White House says Biden will veto legislation if passed

The U.S. House of Representatives approved legislation on Tuesday aimed at blocking a new Department of Labor (DOL) law allowing for the consideration of climate and ESG factors by retirement plan fiduciaries, passing the first hurdle to pass the Republican-sponsored anti-ESG resolution.

After passing with a 216-204 vote mostly along party lines, the resolution sponsored by Republican Congressman Andy Barr will now head to the Senate. If approved by Congress, however, President Biden has pledged to veto the legislation.

The resolution is aimed at disapproving the DOL’s “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” rule passed in December, and effective as of January 30. The rule allowed fund managers for ERISA plans to include ESG considerations in the investment process, and also allowed climate and ESG factors to be considered by fiduciaries when exercising shareholder rights, such as in proxy voting, but required 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.

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Despite significant pushback from investors and other sustainability-focused groups blasting the proposal as outdated and counterproductive, it was finalized by the DOL later that year.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 rule at the end of last year.

The resolution to block the rule is being brought using the Congressional Review Act, through which members of Congress may vote to disapprove rules within 60 days of their implementation, and prevent similar rules from being implemented in the future.

It remains unclear whether the resolution will succeed in the Senate, with Republicans claiming support for the legislation from Democratic Senator Joe Manchin, which may give the proposal sufficient support to pass, with Democrat John Fetterman on a leave of absence.

A White House statement released this week, however, indicated that President would veto the resolution blocking the DOL rule if it passed in Congress. In the statement, the White House said:

“To be clear, the 2022 rule is not a mandate – it does not require any fiduciary to make investment decisions based solely on ESG factors. The rule simply makes sure that retirement plan fiduciaries must engage in a risk and return analysis of their investment decisions and recognizes that these factors can be relevant to that analysis. If DOL were to revert to the 2020 rule, the federal government would be interfering with the market in a manner that stands in the way of retirement plan fiduciaries’ ability to protect these hard-earned retirement savings and pensions and unnecessarily limit the options available to retirement plan participants and investors.”

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