Retirements of Millions of Americans in ‘Jeopardy’ as ESG Rule Weakens Protections

News Analysis

Congress and President Biden are at the center of a battle over whether Americans should use their retirement savings to fund a climate change and social justice agenda.

This conflicts goes beyond complicated investment rules and administrative procedures. It will most likely impact the financial security many Americans when they retire.

Last week, the GOP-controlled Congress heated up the controversy passing a measure 216–204 to block the Biden administration’s new rule that permits including climate change and social justice principles as pension investment criteria. Only one Democrat supported the measure, Rep. Jared Golden (D.Maine). Senate Republicans, supported by Jon Tester of Mont. and Joe Manchin (D-W.Va.), passed a similar measure 50–46.

The Congressional Review Act is a Congressional oversight tool that allows Congress to overturn federal agency rulings. Biden threatened to veto the bill.

Andy Barr (R.Ky.), the House’s first sponsor of the legislation, stated that the law was “a bipartisan, bicameral joint resolution disapproving of a Department of Labor rule-making that will politicize American’s retirement accounts and jeopardize their retirement security.”

The Biden administration allowed pension funds to go for ideological ends. “giving away the basic rights of American citizens, to give more power to the radical left,” Sen. Rick Scott (R-Fla) stated. “If you put money into a retirement plan, you expect to get the best return you can get; you expect that whoever is running it is a fiduciary to get the best return possible. What the Biden administration is saying is ‘no, you don’t have to do that … if you have some social agenda you can focus on your social agenda.'”

Manchin spoke on the Senate Floor. “the ESG rule that we’re going to vote on later today is just another example of how our Administration prioritizes a liberal policy agenda over protecting and growing the retirement accounts of 150 million Americans that will be in jeopardy. Our country is already facing economic uncertainty, record inflation, and increasing energy costs to keep Americans up at night, and put a squeeze on their pocketbooks.”

The White House blasted Congress for trying to repeal the ESG rule and called it an act of treason. “MAGA Republican” effort. While Democrats support the right of Wall Street asset managers and pension funds to invest their money, Republicans want to restrict fund managers from focusing on only monetary returns. This is contrary to what they have done in the past.

“Republicans talk about their love of free markets, small government, and letting the private sector do its work. The Republican bill is the opposite of that,” Karine Jean Pierre, White House press secretary, said this at a March 1 press conference

The Epoch Times inquired about the White House’s reactions to the growing opposition from Congress to ESG investing. However, she refused to give more information.

“As it relates to the dynamics of the Senate and where this is going, I leave that to Senator Schumer,” She said. “That’s something for him to speak to. What I can say is that if this bill reaches the President’s desk, he will veto it.”

“This isn’t about ideological preferences; it’s about looking at the biggest picture possible for investors to minimize risk and maximize returns,” Senator Majority Leader Chuck Schumer, D-N.Y. (statement made on the Senate floor). “Why shouldn’t you look at the risks posed by increasingly volatile climate incidents?”

Conflict centers around a complex pension law known as ERISA, or Employee Retirement Income Security (or Employee Retirement Income Security) Act, overseen by U.S. Department of Labor, and a similarly obscure progressive investment criteria known Environmental, Social, and Governance.

What’s ERISA, and why is it important?

ERISA was a 1974 law that ensured that those responsible for managing company pension funds would be held to the highest standard of fiduciary care and that their actions were solely focused on maximising pecuniary or monetary returns to pensioners. This does not just apply to the investments made by pension managers, but how they vote for shares.

Congress passed this law to address the two main reasons that companies weren’t fulfilling their pension obligations. Also, pension managers were misappropriating their pension funds and using them to fund their personal banking accounts. Teamsters president James is one of the worst abuses of pensioners’ money. “Jimmy” Hoffa was convicted 1964: Fraudulently used union pension funds as personal banks, made loans to his friends and bought homes with them.

“The Hoffa thing was highly salient,” Robert Wright is a Senior Research Fellow at The American Institute for Economic Research. He spoke to The Epoch Times. “Union-based funds were especially subject to malfeasance, to asset tunneling, to directing funds toward investments that aided the plan owners, the trustees, the unions as the case may be, rather than in the best interests of the employees.” Asset tunneling refers to when corporate assets are used for personal or business gain by those who control them.

