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The battle against ESG investing is heating up in Congress this week, with the Senate voting Wednesday to repeal a Labor Department rule that allows pension plans to consider environmental, social and governance (ESG) factors when making investment decisions.
The House of Representatives approved the measure earlier, setting the stage for what would be President Joe Biden’s first veto of legislation.
The Senate voted 50-46 to repeal the rule, with Democrats Joe Manchin of West Virginia and Jon Tester of Montana joining all Senate Republicans.
Manchin said the rule provides an example of “how the administration is prioritizing its liberal policy agenda” to protect retirement investment accounts. He also said the rules could punish the fossil fuel industry that is vital to his country.
The White House said Biden would use his veto power.
“These rules reflect what successful market investors already know – there is overwhelming evidence that environmental, social and governmental factors can have a material impact on certain markets, industries and companies,” he said in a statement this week.
What are some ESG criteria?
ESG investors consider other factors beyond just a company’s profitability and future prospects.
It can pay to avoid companies with a poor record on the environment, mind you, as they may risk large fines from regulators or potentially damaging lawsuits.
“You have to pretend it’s not there, just like the captain of the Titanic had to ignore an iceberg if he saw one,” said Celeste Drake, deputy director of the White House National Economic Council.
On the flip side, companies that care about climate change may be better prepared for its consequences, whether that means flood damage to factory sites or the risk of wildfires.
The social component focuses on the company’s relationship with the internal and external public, considering employee compensation, working conditions and the company’s records on data protection and privacy.
Some ESG investors encourage companies to take a stand on big social issues, such as abortion or racial justice, arguing that some companies’ employees and customers want to know where their employers stand on these issues.
Governance considerations include tying executive pay to company performance and having strong independent directors on the board to act as a strong check on the CEO.
What is the impact of ESG?
Investors who use one or more ESG criteria or who push companies on these issues control $8.4 trillion in US domiciled assets in 2022 overall. This has been the case since the early 2021 peak, with the Ukraine war and its impact on the energy sector among the factors influencing the flow of ESG funds.
Investors are also pushing executives across corporate America to provide more information on carbon emissions, measurements of their impact on human rights and audits for racial equality.
In 2021, a relatively small fund known as Engine No. 1 convinced some of the largest investment companies on Wall Street to approve the proposal to replace three directors on the board of Exxon Mobil, citing the world of decarbonization.
Last month, BlackRock’s president was interrupted several times during a presentation at a conference with questions about the company’s climate change responsibilities. Climate activists have targeted BlackRock for years, urging the world’s largest asset manager to stop investing in fossil fuel companies, or to make it harder to cut emissions.
Some funds pledge not to own shares of companies they consider risky, for example. Others will try to have only companies that get the highest ratings from scorekeepers on ESG issues. Still others try to buy only the companies that get the best scores in a given industry, even if the scores are very low.
These nuances can create confusion among investors trying to find the right ESG fund for them.
What is the backlash like?
Some in the business world have also been highly critical of rating agencies that try to distill complex issues down to simple ESG scores.
Tesla CEO Elon Musk last year called ESG a scam that “has been hijacked by fake social justice warriors.”
Caisse de Dépôt et Placement du Québec was one of the sponsors of the failed bid that pushed Berkshire Hathaway to produce more information on climate change and diversity initiatives. Berkshire’s Warren Buffett also defended the company’s green energy initiatives and concluded that additional reporting requirements would be “asinine.”
The subject is sure to feature in the upcoming Republican primaries for next year’s presidential election.
Florida Gov. Ron DeSantis, a potential candidate, has been involved in a battle with companies he considers “build,” such as Disney.
While climate activists have targeted BlackRock from one end, DeSantis has represented the other end of the spectrum, revealing in December that Florida would pull $2 billion in state assets managed by BlackRock because of its ESG investment practices.
In his recently released book, Dare to be independentDeSantis writes that the “paralysis of the ESG movement” is one of the ways the legislature “can protect individual freedom from stridently ideological private actors.”
DeSantis is also among state governors trying to ban local governments from using ESG criteria when issuing municipal bonds.
Democratic Senate Majority Leader Chuck Schumer this week accused Republicans of pushing anti-ESG legislation to “force their own views down the throats of every company and every investor.”
The U.S. Chamber of Commerce, the country’s largest business lobby, opposes the restrictions on ESG set by the Donald Trump administration, but says the Biden administration’s rules are largely unnecessary because they apply the same standards pension plans have applied to investments for decades.
The Trump and Biden rules prohibit plan managers from subordinating the financial interests of beneficiaries to other goals.
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