Retirement Funds of Millions of Americans in ‘Jeopardy’ as ESG Rule Weakens Protections

News Analysis

Congress and President Biden are at the center of a battle over whether Americans should use their retirement savings to fund a climate change and social justice agenda.

These conflicts go beyond the realm of obscure administrative rules or investment strategies and could affect many Americans’ financial security in retirement.

With a GOP-controlled Congress, last week’s controversy became heated passing a measure 216–204 to block the Biden administration’s new rule that permits including climate change and social justice principles as pension investment criteria. The measure was supported by only one Democrat, Rep. Jared Golden (D.Maine). Senate Republicans supported the measure with Jon Tester, D-Mont. and Joe Manchin (D-W.Va.), passed a similar measure 50–46.

The Congressional Review Act is a Congressional oversight tool that allows Congress to overturn federal agency rulings. Biden threatened to veto this.

Andy Barr (R.Ky.), the House’s first sponsor of the legislation, stated that the law was “a bipartisan, bicameral joint resolution disapproving of a Department of Labor rule-making that will politicize American’s retirement accounts and jeopardize their retirement security.”

The Biden administration allowed pension funds to go for ideological ends. “giving away the basic rights of American citizens, to give more power to the radical left,” Sen. Rick Scott (R-Fla) stated. “If you put money into a retirement plan, you expect to get the best return you can get; you expect that whoever is running it is a fiduciary to get the best return possible. What the Biden administration is saying is ‘no, you don’t have to do that … if you have some social agenda you can focus on your social agenda.'”

Manchin spoke on the Senate Floor. “the ESG rule that we’re going to vote on later today is just another example of how our Administration prioritizes a liberal policy agenda over protecting and growing the retirement accounts of 150 million Americans that will be in jeopardy. Our country is already facing economic uncertainty, record inflation, and increasing energy costs to keep Americans up at night, and put a squeeze on their pocketbooks.”

The White House blasted Congress for trying to repeal the ESG rule and called it an act of treason. “MAGA Republican” effort. Contrary their historic positions, Democrats support Wall Street asset manager freedom and allow pension funds to choose their investment strategies. Republicans, however, want to keep fund managers focused on the monetary return.

“Republicans talk about their love of free markets, small government, and letting the private sector do its work. The Republican bill is the opposite of that,” Karine Jean Pierre, White House press secretary, said this at a March 1 press conference

The Epoch Times questioned the White House press secretary regarding the White House’s response to increasing congressional opposition to ESG investment. She declined to provide more details.

“As it relates to the dynamics of the Senate and where this is going, I leave that to Senator Schumer,” Sie said. “That’s something for him to speak to. What I can say is that if this bill reaches the President’s desk, he will veto it.”

“This isn’t about ideological preferences; it’s about looking at the biggest picture possible for investors to minimize risk and maximize returns,” Senator Majority Leader Chuck Schumer, D-N.Y. (statement made on the Senate floor). “Why shouldn’t you look at the risks posed by increasingly volatile climate incidents?”

Conflict centers around a complex pension law known as ERISA, or Employee Retirement Income Security (or Employee Retirement Income Security) Act, overseen by U.S. Department of Labor, and a similarly obscure progressive investment criteria called Environmental, Social, and Governance.

What’s ERISA, and why is it important?

ERISA, a 1974 law, was passed to make sure that managers of company pension funds are held to the highest level of fiduciary duty and act only to maximise pensioners’ pecuniary returns. This does not just apply to the investments made by pension managers, but how they vote for shares.

Congress passed this law to address the two main reasons that companies weren’t fulfilling their pension obligations. Also, pension managers were misappropriating their pension funds and using them as personal banks. Teamsters president James is one of the worst abuses of pensioners’ money. “Jimmy” Hoffa was convicted In 1964, he used the pension fund of the union as his personal bank and made loans to friends. He also bought houses with the money.

“The Hoffa thing was highly salient,” Robert Wright, senior economic research fellow at The American Institute for Economic Research told The Epoch Times. “Union-based funds were especially subject to malfeasance, to asset tunneling, to directing funds toward investments that aided the plan owners, the trustees, the unions as the case may be, rather than in the best interests of the employees.” Asset tunneling refers to when corporate assets are used for personal or business gain by those who control them.

