Senate Republicans are teaming up to curb retirement plan sponsors’ ability to consider environmental, social and governance factors in selecting investments, as a counter to the Biden administration’s efforts to expand worker and retiree access to such investing.

Sen. Mike Braun of Indiana this week unveiled a bill that would specify the fiduciary duty of plan administrators is to select and maintain investments based solely on monetary factors under 1974 legislation known as the Employee Retirement Income Security Act, a law that governs a broad range of retirement and health benefit plans.

If plan sponsors want to consider non-pecuniary factors when choosing between funds, they could do so only if they are unable to distinguish them “on the basis of pecuniary factors alone,” according to the bill text. Even if an ESG investment choice is able to meet that standard, plan advisers would also have to make lengthy justifications to include it. 

The bill essentially would reinstate a Trump administration Labor Department rule that took away retirement plan sponsors’ ability to direct investments into ESG options. 

The bill is also similar to recent legislation from Sen. Steve Daines of Montana, who joined Braun’s bill as a co-sponsor, as did Sens. Richard M. Burr of North Carolina, Tommy Tuberville of Alabama, Cynthia Lummis of Wyoming, Roger Marshall of Kansas, Roger Wicker of Mississippi and James M. Inhofe of Oklahoma.

“This bill protects investors by ensuring investment managers only consider financial risk and return when investing on behalf of Americans saving for retirement,” Tuberville said in a statement Tuesday. “It’s my hope that Americans, who are already struggling with inflation’s negative impact on their investment accounts, will be protected from fiduciaries investing their money in ways that are not financially beneficial to them.”

The legislation marks the GOP members’ latest attack on the ESG movement. In recent months they have ratcheted up criticism that ESG considerations such as climate risk are politically based and immaterial. Any regulations to encourage their inclusion are inappropriate, they say.

Signal of Republican plans

House Republicans tried to use a six-bill fiscal 2023 spending package to derail the Securities and Exchange Commission’s proposed climate risk disclosure rule through amendments in the Financial Services portion. But Democrats rejected that effort.

While Braun’s legislation and similar bills are unlikely to advance with Democrats in charge, it may foreshadow what’s to come if Republicans take control of either chamber of Congress after the midterm elections this fall.

“Forcing ESG standards on retirement accounts is a clear violation of the Employee Retirement Income Security Act, which requires fiduciaries to put the financial interests of plan participants first,” Rep. Virginia Foxx, R-N.C., said in a July 13 House floor speech. “ESG requirements pressure investors to subject retirement savings to low-yield investments. This is irresponsible.”

Democrats largely support ESG options and have sided with activist shareholders and sustainable investing organizations, arguing that such factors are just as material as traditional financial considerations. The Democrats’ tight margin in the Senate makes it tougher to pass additional legislation to support ESG investors.

That has led federal agencies to propose policies to meet President Joe Biden’s executive orders for an all-hands-on-deck approach on climate action, including climate-related financial risk.

Last month, the Federal Thrift Savings Plan, which manages $782.2 billion in assets for more than 6.5 million federal employees and retirees, opened a limited mutual fund window allowing enrollees to select sustainable funds in addition to the plan’s basic options.

“Federal employees should have access to the kind of sustainable investment options already offered in some public and private sector plans,” said Lisa Woll, CEO of US SIF. The organization is composed of advisers, firms and banks that support sustainable investing, with members representing $5 trillion in assets under management.

“Despite many delays, the [mutual fund window] will now provide participants with new investment options and the opportunity to choose from several sustainable investment funds,” she added.

The Labor Department’s Employee Benefits Security Administration is also working on rules that would shield retirement savings and pensions from climate-related financial risk and other ESG factors. 

The agency is in the midst of finalizing a rule that would expand plan sponsors’ ability to consider climate risk and other ESG factors in their investments. Once finalized, the rule, which was proposed in October 2021, would reverse the Trump administration’s changes to ERISA, as well as boost ESG options in retirement plans and restore advisers’ ability to utilize their shareholder rights.

In addition, the Employee Benefits Security Administration is mulling whether to propose additional rules to specifically focus on protecting 401(k) plans and pensions from physical risks and transition risks of climate change.

Physical risks are risks from natural disasters and other events exacerbated by climate change, such as wildfires and floods. Transition risks are policy and business actions — or lack thereof — to wean the economy off of fossil fuels.

ESG investors told the agency it should prioritize finalizing the rule before moving on to other proposals.