What Is ESG Investing—And Why Republicans Are Trying To Ban It From Retirement Funds

Topline

The Republican-controlled House is expected to vote on a bill Tuesday that would block a Biden rule allowing retirement funds to take into account environmental, social and governance (ESG) investing, which helps screen investments based on socially conscious factors—intensifying a GOP push to challenge a “woke” practice that’s garnered widespread adoption on Wall Street and trillions of dollars in investor funds.

Texas Attorney General Ken Paxton speaks to reporters outside the Supreme Court

The Washington Post via Getty Images

Key Facts

ESG investing considers non-financial factors in their investment decisions, factoring in social accountability, which can ban investments in gun and fossil fuel companies.

The practice has picked up traction on Wall Street as companies bolster social and environmental efforts, but increasingly, Republicans have criticized ESG investing, saying financial institutions should not use their power to invest in so-called woke political agendas.

On Tuesday, the House is expected to vote on a bill—introduced by Republican Representative Andy Barr (R.-Ky)—to block the Labor Department rule allowing fund managers to consider ESG practices for retirement plans, citing that retirement plans should focus solely on maximizing returns instead of “woke” agendas.

The bill’s fate is unclear, but Republicans believe they will be able to pass a companion bill through the Senate using the Congressional Review Act, which can bypass the Senate’s “filibuster” rule requiring 60 votes to pass most legislation.

Criticism of ESG investing escalated last week when 25 GOP-led states asked a federal judge to block a Biden Administration rule that took effect on January 30 and allows retirement plans to consider ESG factors in their investment decisions.

The group, which filed a lawsuit in federal court seeking to block the rule completely, argues the ESG provisions “undermine key protections for [the] retirement savings” of 152 million workers by placing a focus on “woke” social rules, rather than financial returns.

The lawsuit further claims the ESG provisions conflict with tax and labor law requiring retirement advisors to act in the best interests of their clients and put clients’ interests above their own by allowing the advisors to prioritize their own ESG policy preferences instead of long-term financial returns.

However, the Labor Department and proponents of the rule contend ESG factors are relevant to financial returns, as investments subject to climate change risks can ultimately impact profits.

While no federal laws have been passed to completely ban state assets from being invested in ESG strategies, several Republican states—including Iowa, Wyoming and North Dakota—have enacted their own laws prohibiting investments using social factors for investment strategies.

Senate Republicans have also proposed legislation to ban the Biden rule, though its odds of passing in the Democrat-led chamber are very uncertain

Big Number

According to PwC, ESG assets are expected to eclipse $33 trillion by 2026—commanding some 21.5% of total assets under management.

Key Background

During the Trump Administration, the Labor Department passed rules discouraging ESG investing in retirement plans. The rules stated fiduciaries for private pension plans in the Early Retirement Income Security Act of 1974 could not provide investments in ESGs sacrificing investments returns. However, in November, President Joe Biden loosened the rules and made it easier for employers to consider climate change and other ESG investments for their 401(k) plans. As Republicans look to squash state assets being used for any type of ESG or social impact investments, local banking groups have also pushed back against laws barring such investments.

Tangent

Vivek Ramaswamy, a multimillionaire financier who announced his bid for the 2024 GOP nomination this week, rose to prominence in right-wing circles for his criticism of “woke capitalism.” Ramaswamy wrote letters to both Apple and Disney CEOs, urging them to stop hiring practices based on race, sex and politics, and to abstain from making political statements on behalf of the company respectively. His investment firm has also criticized BlackRock, the world’s largest asset management company, for its ESG practices, which have drawn the ire of Republican states. In August, a group of 19 state attorneys general wrote a letter to Blackrock’s billionaire CEO, Larry Fink, claiming the firm’s ESG practices are detrimental to their state pensions, and in the following months Republican-led states including Florida, Missouri and Louisiana—collectively pulled more than $3 billion out of BlackRock pension funds, citing the ESG policies.

States Seeking To Ban Esg In Retirement Plans

Alabama
Alaska
Arkansa
Florida
Georgia
Indiana
Idaho
Iowa
Kansas
Kentucky
Louisiana
Mississippi
Missouri
Montana
Nebraska
New Hampshire
North Dakota
Ohio
South Carolina
Tennessee
Texas
Utah
Virginia
West Virginia
Wyoming