Two years into his presidency, Mr. Biden has overturned his first veto. On March 20, 2023, the President halted an attempt to overturn retirement investment rules that allow fund managers to consider environmental, social and governance (ESG) factors in their decision-making process.
The reason you are reading this here is because this veto power can directly affect countless investors. In other words, if it sticks.
We are here to clarify what happened, why, and what it means to you.
Wait a minute, what is ESG investing?
Before delving into the timeline leading up to this veto, let’s explain what ESG really means.
ESG stands for Environment, Social, and Governance, and ESG investment focuses on companies that have established clear initiatives and policies in these areas.
example of environment Factors include:
- energy
- waste
- emissions and pollution
- water usage
- Usage of natural resources
example of socializing Factors include:
- Equal Pay and Equal Opportunity
- ethical sourcing
- sexual harassment
- health and safety
- social justice training
example of governance Factors include:
- diversity in leadership
- Information transparency
- business ethics
- Substrate structure
- Anti-corruption measures
For example, companies that use renewable sources for power and commit to being carbon negative may score well in the environmental category.
Although ESG factors are non-financial in nature, they can often affect a company’s performance. Historically, fund managers could use these factors to analyze investment opportunities, but the Trump administration has put rules in place to prevent this. The Biden administration overturned these.
Biden used a presidential veto when lawmakers tried to roll back restrictions on ESG use.
what happened
Let’s analyze it, starting with the rule under discussion.
December 1, 2022: The U.S. Department of Labor has issued the final revisions to its “Prudence and Loyalty in Selecting Planned Investments and Exercising Shareholder Rights” rule. This clarifies a point of confusion regarding the use of material ESG factors by investment fund managers.
The final rule allows trustees to consider climate change and environmental, social and governance factors when making investment decisions or exercising shareholder rights under the Employee Retirement Income Security Act (ERISA). Is recognized.
In the first version of the rule, proposed in October 2021, the fiduciary duty was to select investments based solely on “monetary considerations.” These were defined as economic factors that directly affect investment risk/return.
Many wondered if this included ESG elements. While these purposes are not strictly financial, they certainly have the potential to have monetary implications, and it is not clear how the trustees should or may be allowed to deal with this. was. Leverage ESG? Ignore it?
The rule requires the inclusion of ESG considerations as relevant risk factors as long as the fiduciary acts in accordance with the objectives of the plan (i.e. prudent) and has the best interests of the plan holder in mind (i.e. faithfully). was revised to allow
February 7, 2023: HJRes. To be introduced to the House of Representatives on the 30th by the House Education and Workforce Committee, sponsored by Rep. Andy Burr. The commission seeks to nullify the Department of Labor rule.
This bill is clearly anti-ESG. Proponents want to add kibosh to the DOL rule because they feel fund managers shouldn’t leverage ESG factors in their decision-making and doing so could be harmful to investors. there is
February 28, 2023: HJRes. 30 passed the House of Representatives.
March 1, 2023: HJ Res. 30 passes the Senate.
March 20, 2023: Biden has vetoed the resolution. The bill did not move forward and the regulations remain in place.
why it happened
This veto can affect you regardless of how you personally feel about ESG investing and whether it is a positive or negative practice.
In essence, Biden’s veto was in defense of ESG investing, and the message that accompanied his decision was an extension of this. The President said:
“There is extensive evidence that environmental, social and governance factors can have significant impacts on markets, industries and businesses. It will force us to ignore risk factors, ignore free market principles, and jeopardize the savings of working families and retirees.”
His argument was that ESG investing is beneficial to investors because it is realistic. We pay attention to external factors such as climate change that can have a very real impact on the returns of various asset classes. This ultimately provides protection from risk and does not increase exposure to risk.
Mr. Biden’s argument is that investors benefit from giving management more comprehensive choices. This is a safer long-term approach to retirement investing, as many companies are likely to be impacted by climate change and ESG factors at some point.
why it matters
Environmental, social and governance efforts are unlikely to go away anytime soon. In fact, more and more companies are joining the movement with new initiatives and increased transparency.
The goal of long-term investing is to think big and reduce risk. But he has two sides to this argument.
controversy
Proponents of the ‘prudent and loyalty’ rule, and those currently supporting Biden’s veto, say the ‘big picture’ should include ESG factors, even if they aren’t just financial. claim. influence. For example, companies that have policies that drive social change are likely to win more business and outperform those that do not.
Opponents of the rule argue that ESG is too political and promotes anti-capitalist policies. Favoring ESG companies in investments could crowd out other companies and tip the market, and this side is concerned that fiduciaries put too much emphasis on cause (i.e. belief > money) over numbers. .
The true meaning of veto
The Trustee is obligated to protect the Planholder’s funds. By vetoing the bill, Biden argues that ESG investing can help achieve this.
Can this bill still pass?
Technically, this isn’t over yet. After all, there is still a chance, albeit a slim one, that the Republicans will be able to overturn the rules.
But overcoming the veto would require a two-thirds majority of Congress, which is unlikely given the hotly contested bill that sought to nullify the rule.
Take out
I would like to pay attention to how this situation develops. I’d love to know if Biden has any other plans for that veto pen, but making political predictions isn’t really what we do here.
Will Biden endorse ESG efforts in the future? Maybe not. At this point, the president is just trying to protect investors, and he doesn’t appear to be defending anything.
