The US Government Heavily Split on ESG Rules

Like the trailer for Cocaine Bear, the early days of the new American Administration are looking like a preview for something we don’t want to watch.

What happened: Yesterday, both the US Congress and Senate passed votes to overturn a rule that allowed retirement plans to consider ESG factors when investing, if they were in the best financial interest of the plan beneficiaries. 

• ESG – or environmental, social, and governance – has emerged as one of the key political lightning rods between the two parties.

While the US Congress has a clear Republican majority, passing the vote in the Senate required flipping two Democratic senators: Joe Manchin and Jon Tester. The two senators are among the most moderate in the party and key votes in the Senate to get anything passed.

Big picture: This is part of a larger growing Republican stance against the “woke” ESG movement with the view it plays politics with the pension of working Americans and retirees.

• Ron DeSantis, one of the most vocal critics of the “woke” ideology, released a book on Tuesday calling for a “crippling” of the ESG movement. This probably wouldn’t be news worthy, except he’s currently ramping up for what is expected to be a presidential run in 2024 and is considered Donald Trump’s main competitor.

The arguments: Supporters of including ESG criteria for investing say that traditional financial analysis doesn’t truly account for the long-term risks of things like climate change that would affect financial returns in the long run. Including the risks is just part of normal fiduciary duty.

On the other side of the aisle, opponents point to investment exclusions in key segments of the economy – notably fossil fuels – that left some retirees missing out on one of the only sectors to post positive returns last year. Not ideal if you’re a senior on a pension.

What’s next: President Biden is expected to use his first official veto of his presidency to effectively void the vote and continue to allow ESG to be included in assessments.

Zoom out: This political posturing and vetoing is likely what the next two years of US politics look like.

In the end, whether or not pensions can use ESG metrics to make their decisions probably doesn’t change the tide on climate investing, especially with the Inflation Reduction Act driving clean energy investments in the US.