability ratings of more than 20,000 mutual funds representing over $8 trillion of investor savings. Although the highest rated funds in terms of sustainability certainly attracted more capital than the lowest rated funds, none of the high sustainability funds outperformed any of the lowest rated funds.”
Unfortunately, the ESG Act is almost assuredly dead on arrival in the U.S. Senate, which is controlled by Democrats who are universally in favor of ESG metrics.
However, the battle is far from over – all is not lost. As of this writing, 25 states are suing the Biden administration over its new DOL rule.
According to Texas Attorney General Ken Paxton, “The sheer magnitude of the assets that the 2022 Investment Duties Rule would affect – over half of the GDP of the entire United States – suggests that courts should hesitate before finding that DOL has authority to regulate in this area for nonfinancial purposes.”
Eventually, the case could make its way to the U.S. Supreme Court. Based on recent rulings in which the Supreme Court has struck down regulatory overreach, it is more than likely that “judicial review” will have the final say on this matter. Thank goodness for checks and balances.