ERISA had two goals: to discourage this activity and establish strict standards in fiduciary protection. However, today pension funds are being increasingly used. support an ideology ESG is also known as the Environmental and Social Guarantee. It claims that ESG will increase pensioner returns while solving social and environmental problems.

Are ESG Investment Strategies or Ideologies?

ESG can be described as a broad term that includes concepts such as climate change and Critical Race Theory. It also encompasses policies like the reduction of fossil fuel production and establishment diversity, equity, inclusion (DEI), and the implementation corporate racial or gender quotas. These are examples of ESG implemented in practice United Airlines Mandating that at least half its new pilots be from racial minority or female backgrounds ExxonAn oil company has appointed climate change advocates to its board. It will shift to investing in renewable energy and wind power. JPMorgan and Goldman Sachs Refusing to lend money to Arctic oil-drilling projects Bank of America Mortgage loans for minorities exempted from paying down the mortgage payments

ESG supporters argue that ESG isn’t an ideology, but a risk management tool. ESG is considered a good criteria to use for pension investments because ESG-compliant companies are more financially stable.

Brian Moynihan CEO Bank of America stated In 2020 “Our research shows that companies that do well on ESG end up doing better, or fail less … But the most important thing, it aligns capital, aligns capitalism, it defines capitalism the way that people want to define it, which is stakeholder capitalism and solving the big problems of the world.”

New York’s state retirement funds declared That “ESG factors are a key component of the Fund’s analysis of both short- and long-term financial risks and opportunities.” State pension funds fall outside the scope of ERISA. Instead, they are subject to state law.

ESG advocates say it is prudent risk management, good corporate governance and taking into consideration customers’, employees’, community and environmental interests. This is the ESG story. “stakeholder capitalism,” The underlying assumption behind this is that ESG will not be implemented by companies if they do not have it. Companies would instead pursue short-term profits that are exploitive and ignore these other factors.

These claims are not supported by a deeper look at ESG’s history and the results it has achieved to this point.

ESG and UN Sustainable Development Goals: The Origins

ESG is a concept that was first introduced. originally developed Two decades ago, the United Nations Environmental Programme Financial Initiative – UNEP FI – was created to help implement the Sustainable Development Goals of its Principles for Responsible Investing. This was an attempt to bring the private sector into compliance with regulations and laws being enforced by governments. ESG was not an ideology for investment managers, but a method to increase returns and manage risk. This would prevent them from being held liable for breaching shareholders’ fiduciary duties.

The following are some examples investment primer Carole Crozat is the head of research for sustainable investing at BlackRock. “While measuring the alignment of investments to the UN SDGs is complex and evolving task, we believe that their integration in investment decisions can help secure long-term financial performance… Redirecting capital towards UN SDGs could offer $12 trillion of market opportunities linked to our long-term social and environmental well-being.”

ESG is a lucrative way for investors to promote sustainability and social responsibility. Since then, an industry has emerged of ESG rating agents, accountants and consultants as well proxy agents to help companies comply with ESG regulations.

However, asset managers can make more money than low-fee passive index funds which buy every company in the S&P 500 index. They are able to charge higher management fees and manage ESG funds. Critics also claim that asset managers can’t credibly show higher returns on ESG investments or explain the ESG criteria.

“ESG has not been shown to be much of anything at this point,” Wright stated. “It’s just a label that’s slapped on, and it’s not clear that ESG scores are related to actual improvements of any sort—environmental or social justice or the quality of governance.

“The first problem we have is not knowing what they are measuring.” he said. “Numerous studies have demonstrated that ESG-rated funds do not perform better than funds with lower ESG scores. They simply charge more to have the ESG label. It doesn’t look like you are following fiduciary responsibilities and should not be invested for the greatest net return for pensioners.”

Does ESG Really Boost Investment Returns?

Several academic studies have shown that, rather than increasing investment returns, ESG actually lowers investment returns.

