alt=Dennis RomboyUtah headed a group of 25 Republican-led states in a lawsuit filed last week against the U.S. Department of Labor over a rule change allowing 401(k) managers to consider climate change and other environmental, social and governance factors when choosing investments.
On Wednesday, Utah GOP Sens. Mike Lee and Mitt Romney joined all 48 Senate Republicans and Democratic Sen. Joe Manchin, of West Virginia, in introducing a resolution of disapproval challenging the Biden administration’s ESG rule. They say it politicizes Americans’ retirement investments to favor President Joe Biden’s ideological preferences rather than getting the best returns on their money.
“Hundreds of millions of Americans’ retirement funds have taken a hit in our current economy,” Romney said in a statement. “The Biden administration’s recent ESG rule would pose further risk to these retirement funds by forcing fiduciaries to use Americans’ hard-earned money to advance social causes rather than investing to get the best returns. Americans’ retirement is not something to play political games with.”
Opponents of the rule change say it runs contrary to the laws outlined in the Employee Retirement Income Security Act or ERISA.
In November, Biden instituted a rule that explicitly allows ERISA retirement plan fiduciaries to consider environmental, social and governance factors when selecting investments and exercising shareholder rights.
The rule replaces a previous rule which mandated fiduciary decisions be made solely on getting the best returns for the 152 million American workers that depend upon ERISA for their retirement. It took effect Sunday.
Two-thirds of the U.S. population’s retirement savings accounts would be affected, totaling $12 trillion in assets, according to Utah Attorney General Sean Reyes.
“The Biden administration is promoting its climate change agenda by putting everyday people’s retirement money at risk,” Reyes said in a statement. “Americans are already suffering from the current economic downturn.”
The rule undoes regulations put in place during the Trump administration. Those rules, issued in 2020, had a “chilling” effect that kept employers from considering environmental, social and governance factors when selecting 401(k), the Labor Department said last November.
Also known as sustainable or impact investing, ESG funds could push investor money into wind and solar companies or those with diverse board members or steer clear of businesses involved in fossil fuels, for example.
Environmental, social and governance funds have grown more popular in recent years. Investors poured $69.2 billion into them in 2021, an annual record, according to Morningstar, per CNBC.
The public affairs firm ROKK Solutions, in partnership with Penn State’s Smeal College of Business and Center for the Business of Sustainability, found in a study that public opinion on ESG is not nearly as polarized as popular narratives suggest. A survey in late 2021 showed 72% of Americans, regardless of political affiliation, agreed that companies should address the ESG issues to which they contribute.
The survey found that 79% of Democrats and 54% of Republicans rank climate change in the top five issues of importance, and the numbers among Republican voters under 45 rises to 66%.
A majority of voters under the age of 45 (62% Democrats and 51% Republicans) would choose to buy from a company that endorsed ESG issues they agree with, and a similar majority would choose to work for a company based on its endorsement of environmental, social and governance issues (61% Democrats and 51% Republicans), according to the survey.
But senators opposing the rule change point to a Harvard Business Review article about research that shows ESG investing policies have worse rates of return.
A study by UCLA and NYU found that over the past five years, ESG funds underperformed the broader market, averaging a 6.3% return compared to 8.9% return, respectively, according to the senators. Also, in comparison to other investment plans, ESG investors generally end up paying higher costs for worse performance.
The 25 states joining Utah in the lawsuit are Alabama, Alaska, Arkansas, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, New Hampshire, Ohio, South Carolina, North Dakota, Tennessee, Texas, Virginia, West Virginia and Wyoming.
All but Louisiana and Kentucky are led by GOP governors, but the attorneys general in those two states are Republicans.