The U.S. Senate on March 1 voted to overturn the month-old regulation that allows fiduciaries to consider environmental, social and corporate governance (ESG) factors when choosing retirement investments.
The resolution will head to President Joe Biden, who earlier this week promised he would veto any bill that nullifies the ESG rule.
All Senate Republicans present and two Democrats on Wednesday voted for the resolution to void the Department of Labor's (DOL's) ESG rule in a 50-46 vote. On Feb. 28 in a 216-204 vote, members of the U.S. House of Representatives approved an identical resolution.
The ESG rule, which took effect Jan. 30, was finalized in November following an executive order signed by Biden in May 2021 that directed federal agencies to consider policies to protect against the threats of climate-related financial risk.
The ESG rule—Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights—permits retirement plan fiduciaries, such as 401(k) plan sponsors, to consider climate change and other ESG factors when they select investment options and exercise shareholder rights, such as proxy voting for plan-held securities. The DOL emphasized, though, that the rule allows fiduciaries to consider these factors—it does not mandate it.
In late January, Republican attorneys general from 25 states—led by Texas Attorney General Ken Paxton and Utah Attorney General Sean D. Reyes—sued the Biden administration. In a statement announcing the filing, Paxton alleged the rule "prioritizes woke Environmental, Social and Governance investing over protecting the retirement savings of approximately two-thirds of the U.S. population."
The states also argued that the rule conflicts with the Employee Retirement Income Security Act (ERISA), because current law requires fiduciaries to consider financial benefits first and not any "nonfinancial and nonpecuniary benefits." They also said the DOL is deviating from prior policy because its 2020 rule still required that financial factors take priority.
ERISA covers some 747,000 retirement plans, 2.5 million health plans and 673,000 other welfare benefit plans. Employee benefits plans cover about 152 million workers and more than $12 trillion in plan assets—equivalent to more than half of the nation's gross domestic product, the complaint said.
Supporters, mostly Democrats, on Wednesday defended the ESG rule, with Senate Majority Leader Chuck Schumer, D-N.Y., saying, "This isn't about ideological preference—it's about looking at the biggest picture possible for investors to minimize risk and maximize returns. Why shouldn't you look at the risks posed by increasingly volatile climate incidents?"
Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets at Ceres, a nonprofit organization working on sustainability challenges, said the rule "levels the playing field so fiduciaries can consider all financially relevant factors in making investment decisions."
Rolling back the law would be problematic, he said, and would "significantly increase expense and legal risk for retirement plans and require managers to ignore significant financial risks."