ESG Investing Fight Is Less Than Meets the Eye

Congressional Republicans have fired yet another volley in their ongoing battle against environmentally and socially conscious investing. Although their effort to influence retirement-plan managers is more political than consequential, President Joe Biden is right to veto it.

At issue is the extent to which private-sector retirement plans, which hold some $12 trillion in , can explicitly consider environmental, social and governance issues in selecting investments. In late 2020, the Trump administration adopted a aimed at discouraging such behavior: It a greater burden on fiduciaries — the people who, say, oversee a company pension fund or 401(k) plan — to demonstrate that any ESG-related considerations were purely “pecuniary,” potentially exposing them to added litigation risk. Certain ESG choices, for example, would require extra documentation showing that they were economically indistinguishable from a non-ESG alternative.

It’s hard to know what effect the rule would’ve had, because the Biden administration quickly announced plans for a redo. Its , issued late last year, eliminated the added documentation and specifically designated factors such as the “economic effects of climate change” as potentially relevant to investment analysis. This shift in emphasis makes it easier for fiduciaries to expressly consider ESG issues and offer ESG funds, but does not require them to do so. The rule still requires them to act in plan participants’ financial interests. 

What’s most important is where the Trump and Biden rules : A fiduciary’s primary goal should be prudent, diversified investments for future retirees, enabling the most advantageous combination of risk and return. This should exclude stuff like . But it’s in no way incompatible with ESG investing. If, for example, a company’s profits depend too heavily on activities that contribute to climate change, any asset manager might reasonably see that as a threat to its value. That’s just investing, whatever the label. Under no circumstances are plan fiduciaries  to accept greater risk or less return in pursuit of ESG goals (an approach that does in the broader investment world). Separately, they should ensure that ESG-labeled funds are what they purport to be — something that often hasn’t been the case

But Republicans often seem more interested in attacking ESG as “woke capitalism” than in the finer points of portfolio selection. To that end, they’ve mustered the necessary House and Senate votes to advance a resolution that will strike down the Biden rule. Given the similarities between the two rules, this is a much bigger deal for the culture wars than it would be for finance. Nonetheless, there’s a chance that the resolution could create enough uncertainty to chill otherwise useful investments if it stands.

Biden should use his veto, as he has pledged

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