Vetoing Financial Security

P resident Joe Biden is widely expected to issue the first veto of his presidency in response to a bipartisan congressional resolution aimed at protecting pension funds from politically motivated investment managers. While it’s obviously not surprising for a president to side with his own administration’s regulators, this puts the White House on the wrong side of what has become one of the most important topics in the word of finance and investing.

The backstory to what we’re hearing about this week goes back over 50 years, so a little history lesson is in order. In the mid 20th century, there were widespread worries that both corporations and labor unions were mismanaging their pension funds and putting the financial future of retirees in jeopardy. In 1961, for example, President John F. Kennedy created the President’s Committee on Corporate Pension Plans to investigate and issue recommendations. Not too long after, in December 1963, the Studebaker-Packard Corporation defaulted on its pension promises to workers, making many Americans more aware of the threat. Teamsters boss Jimmy Hoffa being sentenced to prison in 1967 for defrauding his own union’s pension fund also attracted policy-makers to the idea of new legislation that could protect workers. Partially in response to these and other scandals, Congress eventually passed the Employee Retirement Income Security Act in 1974, and President Ford signed it on September 2 of that same year.

ERISA set rules for how corporate and labor-union pension plans should be managed, and charges the Department of Labor with implementing them. One of the most important provisions built into the law was that pension plans focus exclusively on generating financial return for pension beneficiaries, not be run for the benefit of those managing them. They weren’t to be looted and used by corporate managers to benefit shareholders, and they weren’t supposed to be the private slush funds of unions bosses. Importantly, this central goal wasn’t some new idea dreamed up by a post-Watergate Congress. The idea that a trustee or fiduciary has an obligation to manage assets solely for the benefit of a trust’s (or pension fund’s) stipulated beneficiaries is a very old one in Anglo-American law. ERISA merely created a specific mechanism for enforcing this ancient obligation.

Pension-fund management has had its share of controversy and disagreements since then, of course, but these obligations were relatively straightforward until we reached the era of socially responsible investing and its current misbegotten stepchild: environmental, social, and governance (ESG) theory. ESG effectively opened the door to all manner of investment managers (rather than those managing funds with a specific remit to include nonfinancial items among their investment goals) directing capital not just in the interest of generating return but in a way consistent with progressive political goals. Advocates of ESG investing often claim that their desire for profit comes first, and their other goals come second, but introducing any additional considerations into the mix changes the long-standing expectation that pension managers are supposed to be focused entirely on delivering good returns for retirees, full stop.

To address this growing controversy over incorporating ESG factors into pension-fund investment decisions, the Trump-era Department of Labor, led by then-secretary Eugene Scalia, published a rule, “Financial Factors in Selecting Plan Investments,” which simply restated ERISA’s requirements that fund managers are required to have a sole focus on delivering returns. If investing in renewable energy or companies with more diverse management teams could be shown to be correlated with positive returns, then that would be fine. Otherwise, not.

That rule was duly considered and published toward the end of the last administration. When the Biden team came into the White House, however, it quickly announced that it had no intention of enforcing the rule that Secretary Scalia had ushered in, and set about rewriting the rule. After notice and comment from the public, a new rule, which does allow fiduciaries to consider ESG criteria, was published by the Department of Labor at the end of last year and is the current legal standard.

Last week, that status quo was challenged by a resolution of disapproval sponsored by Representative Andy Barr (R., Ky.) and Senator Mike Braun (R., Ind.). The final votes were bipartisan, with Representative Jared Golden (D., Maine) joining the majority in the House, and Senators Joe Manchin (D., W.Va.) and Jon Tester (D., Mont.) providing the necessary margin of support in the Senate. The resolution was proposed pursuant to the requirements of the Congressional Review Act (CRA), which allows Congress to invalidate regulations enacted by federal agencies within a certain time frame. The CRA process also forbids an agency that has had a rule overturned by Congress from going back and enacting a “substantially similar” rule in the future. This would stop any future president from directing a future Department of Labor leadership team from resurrecting the ESG-permissive policy.

Unfortunately for the bipartisan majority in Congress this week, President Biden has already issued a veto threat that all sides fully expect him to follow through on. That veto will leave the current rule intact for the foreseeable future. The effort to pass the anti-ESG resolution was not entirely quixotic, however. It demonstrates that there is a congressional majority willing to push back on what many have termed “woke” money management, and it shows everyone in the financial world that ESG initiatives aren’t the feel-good free lunch they were promised. CEOs and managers were encouraged to sign on to a long list of climate-change and diversity, equity, and inclusion (DEI) policies with the promise that doing so would make them popular, less likely to be scrutinized by regulators, and generally lower the reputational risk to their firms. This week’s vote is dramatic evidence that those promises have not been delivered.

From President Kennedy’s commission appointees in 1961 to the people who wrote the text of ERISA in 1974 to the Department of Labor employees who have been keeping pension funds honest since, generations of policy-makers have worked hard to protect the nation’s workers from having their pension money stolen or gambled away. This fight is not really so different. Previous executives took pension money to cover their own managerial incompetence or used it to benefit their cronies. But today, some managers want to use the life savings of retirees to promote their own political hobbyhorses and pet causes. Does it really matter if beneficiaries suffer lower returns because of corruption or because their money was funneled into the next Solyndra? They’re going to end up just as poor either way.

Departing one iota from the historical responsibility of trust fiduciaries and the statutory requirements of ERISA is dangerous and irresponsible. Fund managers don’t need any special permission to make sound investments that happen to coincide with ESG goals. The only reason they would need a green flag to depart from traditional norms is if they want to invest for politics rather than retiree benefit. And that would make a mockery of 50 years of effort to protect the pensions of working Americans. By opposing the effort to protect the nation’s pensions, the president puts himself on the side of activists in the financial world who think they have the right to play politics with pensioners’ retirement futures. He should instead stand with the millions of Americans who worked hard for decades and deserve to enjoy a comfortable retirement.