ERISA’s goal was to stop this kind of activity by establishing strict standards for fiduciary care. However, today pension funds are being increasingly used. support an ideology ESG is also known as the Environmental and Social Guarantee. It claims that ESG will increase pensioners’ returns while solving social and environmental problems.

Are ESG Investment Strategies or Ideologies?

ESG, which is a general term, encompasses theories like Critical Race Theory and climate change. Policies like reducing fossil fuel consumption, creating diversity, equity and inclusion (DEI) programs and implementing corporate gender and racial quotas are all examples of ESG. These are examples of ESG implemented in practice United Airlines Mandating that at least half its new pilots be from racial minority or female backgrounds ExxonAn oil company has appointed climate change advocates to its board. It will shift to investing in renewable energy and wind power. JPMorgan and Goldman Sachs Refusing to lend money to Arctic oil-drilling projects Bank of America Mortgage loans for minorities exempted from paying down the mortgage payments

ESG advocates argue that ESG does not represent an ideology. Instead, it’s a tool for managing risk. ESG advocates argue that it is a suitable criteria to invest pension funds because ESG compliance scores are higher than companies with lower ratings.

Brian Moynihan, CEO Bank of America stated In 2020 “Our research shows that companies that do well on ESG end up doing better, or fail less … But the most important thing, it aligns capital, aligns capitalism, it defines capitalism the way that people want to define it, which is stakeholder capitalism and solving the big problems of the world.”

New York’s state retirement funds declared That “ESG factors are a key component of the Fund’s analysis of both short- and long-term financial risks and opportunities.” The state pension fund is not subject to ERISA’s jurisdiction, rather they are under the authority of state law.

ESG is, according to supporters, about risk management and corporate governance that takes into consideration the needs of employees and customers. The ESG narrative is “stakeholder capitalism,” The underlying assumption behind this is that ESG will not be implemented by companies if they do not have it. Companies would instead pursue short-term profits that are exploitive and ignore these other factors.

However, if you look closely at ESG’s origins and the results it has produced, these claims may be questionable.

ESG and UN Sustainable Development Goals: The Origins

ESG is a concept that was first introduced. originally developed The United Nations Environmental Programme Financial Initiative was established two decades ago by the UNEP FI as a means to achieve its Sustainable Development Goals through the Principles for Responsible Investing. This was an attempt to bring the private sector into compliance with regulations and laws being enforced by governments. ESG was not an ideology for investment managers, but a method to increase returns and manage risk. This would prevent them from being held liable for breaching shareholders’ fiduciary duties.

This article is about investment primer Carole Crozat is the head of research for sustainable investing at BlackRock. “While measuring the alignment of investments to the UN SDGs is complex and evolving task, we believe that their integration in investment decisions can help secure long-term financial performance… Redirecting capital towards UN SDGs could offer $12 trillion of market opportunities linked to our long-term social and environmental well-being.”

ESG was sold as a profit-making way to help achieve goals such sustainability and social justice. Since then, an industry has emerged of ESG rating agents, accountants and consultants as well proxy agents to help companies comply with ESG regulations.

Asset managers may make the biggest profit, as they can charge more for ESG fund management fees than passive index funds, which simply purchase all companies within an index such as S&P 500. Critics claim asset managers are unable to show higher ESG investment returns or clearly define ESG criteria.

“ESG has not been shown to be much of anything at this point,” Wright spoke. “It’s just a label that’s slapped on, and it’s not clear that ESG scores are related to actual improvements of any sort—environmental or social justice or the quality of governance.

“The first problem we have is not knowing what they are measuring.” he said. “Numerous studies have demonstrated that ESG-rated funds do not perform better than funds with lower ESG scores. They simply charge more to have the ESG label. It doesn’t look like you are following fiduciary responsibilities and should not be invested for the greatest net return for pensioners.”

Does ESG Really Boost Investment Returns?

Several academic studies have shown that, rather than increasing investment returns, ESG actually lowers investment returns.

