Congress Rejects DOL Rule Allowing Pension Fund ESG Investments

By Dan Yager posted 03-03-2023 00:00


With the help of two moderate Democratic senators, congressional Republicans kicked off their attack on ESG by passing a Congressional Review Act (CRA) resolution (H.J. Res. 30), which would repeal a new Department of Labor rule clarifying that pension fund fiduciaries may consider ESG factors in directing investments. 

Bipartisan support in the Senate, but veto expected: After passage by the Republican House mostly along party lines, the resolution was able to pass the Democratic Senate, 50-46, under a special CRA procedure that prevents a filibuster. Democratic Senators Joe Manchin (D-WV) and Jon Tester (D-MT) voted aye. President Biden has indicated he will veto the measure, with the rule’s survival further secured by his announcement that he would nominate Deputy Labor Secretary Julie Su to be the next Secretary of Labor.

Background: The basic federal pension law, ERISA, requires pension plan fiduciaries to act “solely in the interest of the participants and beneficiaries” for the “exclusive purpose” of “providing benefits to participants and their beneficiaries.” There is a longstanding debate over whether fiduciaries may consider factors not directly related to the financial performance of the companies in which they invest. The Trump administration sought to resolve this by requiring that only “pecuniary factors” could be considered. The new rule, promulgated in November 2022, eliminates the “pecuniary factors” requirement, but does not require ESG investments. Meanwhile, it retains the “core principle” that fiduciaries may not subordinate the interests of beneficiaries “to objectives unrelated to the provision of benefits under the plan.”

Debate to continue: Since the legal issue is only relevant to the performance of pension plan fiduciaries, it has little direct effect on companies’ ESG activities. However, it has become a focal point in the political debate over whether those activities actually enhance the financial performance of companies. In a Wall Street Journal op-ed, Florida Gov. Ron DeSantis (R) argues that companies are simply responding to pressure from the left “to use their power to advance the woke political agenda . . . . ESG is a way for the left to achieve through corporate power what it can’t get at the ballot box.” In a competing op-ed, Senate Majority Leader Chuck Schumer (D-NY) argues: “Investors and asset managers increasingly recognize that maximizing returns requires looking at the full range of risks to any investment . . . that the public doesn’t normally associate with financial well-being.” 

Su Nominated to fill departing Secretary Walsh’s shoes:   Meanwhile, as the Association anticipated, President Biden formally nominated Deputy Labor Secretary Julie Su to be the next Secretary of Labor. The President called on the Senate to confirm her nomination quickly. The Senate Committee on Health, Education, Labor, and Pensions is expected to advance the former California labor secretary’s nomination soon. However, the timing of when the full Senate chamber will consider Su’s nomination is unknown at this time, as two Democratic senators are out on medical leave. With strong Republican opposition anticipated, Su will require all 51 Democratic votes to secure confirmation. As Su awaits a confirmation vote, she will continue to serve as acting secretary and lead DOL priorities, including closely scrutinizing wage and hour and labor practices of employers.