Congress passed the Employee Retirement Income Security Act (ERISA), which governs private pensions, in 1974, in response to widespread concerns at the time that both private employers and union officials were mismanaging pension funds and that American workers were being shortchanged on retirement benefits that they had been promised. ERISA requires pension fund managers “to act solely in the interest of the plan’s participants and beneficiaries, and for the exclusive purpose of providing benefits to participants.” However, in recent years, politically motivated pension managers have sought to direct capital toward other, unrelated “non-pecuniary” goals, including those associated with environmental, social, and governance (ESG) theory.
In November 2020 the Department of Labor published a final rule, “Financial Factors in Selecting Plan Investments,” to protect pension plan beneficiaries from having the value of their retirement assets eroded by this trend. Then in December 2020, the Department published a related rule, “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” modifying the expectations for proxy voting by pension fund managers with respect to ESG considerations. This rule, as with the previous one, had the goal of protecting retirees’ assets from politically motivated mismanagement.
However, in March 2021 the Biden administration’s Department of Labor announced that it would not enforce these recently enacted rules and intended to “revisit” them. This was, in part, an effort to comply with President Biden’s executive order 13990, “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis,” which directed federal agencies to review existing regulations promulgated under the previous administration that may be inconsistent with the current administration’s policies on climate change. The new rule on ESG and pension management from the Department of Labor, overturning the two previous rules from the Trump administration, was published in November 2022.
That process of revisiting the 2020 rules resulted in a new rule proposed in October 2021, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” which has now effectively repealed both of the previous rules.
That new rule cites the language of executive order 13990 as justification, but omits the section of the order that calls for it to be “implemented in a manner consistent with applicable law.” Overriding the investment security of pension fund beneficiaries in pursuit of climate goals is not consistent with the requirements of current law, and therefore the new rule should not be considered valid. ERISA requires pension funds and the people who administer them to direct investment decisions solely toward funding the retirements of workers. There is no mention of climate change, gender diversity, or denying capital to firms that are not considered to be “socially responsible.”
The two Trump-era rules restated that expectation and warned against the increasingly frequent practice of using ESG factors, rather than traditional return calculations, to select investments and guide their proxy voting. Managers who did choose to include ESG factors in their investment decisions were expected to demonstrate that these political considerations were not resulting in lower profits, but were only being used as a tiebreaker among options with otherwise identical expected returns.
Safeguarding the retirement security of working Americans is a vital societal goal, and a key element of the American dream. Men and women who have worked and saved for decades, especially when they have no ability to take their pension benefits into an individualized plan, should not have their financial future determined by the political and social whims of fund investment managers.
Securities and Exchange Commission
The popularity of environmental, social, and governance theory in the business world has fueled an enthusiasm in recent years for integrating such factors into both individual firm management and portfolio selection. This generally takes one of two major forms:
- As a purely profit-driven way of avoiding business risks associated with things like climate change; or
- Via a semi-concessionary altruistic method in which investors accept the likelihood of lower investment returns through divestment from firms that are legal, but considered ethically problematic, such as fossil-fuel, tobacco, and firearms producers.
ESG integration and investing is often defended as a mainstream, non-ideological approach to financial management, but critics insist that it is part of an ideologically driven effort to introduce controversial policy positions into management practice, industry standards, and regulatory policy. In the last few years, conservative, centrist, and even left-leaning critiques of ESG have multiplied, as have legislative and regulatory efforts to stop or reverse government policy that encourages this trend.
One of the most significant instances of this overreach is the climate disclosure rule proposed by the Securities and Exchange Commission in March 2022. This proposal will effectively require firms to prioritize an array of politically motivated “stakeholder” groups ahead of the legal owners of corporations, their shareholders.
The proposal is legally unjustified, not needed to cover legitimate climate concerns, misapplies the concept of materiality, will not lead to consistent data reporting, and ignores significant compliance costs.