A group of 27 Republican state Attorneys General announced the publication of a letter to Congressional leaders aimed at blocking the implementation of a new Department of Labor (DOL) law allowing for the consideration of climate and ESG factors in private employer-sponsored retirement plans (ERISA).
The letter marks the latest move in an ongoing anti-ESG push by Republican politicians in the U.S., which has included initiatives targeting large investors, law firms, and proxy advisory firms. The campaign follows the launch of a lawsuit by most of the same AGs in January against the Biden administration seeking an injunction to stop the rule’s implementation, and asking the court to set aside the rule.
In the letter, led by Utah Attorney General Sean Reyes and sent to Republican Senate and House leaders including U.S. Senate minority leader Mitch McConnell, and House speaker Kevin McCarthy, the AGs warn that the retirement savings of Americans are being threatened by asset mangers “using their ownership stake in public companies to pressure them to comply with woke environmental and social agendas.”
The letter and recent lawsuit follow the release late last year by the DOL of its final ruling allowing fund managers for ERISA plans to include ESG considerations in the investment process, and also allowing climate and ESG factors to be considered by fiduciaries when exercising shareholder rights, such as in proxy voting.
The DOL’s ruling marked a major reversal of a Trump administration move to block the integration of climate and ESG factors in these funds. In June 2020, the Trump administration DOL announced a proposed rule that effectively would put strict limits on ESG investing in ERISA plans.
Despite significant pushback from investors and other sustainability-focused groups blasting the proposal as outdated and counterproductive, it was finalized by the DOL later that year. In a further blow to ESG-focused investors, the DOL also issued rules regarding proxy voting, impacting the ability of investment managers to promote sustainability goals through their investments, and suggesting that proxy voting on ESG issues is not in the interests of investors.
In May 2021, President Biden directed the Department of Labor to consider reversing Trump-era rules, as part of an executive order directing federal government agencies to implement policies to act to mitigate climate-related financial risk and help safeguard investors’ savings and pensions from these risks. This led to the DOL’s proposals at the end of last year.
Addressing concerns that fund managers could potentially consider ESG factors that would not necessarily be in the best interest of investors, the new DOL rule added text clarifying that considerations “must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis,” such as the economic effects of climate change or other ESG factors on an investment.
In the letter, however, the AGs argue that the rule “threatens the financial stability of millions of Americans,” and violates ERISA rules mandating asset managers to focus solely on financial returns and reducing risks and expenses. The letter also cites a 2022 Wall Street Journal article pointing to studies showing that ESG strategies have underperformed.
The AGs ask members of Congress to use their authority under the Congressional Review Act (CRA) to disapprove of the rule, which would need to be done within 60 days of the implementation. The DOL rule went into effect on January 30.
Click here to access the letter.