A 2020 study by the Boston College Center for Retirement Research found that ESG investing reduced pensioners’ returns by 0.70 to 0.90 percent per year, with much of the difference attributable to higher management fees for ESG funds. A 2021 report by Columbia London School of Economics and University It was found that ESG funds perform less financially than other funds in the same asset manager or year and also charge more fees.” It further noted that companies in ESG funds have “Portfolio firms managed by non-ESG fund managers have worse records of compliance with environmental and labor laws than portfolio companies held by non ESG funds.”

Regarding the benefits of “Stakeholder capitalism” A 2021 study from the University of South Carolina and the University of Northern Iowa Statement: Managers have a simple excuse for failing to meet stakeholder objectives.” The report found a correlation between a CEO’s underperformance and how vocal they were in supporting unquantifiable ESG goals.

As a result, many states, including Texas, Florida, and West Virginia, have banned their state pension funds from using ESG criteria. Regarding ERISA, the Trump administration implemented a rule in 2020 that emphasized the duty of pension managers to invest solely according to pecuniary criteria to the exclusion of ESG criteria. This is the ruling that the Biden administration has now reversed.

When originally announcing the new ruling last November, Labor Secretary Marty Walsh stated: “The rule today clarifies how retirement plan fiduciaries may consider the financial benefits of investing with companies that are committed to positive social, environmental and governance actions. This will help participants get the best out of their retirement benefits. The American worker and his family will benefit from the removal of restrictions on plan trustees by the current administration. This will allow them to help save for their retirement.”

Assistant Secretary for Employee Benefits Security Lisa M. Gomez added that “The rule today will increase the resilience of workers’ pension savings and retirement plans by eliminating unnecessary barriers and ending the chilling effect that the previous administration had on investments taking into account environmental, governance, and social factors.

If returns are reduced as pension managers chase ESG funds, Wright said, asset managers may profit, but “Pensioners feel the pain. It defeats the entire purpose of ERISA.”

The problem with Biden reinterpreting ERISA to allow for ESG is that, seen in combination with other policies like the Securities and Exchange Commission requirement that all listed companies report their CO2 emissions and plans to reduce them, it could appear to be government advocacy for ESG criteria.

According to a White House statement, Biden’s new ERISA ruling “reflects what successful marketplace investors already know—there is an extensive body of evidence that environmental, social and governance factors can have material impacts on certain markets, industries, and companies.”

“They are almost saying that you have to now invest in ESG funds. This is highly problematic.” Wright said. Drawing a parallel to Biden’s executive order to force companies to fire employees who refused the vaccine, Wright said if corporate leaders and fund managers “If they have other reasons to question the rationality or veracity of the instructions, it is their duty to obey the government’s dictates. In this instance, ERISA, it is their responsibility.”

Indeed, representatives from two of the world’s largest asset managers have recently stated that there is no financial benefit to ESG investing. Tim Buckley, CEO of Vanguard, stated in February that “Research shows that ESG investment is not superior to broad-based investing. Vanguard pulled out from the Net Zero Asset Management (NZAM), in December 2022.

Testifying before the Texas state senate Dalia Blass from BlackRock explained her support for ESG investment in the same month. Global GDP can be affected by a disorderly transition, which could result in a 25% decrease.”

However, when asked by Texas senators to provide evidence to support this thesis, State Street Chief Investment Officer Lori Heinel stated: “There is no proof that it will increase returns over time. The evidence is quite the contrary. Last year, even if you weren’t an owner of energy companies, your performance was poor compared to the broad benchmarks. The year before, that was quite the opposite … but that was just a happenstance, that’s not because it’s a good investment.”

Will ESG Investing Open Up Fund Managers to Lawsuits?

The admissions from State Street and Vanguard undermine the case that ESG is good for retirees. And if asset managers cannot show that the pro-ESG thesis is credible, or if it turns out that investing in higher-fee ESG funds reduces pensioners’ returns, there may be legal ramifications.

In 2005, betting on the transition to renewable energy, the Obama administration provided $535 million in loan guarantees for Solyndra, a solar panel manufacturer that soon went bankrupt, leaving American taxpayers on the hook for those lost funds. If asset managers, by contrast, are seen to have misused retirees’ money betting on ESG criteria, pensioners may have someone to go after to recoup lost funds.

“It is possible that there may be corporate lawyers at places such as Davis Polk. [an international law firm] This is what people are salivating about, as there will be lawsuits.” Wright said.

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