Vanguard Shuns ESG, Biden Administration Scrambles

The Senate overturned a federal rule on ESG investments Wednesday, passing a bill that would block the Biden Administration's proposed rule.

The GOP-controlled House voted Tuesday to block a Biden administration rule that allows retirement plans to consider environmental, social and corporate governance principles when choosing investments, even if they’re not the most profitable for their clients. The Biden Administration is now threatening to use its first Presidential Veto to keep the rule alive.

Over the past few years, asset managers and financial institutions have increasingly focused on prioritizing ESG factors when making investment decisions. They have set their sights on investing in companies based on their efforts to combat climate change and curb their carbon footprints.

Biden’s proposed Labor Department rule, which falls under the Employee Retirement Income Security Act (ERISA), had freed managers of retirement accounts and pension funds from their fiduciary responsibility to consider only profitability, so that they could put their clients’ money in environmental, social and governance (ESG) investments yielding lower returns with higher fees.

The Biden rule would have eliminated a 2020 Trump Administration requirement that fiduciaries consider only the monetary benefit (“pecuniary only”) to their clients when choosing investments. It also argues that, by investing in ESG, climate disasters may be prevented, thus providing a form of financial benefit to clients:

“Risk and return factors may include the economic effects of climate change and other environmental, social, or governance factors on the particular investment or investment course of action.”

The GOP says the nation's top money managers are pursuing an ideological agenda at the expense of financial returns in violation of their fiduciary duty.

ERISA covers approximately 747,000 retirement plans, 2.5 million health plans, and 673,000 other welfare benefit plans. Employee benefit plans cover about 152 million workers, and more than $12 trillion in plan assets, equivalent to more than half of the nation’s gross domestic product.

Attorney’s General Form Coalition

Late last year, a group of 15 states simultaneously announced a boycott of major financial institutions, and plans to pull nearly $600B of assets from banks that wish to prohibit financing to the fossil fuel industry.

The decision came after Kentucky passed a law in April 2022 that directed the state treasurer to publish a yearly list of banks and asset managers that are found to be boycotting energy companies.

Now, an alliance of two hundred companies engaged in oil and natural gas exploration and production has joined with the attorneys general of 25 states in a lawsuit seeking to stop the Biden administration's new rule, if the president chooses to veto.

The basis of the suit lies in the structure of ERISA, which grants retirement plan participants the right to sue for benefits and breaches of fiduciary duty, and also sets minimum standards for participation, vesting, benefit accrual, and funding of retirement plans.

In an effort to stop public pension funds from using ESG as a consideration when making investment decisions, red states from Texas to West Virginia have pulled billions from BlackRock and other money managers despite concerns that doing so may hurt financially.

“This rule is an affront to every American concerned about their retirement account. The fact that the Biden Administration is now opting to risk the financial security of working-class Americans to advance a woke political agenda is insulting and illegal,” Texas Attorney General Ken Paxton, who is co-leading the lawsuit, said in a press release announcing the complaint:

“The rule authorizes fiduciaries to consider nonfinancial factors when administering trust assets, likely leading many to focus on advancing an ESG agenda instead of achieving long-term financial stability for their clients. Beyond being detrimental to the retirement accounts of hard working Americans, the rule is fundamentally unlawful, as well as arbitrary and capricious.”

Vanguard Folds, Departing ESG

The same day the Senate struck down the proposed ESG rule, Vanguard announced it would end its membership in the Net Zero Asset Managers Initiative (Net Zero), which promotes ESG investing.

“Our research indicates that ESG investing does not have any advantage over broad-based investing,” said CEO Tim Buckley in a recent interview with the Financial Times.

Last week, Consumers’ Research and 13 state attorneys general asked the Federal Energy Regulatory Commission (FERC) to review Vanguard’s request to own energy company stocks. The proposal asked FERC to prevent concentrations of power over the energy grid, among firms that promote ESG investing. Consumers’ Research’s brief outlines the concern.

“More alarming to Consumers’ Research—and hopefully to the Commission as well—is how the Big Three [Vanguard, BlackRock, and State Street Advisors] have used their combined market power to shape American energy policy. In just the past few years, the Big Three have embarked on a full-scale engagement and proxy-voting strategy to force utility companies to comply with various decarbonization goals.”

In a statement regarding Vanguard’s announcement West Virginia State Treasurer Riley Moore said “This is tremendous news for American consumers and investors and demonstrates we are turning the tide against the woke radicals who are trying to impose their social and environmental agenda on our economy through coercive means.”