The war against ESG investing heated up in Congress this week, with the Senate voting Wednesday to overturn a Labour Department rule allowing retirement plans to consider environmental, social and governance (ESG) factors when making investment decisions.

The House of Representatives approved the measure earlier, setting the stage for what will be the first veto of legislation from President Joe Biden.

The Senate voted 50-46 to overturn the rule, with Democrats Joe Manchin of West Virginia and Jon Tester of Montana joining all Senate Republicans.

Manchin said the rule exemplified “how the administration prioritizes a liberal policy agenda” over protecting the retirement accounts of pension investments. He also said the rule could penalize the fossil fuel industry important to his state.

The White House says Biden will exercise his veto power.

“The rule reflects what successful marketplace investors already know — there is an extensive body of evidence that environmental, social and governance factors can have material impacts on certain markets, industries and companies,” it said in a statement this week.

What are some ESG criteria?

ESG investors consider other factors beyond just profit and a company’s future prospects.

It can pay to avoid companies with poor records on the environment, the thinking goes, because they may be at greater risk of big fines from regulators or potentially damaging lawsuits.

“You would have to pretend it’s not there, in the same way that the captain of the Titanic would have to ignore the iceberg had he seen it,” said Celeste Drake, deputy director of the White House National Economic Council.

The sun is shown setting at a wind farm.
The sun sets at a wind farm in McCook, Texas, during a heat wave on July 20, 2022. Republican-led legislation overturned a rule by the Department of Labour that allows retirement plans to consider environmental, social and governance factors when making investment decisions. (Delcia Lopez/The Monitor/The Associated Press)

On the flip side, companies that care about climate change may be better prepared for its repercussions, whether that means potential flooding damage at factory sites or the risks of increased wildfires.

The social component focuses on a company’s relationships with internal and external publics, considering things like employee compensation, working conditions and a company’s record on data protection and privacy.

Some ESG investors encourage companies to take positions on big social issues, such as abortion or racial justice, arguing that some companies’ employees and customers want to know where the employers stand on the issues.

Governance considerations include tying executive pay to a company’s performance and having strong, independent directors on the board to act as a powerful check on CEOs.

What has ESG’s impact been?

Investors who use one or more ESG criteria or who push companies on such issues controlled $8.4 trillion in U.S.-domiciled assets in 2022 overall. That was done from an early 2021 peak, with the Ukraine war and its effect on the energy sector among factors affecting the flow of ESG funds.

Investors are also pushing executives across corporate America to give more details about their carbon emissions, measurements about their impacts on human rights and audits for racial equity.

In 2021 a relatively small fund known as Engine No. 1 convinced some of Wall Street’s biggest investment firms to approve its proposal to replace three directors on Exxon Mobil’s board, citing a decarbonizing world.

Last month, BlackRock’s president was interrupted several times during a presentation at a conference by questions on the company’s climate change responsibilities. Climate activists have targeted BlackRock for years, asking the world’s largest asset manager to stop investing in fossil fuel companies, or to push them harder to cut emissions.

A man in a suit is shown holding a microphone while seated at a public event.
Robert Kapito, President of BlackRock, is shown speaking at a Hong Kong event on Nov. 2, 2022. At a more recent appearance in the U.S., activists pressed Kapito on BlackRock’s investments in fossil fuels. (Peter Parks/AFP/Getty Images)

Some funds pledge not to own stocks of any companies seen as dangerous, for example. Others will try to own only companies that get the highest ratings from scorekeepers on ESG issues. Still others try to buy only companies that score the best within their specific industry, even if that score is very low overall. 

Such nuance can make for confusion among investors trying to find the right ESG fund for them.

What’s the backlash been like?

Some in the business world also have been particularly critical of rating agencies that try to boil complex issues down to simple ESG scores. 

Tesla CEO Elon Musk last year called ESG a scam that “has been weaponized by phony social justice warriors.”

A man in a suit and tie is shown gesturing with his hands while speaking in front of some American flags.
Florida Gov. Ron DeSantis has taken on corporations that wade into social issues, and has written that he would like to cripple the ESG trend. (Wilfredo Lee/The Associated Press)

Caisse de Dépôt et Placement du Québec was among the sponsors of a failed bid pushing Berkshire Hathaway to produce more information about its climate change and diversity initiatives. Berkshire’s Warren Buffett in turn defended the company’s green energy initiatives and inferred that the additional reporting requirements would be “asinine.”

The subject is certain to feature in the Republican primaries leading up to next year’s presidential election.

Florida Gov. Ron DeSantis, a potential candidate, has engaged in battles with corporations he considers “woke,” such as Disney.

While climate activists targeted BlackRock from one side, DeSantis has represented the other end of the spectrum, indicating in December Florida would pull $2 billion of state assets managed by BlackRock due to its ESG investing practices.

In his just-released book, The Courage to Be Free, DeSantis writes that “crippling the ESG movement” is one of the ways lawmakers “can protect individual freedom from stridently ideological private actors.”

DeSantis is also among the state governors trying to bar local governments from utilizing ESG criteria when issuing municipal bonds.

Democratic Senate Majority Leader Chuck Schumer this week accused Republicans pushing anti-ESG legislation of “forcing their own views down the throats of every company and every investor.”

The U.S. Chamber of Commerce, the country’s largest business lobby, opposed limits on ESG set by the Donald Trump administration, but has said the Biden administration rule was largely unnecessary because it imposes the same standard that retirement plans have applied for decades on investments.

Both the Trump and Biden rules prohibit plan managers from subordinating the financial interests of beneficiaries to other objectives.

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