Biden vows veto of anti-ESG investing measure backed by red states

President Joe Biden may break out his veto pen for the first time to strike a controversial resolution that overturns a new labor rule that allows retirement plans to consider environmental, social and governance factors in their investment decisions.

The five-month-old Department of Labor rule that Congress wants to overturn applies to private-sector workplace retirement plans. A total of 26 states led by Republicans sued in January to overturn the rule, saying it would diminish tax revenue from retirement distributions and hurt states, like Louisiana, Texas and Utah, where fossil fuel industries have a significant presence.

The House passed the resolution, H.J. Res. 30, Tuesday by a vote of 216-204 and the Senate approved it Wednesday with a vote of 50-46 after Democrats Sen. Joe Manchin of West Virginia and Sen. Jon Tester of Montana crossed party lines. The resolution, introduced by Indiana Sen. Mike Braun, was invoked under the Congressional Review Act, which allows lawmakers to overturn new rules with a simple majority. Republican opponents used the same process to overturn a controversial 2021 Department of Transportation memo on how states should spend their infrastructure funds. Republicans have said they plan to pursue more Congressional Review Act resolutions to overturn Biden administration rules they say are an overreach.

The White House said Wednesday that Biden would veto the measure if it comes to his desk.

Bloomberg News

Drafted in November 2022, the new Labor Department rule allows fiduciaries to consider ESG factors as they invest in privately held retirement plans. The rule reversed Trump administration guidance on the Employee Retirement Income Security Act of 1974, which governs defined benefit and defined contribution retirement plans, to require that fund managers focus on "financial over nonpecuniary benefits."

ESG factors have become increasingly important in the market over the last few years, prompting regulatory scrutiny and political opposition. The labor rule spat marks the latest salvo in a Republican-led war about so-called "woke capitalism" that emphasizes ESG factors in investing. On the state level, a rising number of Republican governors have enacted or are pursuing anti-ESG measures that affect investment strategies and the muni bond market.

On the Senate floor Wednesday, Majority Leader Chuck Schumer, D-N.Y., defended the rule.

"This isn't about ideological preference, it's about looking at the biggest picture possible for investors to minimize risk and maximize returns," said Schumer, who also penned a Feb. 28 Wall Street Journal opinion piece on the issue. "Why shouldn't you look at the risks posed by increasingly volatile climate incidents?"

In their January federal court lawsuit, Republican states argued that the Biden rule "undermines key protections for retirement savings of 152 million workers – approximately two-thirds of the U.S. adult population and totaling $12 trillion in assets." The complaint was filed in the U.S. District Court for Northern District of Texas, Amarillo division.

The American Securities Association said in a statement it supports the measure.

"The retirement savings of America's working families must never take a back seat to the fee generation of Wall Street's ESG Industrial Complex," ASA CEO Chris Iacovella said. "We are pleased the Senate is taking bipartisan action to roll-back this rule and we urge the President to accept the will of Congress and the American people."