A 2020 study by the Boston College Center for Retirement Research found that ESG investing reduced pensioners’ returns by 0.70 to 0.90 percent per year, with much of the difference attributable to higher management fees for ESG funds. A 2021 report by Columbia London School of Economics and University The results showed that ESG funds are less successful than funds managed by the same year or asset manager, as well as charging higher fees.” It further noted that companies in ESG funds have “Portfolio firms managed by non-ESG fund managers have worse records of compliance with environmental and labor laws than portfolio companies held by non ESG funds.”

Regarding the benefits of “Stakeholder capitalism” A 2021 study from the University of South Carolina and the University of Northern Iowa “The push for stakeholder-focused goals provides managers with an excuse that lowers accountability for poor firm performances,” stated the author.” The report found a correlation between a CEO’s underperformance and how vocal they were in supporting unquantifiable ESG goals.

As a result, many states, including Texas, Florida, and West Virginia, have banned their state pension funds from using ESG criteria. Regarding ERISA, the Trump administration implemented a rule in 2020 that emphasized the duty of pension managers to invest solely according to pecuniary criteria to the exclusion of ESG criteria. This is the ruling that the Biden administration has now reversed.

When originally announcing the new ruling last November, Labor Secretary Marty Walsh stated: “The rule today clarifies how retirement plan fiduciaries may consider the financial benefits of investing with companies that are committed to positive social, environmental and governance actions. This will help participants get the best out of their retirement benefits. American workers will be able to save money for retirement by removing restrictions placed on plan fiduciaries by the previous administration.”

Assistant Secretary for Employee Benefits Security Lisa M. Gomez added that “Today’s rule will improve the retirement savings of workers and their pensions by removing unnecessary obstacles and ending any chilling effects caused by prior administrations on investing in environmental, social, and governance factors.

If returns are reduced as pension managers chase ESG funds, Wright said, asset managers may profit, but “Pensioners feel the pain. This defeats the purpose of ERISA.”

The problem with Biden reinterpreting ERISA to allow for ESG is that, seen in combination with other policies like the Securities and Exchange Commission requirement that all listed companies report their CO2 emissions and plans to reduce them, it could appear to be government advocacy for ESG criteria.

According to a White House statement, Biden’s new ERISA ruling “reflects what successful marketplace investors already know—there is an extensive body of evidence that environmental, social and governance factors can have material impacts on certain markets, industries, and companies.”

“You almost feel like you are being told that ESG funds will be your responsibility. That’s extremely problematic.” Wright said. Drawing a parallel to Biden’s executive order to force companies to fire employees who refused the vaccine, Wright said if corporate leaders and fund managers “If they have other reasons to question the rationality or veracity of what they are being instructed to do, it is their duty to obey the government’s dictates. In this instance, ERISA, it is their responsibility.”

Indeed, representatives from two of the world’s largest asset managers have recently stated that there is no financial benefit to ESG investing. Tim Buckley, CEO of Vanguard, stated in February that “Research shows that ESG investment is not superior to broad-based investing. Vanguard pulled its support from Net Zero Asset Managers (NZAM), December 20,22.

Testifying before the Texas state senate Dalia Blass from BlackRock explained her support for ESG investment in the same month. Global GDP can be affected by a disorderly transition, which could result in a 25% decrease.”

However, when asked by Texas senators to provide evidence to support this thesis, State Street Chief Investment Officer Lori Heinel stated: “This is not a time-tested method that I believe will yield any returns. The evidence is quite the contrary. Last year, even if you weren’t an owner of energy companies, your performance was poor compared to the broad benchmarks. The year before, that was quite the opposite … but that was just a happenstance, that’s not because it’s a good investment.”

Will ESG Investing Open Up Fund Managers to Lawsuits?

The admissions from State Street and Vanguard undermine the case that ESG is good for retirees. And if asset managers cannot show that the pro-ESG thesis is credible, or if it turns out that investing in higher-fee ESG funds reduces pensioners’ returns, there may be legal ramifications.

In 2005, betting on the transition to renewable energy, the Obama administration provided $535 million in loan guarantees for Solyndra, a solar panel manufacturer that soon went bankrupt, leaving American taxpayers on the hook for those lost funds. If asset managers, by contrast, are seen to have misused retirees’ money betting on ESG criteria, pensioners may have someone to go after to recoup lost funds.

“In places like Davis Polk, I can imagine that corporate lawyers are available [an international law firm] Who are you salivating at this? Because there are certain to be lawsuits.” Wright said.