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

Critics say Biden admin rule adds climate and social agenda to asset managers’ primary duty of maximizing returns
By Kevin Stocklin
Kevin Stocklin
Kevin Stocklin
Kevin Stocklin is a business reporter, film producer and former Wall Street banker. He wrote and produced "We All Fall Down: The American Mortgage Crisis," a 2008 documentary on the collapse of the mortgage finance system. His most recent documentary is "The Shadow State," an investigation of the ESG industry.
March 7, 2023Updated: March 7, 2023

News Analysis

The Biden administration and Congress are currently caught up in a tug-of-war over a new Labor Department rule regarding whether Americans’ retirement savings should be used to finance a climate and social justice agenda.

The conflict goes well beyond obscure investment rules and administrative procedures and is likely to affect the financial security of many Americans in their retirement years.

The controversy heated up last week with the Republican-controlled House approving a measure on a 216–204 vote to block the Biden administration’s new rule that permits the inclusion of climate change and social justice principles as pension investment criteria; Rep. Jared Golden (D-Maine) was the sole Democrat to support the measure. Senate Republicans passed a similar measure 50 to 46, with the support of Democrats Jon Tester (D-Mont.) and Joe Manchin (D-W.Va.), who both face reelection in Republican-leaning states in 2024.

The rule was challenged under the Congressional Review Act, which is a congressional oversight mechanism that can overturn rulings by federal agencies. Biden has threatened to veto the resolution.

Rep. Andy Barr (R-Ky.), who introduced the measure in the House, said it 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.”

In allowing pension funds to be used for ideological purposes, the Biden administration is “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.'”

Speaking on the Senate floor, Manchin said: “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 denounced Congress’s attempt to overturn the ESG rule, branding it a “MAGA Republican” effort. Contrary to their historical positions, Democrats are now championing the freedom of pension funds and Wall Street asset managers to make their own investment decisions, while Republicans are attempting to limit fund managers to focusing purely on monetary returns.

“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,” White House press secretary Karine Jean-Pierre said during a news briefing on March 1.

Jean-Pierre declined to elaborate when asked by The Epoch Times about the White House’s reaction to growing congressional opposition to ESG investing.

White House press secretary Karine Jean-Pierre
White House press secretary Karine Jean-Pierre speaks during the daily press briefing in the James S. Brady Press Briefing Room of the White House on Feb. 13, 2023. (Mandel Ngan/AFP via Getty Images)

“As it relates to the dynamics of the Senate and where this is going, I leave that to Senator Schumer,” she 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,” Senate Majority Leader Chuck Schumer (D-N.Y.) stated on the Senate floor. “Why shouldn’t you look at the risks posed by increasingly volatile climate incidents?”

The conflict centers on an arcane pension law called the Employee Retirement Income Security Act, which is overseen by the U.S. Department of Labor, and an equally arcane progressive investment criterion called environmental, social, and governance (ESG).

ERISA and Why It Matters

ERISA is a law enacted in 1974 to ensure that, among other things, those who manage company pension funds are held to the highest legal standard of fiduciary care, and that they act solely to maximize pecuniary, or monetary, returns for pensioners. That applies not only to what pension managers invest in, but also how they vote the shares they own.

Congress passed this law because companies were failing to honor their pension obligations to employees and because pension managers were misappropriating pension funds, in extreme cases using them as their own personal banks. In one of the more egregious abuses of retirees’ money, Teamsters President James “Jimmy” Hoffa was convicted in 1964 of fraudulently using the union’s pension fund as his personal bank, making loans to friends, buying houses, and otherwise using the funds for personal gain.

“The Hoffa thing was highly salient,” Robert Wright, a senior 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 is when those in control of corporate assets use them for their own purposes or personal gain.

One of the goals of ERISA was to prevent that kind of activity and set strict standards of fiduciary care. Increasingly, however, pension funds are today being used to support the ESG ideology, based on the claim that it will enhance returns for retirees while simultaneously solving environmental and social problems.

Epoch Times Photo
Brandon M, ranch manager at Fortitude Ranch Nevada, surveys the open range flanked by a solar panel on March 2, 2023. (Allan Stein/The Epoch Times)

Is ESG an Investment Strategy or an Ideology?

ESG is an umbrella term that encompasses concepts such as climate change, critical race theory, and social justice; it embraces policies such as reducing fossil fuel production, establishing diversity, equity, and inclusion programs, and implementing corporate racial and gender quotas.

Examples of ESG in practice include United Airlines mandating that half of its new pilot hires be racial minorities or women; Exxon, an oil company, adding climate change activists to its board to shift toward investing in wind and solar technology; JPMorgan and Goldman Sachs refusing to lend to Arctic oil drilling projects; and Bank of America waiving down payments on mortgage loans to minorities.

ESG advocates say that it isn’t an ideology but rather a risk-management tool. They argue that ESG provides appropriate criteria for investing pension money because companies that are highly rated in terms of ESG compliance perform better financially.

“Our research shows that companies that do well on ESG end up doing better, or fail less,” Bank of America CEO Brian Moynihan stated in 2020. “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 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 aren’t under the jurisdiction of ERISA, but rather of state law.

ESG, supporters say, is about prudent risk management and good corporate governance, taking into account the interests of customers, employees, the community, and the environment. This narrative is called “stakeholder capitalism,” and its underlying assumption is that, without ESG, companies would simply pursue an exploitive short-term profit motive that ignores these other factors.

