Part of the ongoing congressional debate over ESG centers on whether these factors should be considered as part of pension and retirement funds. Those of you expecting a resolution should prepare to exercise some patience.
One of the most active representatives on the anti-ESG side of the debate is Rep. Andy Barr (R-Ky.), who introduced legislation targeting the use of ESG factors in retirement plan investments June 21. Barr has proposed changes to the Employee Retirement Income Security Act, which regulates voluntarily established retirement in private industry such as corporate pensions and 401(k) plans, and the Investment Advisers Act of 1940, which regulates investment advisers.
The June bill aims to specify requirements concerning the consideration of pecuniary — related to or measured in money — and non-pecuniary factors in investment decisions. Specifically, it would require retirement fund investment managers to focus solely on maximizing profits, theoretically limiting their ability to incorporate environmental, social and governance data into investment analysis and decision-making.
While fiduciaries are already required to act in the best interest of those to whom they have a fiduciary duty, a flood of state bills over the past two years aim to limit the inclusion of ESG factors in decisions. Florida’s Government and Corporate Activism law, for example, requires that only pecuniary factors are considered when investing the assets of any retirement system or plan. It defines a pecuniary factor as something that the "plan administrator, named fiduciary, board or board of trustees prudently determines is expected to have a material effect on the risk or returns of an investment based on appropriate investment horizons consistent with the investment objectives and funding policy of the retirement system or plan.” The law also states that “the term does not include the consideration of the furtherance of any social, political or ideological interests."
Robert Eccles, founding chairman of the Sustainability Accounting Standards Board and visiting professor of Management Practice at the Said Business School at Oxford University, sees an upside to Florida’s law. In a recent Wall Street Journal editorial, he wrote: "The Florida bill is wreathed in a lot of partisan language, but all its main two provisions would do is make sure that investors only pay attention to ESG issues that are actually material when investing state money." If ESG factors are material to a company’s performance and can reduce systematic risk such as the risk posed by climate change, then ESG factors are pecuniary.
Broader anti-ESG landscape
So far, Republican lawmakers have introduced 165 pieces of anti-ESG legislation in 37 states to prevent or restrict the use of ESG criteria in investment decision-making. While most of these bills are dead, 19 have become law with three awaiting a signature from the governor; 11 of these new or pending laws restrict pension investments, including HB2100 in Kansas and HB1008 in Indiana.
A lot is at stake — $5.6 trillion managed by public sector retirement systems exist in the U.S. on behalf of more than 26 million active and retired members. But some of this legislation is already backfiring. Analysis by state consultants and advisers found that initial versions of the Indiana and Kansas bills targeting the use of ESG factors in management of the states’ public pensions would reduce public pension returns by $6.7 billion and $3.4 billion, respectively, over 10 years.
The overall total of U.S. retirement assets under management was valued at $35.4 trillion at the end of March. Representing 31 percent of all U.S. household financial assets, American retirement accounts are a massive source of market capital. That means rules about how and where that money gets allocated can have major impacts/implications, and it’s why Democrats and Republicans have been battling over the inclusion of ESG analysis in account management.
The House Financial Services Committee, controlled by Republicans, is holding a series of hearings on ESG this summer. Even so, it is unlikely that Barr’s bill will become law. In March, President Joe Biden exercised his veto power for the first time to nullify a previous version of the legislation that was sent to his desk.
Amid the head-spinning arguments on both sides, one thing we can say with certainty is that with the legislative, judicial and executive branches all chiming in on ESG, investors are in an awkward position to navigate conflicting guidance from a broad range of government officials. That’s why many have chosen to go silent on communicating their ESG initiatives as they wait for the dust to settle.