Biden’s ESG Tax on Your Retirement Fund
A Labor Department rule would push fiduciaries to favor climate policies over the interests of investors.
By Vivek Ramaswamy and Alex Acosta, July 19, 2022
BlackRock CEO Larry Fink wrote in 2020 that “sustainable investing is the strongest foundation for client portfolios.” Al Gore said in 2021 that “you don’t have to trade values for value. Green can enhance returns.” These claims haven’t aged well: ESG (environmental, social and governance) funds have trailed the market since the beginning of the year and are badly underperforming the sectors they shun, including oil, gas and coal.
That may spur retirement fund managers to reconsider their commitments to ESG funds. But new ESG-favoring regulations may come to the rescue. Last year the U.S. Labor Department proposed a regulation that would tell retirement-fund managers to consider ESG factors such as “climate change” and “collateral benefits other than investment returns” when investing employees’ money.
This would encourage America’s perpetually underfunded pension plans to invest in politically correct but unproven ESG strategies. It would also violate retirees’ basic right to have their money invested solely to advance their financial interests.
Retirement and pension-fund managers are fiduciaries, legally required to make every investment decision with one purpose—maximizing retirees’ financial interests. The Uniform Prudent Investor Act, a model law adopted by 44 states, makes clear that “no form of so-called ‘social investing’ ” is lawful “if the investment activity entails sacrificing the interests of . . . beneficiaries . . . in favor of the interests . . . supposedly benefitted by pursuing the particular social cause.” This principle is built into the Employee Retirement Income Security Act itself, as the Supreme Court held in Fifth Third Bancorp v. Dudenhoeffer (2014). The Biden administration can’t change that by regulation.
Trump-era regulations allowed ESG factors to be used as a tiebreaker when a fund manager chooses between two equal investments. This is itself a dubious notion. Law professors Robert Sitkoff and Max Schanzenbach argue that in cases of a tie, fund managers should split available capital between the investments to increase portfolio diversification. Kentucky Attorney General Daniel Cameron in May formally issued a legal opinion that investing with “mixed motives” breaches fiduciary duties, suggesting that ties likely can’t be legally broken this way.
Amid these concerns, Trump-era regulations applied safeguards against ESG expansionism. Investment managers could call a tie only if they are “unable to distinguish investment alternatives on the basis of pecuniary factors alone.” Investment managers must document the basis for such a tie and for selecting particular ESG factors as the tiebreaker.
The Biden administration seeks to remove those limits, allowing fund managers to consider ESG factors whenever they deem two investments “equally serve the financial interests of the plan.” Fiduciaries need not document the reason for the tie or how they broke it, the Labor Department explains in announcing the rule, so as to not “chill investments based on climate change or other ESG factors.” The department asserts that “two hours of labor to maintain the needed documentation” might prove too onerous for fund managers.
The new rule suggests that fund managers weigh factors such as “climate change,” “board composition” and “workforce practices.” While the drafters were smart enough not to mandate consideration of ESG factors explicitly, the draft rule’s one-sided list of examples tilts the scale in favor of ESG-linked investment selection, proxy voting and shareholder engagement.