Environmental, social, and corporate governance (ESG) took center stage this week as Congressional Republicans passed a bill attempting to strike down a Labor Department rule supporting it.
- In November, the U.S. Department of Labor announced that retirement plans would be allowed to weigh ESG issues in investing their money.
- On Wednesday, the Democratic-controlled Senate voted 50-46 to strike down the rule, with all Republicans and several moderate Democrats supporting, including Senator Jon Tester (MT) and Senator Joe Manchin (WV)—beating the one-seat majority due to three senator’s absences.
- The bill previously passed the House of Representatives 216-204 on Tuesday, with one Democrat and all Republicans supporting it.
- President Joe Biden promises to veto the vote if it ends up on his desk, marking the first veto of his presidency.
Why It’s Important
The question of ESG governance continues to rage in corporate America. Investment firms like BlackRock have upheld ESG as a necessary part of “stakeholder capitalism,” which says that large corporations must address investing with greater social responsibility. Firms like Vanguard are dismissing the claim, noting that ESG indexes have underperformed and are irresponsible investments.
As Democratic supporters of ESG have noted, the Labor Department’s ruling amounted to a voluntary decision on the part of investors, making decisions on behalf of retirement funds. It made no federal requirements or necessity to invest in ESG, merely creating the opportunity if investors see it within their financial interests. Before the ruling, a previous Trump administration rule required financial considerations to be the sole focus for investors.
Anti-ESG stances have become a powerful call-to-action for Republicans, with Florida Governor Ron DeSantis and Texas Governor Greg Abbott taking the lead in divesting from investment firms focusing on ESG. Republicans argue that ESG risks the returns on retirement funds and funnels money to political causes their constituents do not support, part of a larger war against what they call “Woke Capitalism.”
“I’m opposing this Biden administration rule because I believe it undermines retirement accounts for working Montanans and is wrong for my state,” says Senator Tester.
“This isn’t about ideological preference—it’s about looking at the biggest picture possible for investors to minimize risk and maximize returns,” says Majority Leader Chuck Schumer. “If the market naturally leads to consideration of ESG factors, then Republican should practice what they’ve long preached—get out of the way.”