But a closer look at how ESG originated, and what it has delivered to date, raises questions about the claims.

Origins of ESG, UN Sustainable Development Goals

The concept of ESG was originally developed at the United Nations Environmental Programme Financial Initiative two decades ago, as a way to implement its sustainable development goals (SDG) through its principles for responsible investing. It was a way to engage the private sector as a complement to laws and regulations being implemented by governments.

For investment managers who accepted these principles, it was essential that ESG be characterized, not as an ideology, but rather as a way to manage risk and boost investment returns, lest they be liable for violating their fiduciary duty to shareholders.

“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,” states an investment primer by Carole Crozat, BlackRock’s head of sustainable investing research. “Redirecting capital towards UN SDGs could offer $12 trillion of market opportunities linked to our long-term social and environmental well-being.”

ESG has been sold to investors as a profitable way to support goals such as sustainability and social justice. An industry of ESG rating agencies, accountants, consultants, lawyers, and proxy agents has since emerged to track and assist companies with ESG compliance.

Epoch Times Photo
A flag of the United Nations flies in front of the organization’s headquarters in Geneva in a file photo. (Fabrice Coffrini/AFP)

The biggest profits, however, may go to asset managers, who can charge higher fees for managing ESG funds because they are actively managed, versus low-fee passive index funds that simply buy all companies in an index such as the S&P 500. Meanwhile, critics contend that asset managers can’t credibly demonstrate higher returns from ESG investments, or even clearly explain what ESG criteria are.

“ESG has not been shown to be much of anything at this point,” Wright said. “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.

“Problem No. 1 is we just don’t know what these things are measuring,” he said. “There have been several studies that have shown that funds that have highly rated ESG companies in them do not outperform funds with lower ESG scores; they simply just charge more for the ESG label.

“That on its face doesn’t seem to be following fiduciary responsibility that you should be investing for the highest net return for pensioners.”

Does ESG Really Boost Investment Returns?

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

“ESG funds appear to underperform financially, relative to other funds within the same asset manager and year, and charge higher fees,” a 2021 report by Columbia University and the London School of Economics found. It further noted that companies in ESG funds have “worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds managed by the same financial institutions.”

Regarding the benefits of “stakeholder capitalism,” “the push for stakeholder-focused objectives provides managers with a convenient excuse that reduces accountability for poor firm performance,” a 2021 study by the University of South Carolina and the University of Northern Iowa stated. 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 fund managers to invest solely according to pecuniary criteria to the exclusion of ESG criteria. That’s the ruling that the Biden administration has reversed.

“Today’s rule clarifies that retirement plan fiduciaries can take into account the potential financial benefits of investing in companies committed to positive environmental, social, and governance actions as they help plan participants make the most of their retirement benefits,” Labor Secretary Marty Walsh stated when originally announcing the rule in November 2022. “Removing the prior administration’s restrictions on plan fiduciaries will help America’s workers and their families as they save for a secure retirement.”

Lisa M. Gomez, assistant secretary of labor for the Employee Benefits Security Administration, added that the rule “will make workers’ retirement savings and pensions more resilient by removing needless barriers, and ending the chilling effect created by the prior administration on considering environmental, social and governance factors in investments.”

ESG image
“The Shadow State” clip showing the component parts of ESG. (Epoch Original)

If returns are reduced as pension managers chase ESG funds, Wright said, asset managers may profit, but “the pensioners suffer. It kind of defeats the whole purpose of ERISA.”

The problem with Biden reinterpreting ERISA to allow for ESG is that, in combination with other policies such as the Securities and Exchange Commission’s 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.”

“It’s almost like they are saying, it’s now your duty to invest in ESG funds, and that’s 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 “have independent reasons to doubt the veracity or rationality of what they’re being told to do, is their responsibility to follow the government dictates or is their responsibility to follow the spirit of the statute, in this case ERISA?”

Indeed, representatives from two of the world’s largest asset managers have recently stated that there is no financial benefit to ESG investing. Vanguard CEO Tim Buckley stated in February that “our research indicates that ESG investing does not have any advantage over broad-based investing”; Vanguard pulled out of the Net Zero Asset Managers initiative in December 2022.

Testifying before the Texas Senate that same month, BlackRock spokesperson Dalia Blass justified her firm’s support for ESG investing.

“We believe that an orderly transition to a low carbon economy is much more beneficial for our clients’ portfolios. A disorderly transition can cost the global economy about a 25 percent reduction in GDP [gross domestic product].”

However, when asked by Texas lawmakers to provide evidence to support this thesis, State Street Chief Investment Officer Lori Heinel stated: “I have no evidence that this is good for returns in any time frame. In fact, we’ve seen the evidence to be quite contrary. Last year, if you didn’t own energy companies, you did miserably compared to 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 statements from State Street and Vanguard undermine the case that ESG is good for retirees. And if asset managers can’t 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 U.S. taxpayers on the hook for those lost funds. If asset managers, by contrast, are seen to have misused bets on ESG criteria, retirees may have someone to go after to recoup lost funds.

Wright said, “I imagine there are corporate lawyers in places like Davis Polk [an international law firm] who are just salivating over this, because there are sure to be lawsuits.”