President Biden issued the first veto of his presidency on Monday, defending a recently enacted Department of Labor rule allowing fund managers for ERISA plans to include ESG considerations in the investment process from Republican attempts to overturn the rule in Congress.

In a message to the House of Representatives release by the White House following the announcement of the veto, Biden countered claims that the rule would lead fund managers to sacrifice financial returns for to pursue a political agenda, adding that the Republican-led resolution “would prevent retirement plan fiduciaries from taking into account factors, such as the physical risks of climate change and poor corporate governance, that could affect investment returns.”

Biden added:

“There is extensive evidence showing that environmental, social, and governance factors can have a material impact on markets, industries, and businesses.  But the Republican-led resolution would force retirement managers to ignore these relevant risk factors, disregarding the principles of free markets and jeopardizing the life savings of working families and retirees.”

President Biden’s move blocks the recent majority votes in Congress earlier this month of a resolution disapproving the DOL’s “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” rule which took effect as of January 30. The Republican-led resolution was 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.

The DOL rule allows fund managers for ERISA plans to include ESG considerations in the investment process, and also allows climate and ESG factors to be considered by fiduciaries when exercising shareholder rights, such as in proxy voting, but also requires that such 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 in itself 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.

Countering the rise of ESG in the investment, finance and business world has become a major focus for many Republican politicians in the U.S., with claims that ESG-focused asset managers are following a “woke” agenda that values social causes over investment returns, and that climate-focused investors and financiers are “boycotting” fossil fuel-based energy companies.

Following Biden’s announcement that he would not grant approval to the Congressional resolution, Republican Congressman Andy Barr, who had sponsored the resolution in the House said:

“It is clear that President Biden is beholden to woke special interest groups, NOT the American people.”

President Biden has issued his first veto on a bipartisan, bicameral Congressional Review Act that would have protected middle-class investors saving for retirement. I was proud to lead this critical piece of legislation with @SenatorBraun.

It is clear that President Biden is…

— Rep. Andy Barr (@RepAndyBarr) March 20, 2023

While further initiatives in Congress to overturn the veto, which would require a two-thirds majority in both the House and the Senate, appear unlikely, Republicans have already moved to counter the impact of the rule at the state level, most notably through a multi-state alliance launched by Florida Governor Ron DeSantis last week to “protect individuals from the ESG movement.” Actions considered by the alliance include blocking the use of ESG in all investment decisions at the state and local level, and prohibiting state fund managers from considering ESG factors in their investments on behalf of the state.

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