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President Biden used his first veto on March 20, 2023. It took him more than two years to deem the bill worthy of an executive “thumbs down,” and he used it to point to something investors should know about.
We’ll go into the details of what happened on Capitol Hill, but the gist is this: Biden blocked efforts to repeal a retirement investment rule that would have allowed fiduciaries to use ESG factors to choose investments. This means that retirement fund managers can continue to incorporate ESG considerations into the mix when shaping investment opportunities.
Here’s what happened, how it happened and why it matters to investors across the country.
What is ESG?
ESG stands for Environment, Social and Governance. esg investing Is a type of investment that focuses on companies and corporations working to address environmental, social and governance issues and causes. This can include policies and standards, initiatives and projects, disclosure and research, and more.
ESG factors can be anything in these areas. Here are some examples.
environmental factors Energy consumption, waste and greenhouse gas emissions are included.
social situation Include employee compensation, community involvement, and safety and quality standards.
governance factor Corporate leadership, C-suite salary structure and business ethics are covered.
Selecting ESG investments involves the use of quantitative metrics and often strict criteria. These metrics evaluate a company’s performance from a sustainability perspective. You can do your own research to learn about companies’ behavior, use ESG scoring platforms to compare investments, or both.
But just because a company has a high ESG rating, doesn’t mean it’s more sustainable than another. Different platforms give businesses different scores, and it’s easy for companies to make claims about their standards that don’t reflect the full picture. ESG investing comes with due diligence.
Retirement fund managers are legally bound to consider the economic risks and rewards of each opportunity. The whole debate we’re about to get into is about whether ESG considerations are relevant or not.
If you are curious about ethical investing, click on the link below.
>>> Learn more: The Revelation of Ethical Investing (ESG vs SRI vs Impact Investing)
what happened because of the veto
There’s quite a history to this veto, and it’s important to understand where it all started and how we ended up here.
It all started with the exercise of prudence and loyalty and shareholder rights rules in the selection of plan investments. Let’s call it the Prudence and Loyalty Rule.
Basically, this rule, created by the Department of Defense in 2022, implements language to allow subsidiaries to use ESG factors to help them choose investments.
In previous years, trustees were already using ESG-related information to decide which investments would promise the best returns and lowest risk to their plan holders. But it got even more difficult under the Trump administration.
In 2020, the US Department of Labor placed constraints on ESG investing by issuing a rule for pension and 401(k) fund managers to place pecuniary factors (those strictly related to funding) ahead of non-economic factors. ESG considerations should not be included unless they are materially economic in nature.
And if the fiduciary had to choose between economically equivalent investments that ultimately came down to the difference of non-economic considerations (such as ESG), they would have to jump through additional hullabaloo by documenting these decisions extensively.
The Biden administration issued the Prudence and Loyalty Rule to reverse the plan. The final version of the new rule was released in November 2022, and it restored the ability of trustees to take ESG considerations into account to choose the best investments for their plan holders.
On February 7, 2023, the Republican-led House Education and the Workforce Committee proposed a bill (HJ Res. 30) that would reverse the Prudence and Loyalty Rule. This anti-ESG bill passed in the House and then in the Senate by a narrow margin.
But then it reached the President’s desk.
President Biden stopped the bill in its tracks. Without his approval, the rule could not be reversed. The House attempted to override his veto, but achieved only a 219–200 majority when he needed a two-thirds majority to impeach.
“There is widespread evidence that environmental, social and governance factors can have a material impact on markets, industries and businesses. […] Retirement plan trustees should be able to consider any number of factors that maximize financial returns for retirees across the country. It’s not controversial – it’s common sense.”
this controversy is not new
What is this controversy that Biden is talking about?
Republicans and Democrats have been debating the merits of ESG investing for years. This is a deeply partisan hot topic with at least two clear sides.
On the one hand, you have those who believe that allowing subsidiaries to use ESG factors is a political landmine. They feel that ESG investing advances a liberal agenda and can allow political causes and social values to be placed over returns and performance. this side favors overturning Prudence and loyalty rule.
On the other hand, you have those who believe that it is not safe to allow believers to use ESG factors. They feel that long-term ESG investing is likely to provide better returns to investors as it can account for external risk factors, such as climate change and global warming, that may affect the market. This side is in favor of the rule of wisdom and loyalty.
You can see why it is so difficult for the government to make policies on this subject.
With his veto, Biden is courting the pro-ESG camp.
reading between the lines
In the letter accompanying his veto, President Biden said the following:
,[The rule] Allows Retirement Plan Fiduciaries to make fully informed investment decisions by considering all relevant factors that may affect potential investments, while ensuring that investment decisions made by Retirement Plan Fiduciaries generate financial returns for retirees maximize the
[…] The resolution would prevent retirement plan facilitators from taking into account factors such as the material risks of climate change and poor corporate governance, which can affect investment returns.
The President is showing support for ESG investing, but his argument is not about values. they believe No It would be risky for investors to consider ESG factors as these factors are likely to impact businesses.
Basically, ESG is about “external factors” that are important to the economy. Climate change, environmental threats, social events and movements, and the development of governance have a wide-ranging impact on the world. This, then, should be reflected in the investment portfolio. If this were not the case, these portfolios would be affected by changes but not protected or prepared against them.
Imagine a person knows it may rain and they decide to go for a walk. They can either pack an umbrella or bring their own, but they run the risk of getting wet. Pro-ESG investors take up the umbrella.
This veto is good news for ESG proponents, but it’s impossible to say right now what it might mean for investing overall.
We’re not sure what to expect from a Biden administration moving forward. But for now, it’s important to be aware of this veto. The debate will continue as lawmakers on both sides continue to address the topic.