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Americans for Tax Reform supports Reps. Andy Barr (R-Ky.) and Rick Allen’s (R-Ga.) reintroduction of the Ensuring Sound Guidance Act and urges members of Congress to support passage.

Bill Background

The bill prohibits managers of private employer-sponsored retirement plans (e.g., 401(k)s and employee stock ownership plans) from making investments based on environmental, social, and governance (ESG) factors. The goal of the bill is to ensure that these plan managers, which maintain a fiduciary duty to plan participants, invest in securities and other financial products that will focus solely on financial, or “pecuniary” returns for retirement plan participants.

The bill clarifies in federal statute that these retirement plans, which are governed by the U.S. Department of Labor (DOL) under the Employee Retirement Income Security Act of 1974 (ERISA), must focus on returning monetary benefits to retirees, not ancillary social or environmental benefits. If enacted, the bill would require the Securities and Exchange Commission (SEC) to modify its rules so that brokers, dealers, and investment advisers that provide investment advice to retail investors, or investors who use “such advice primarily for personal, family, or household purposes,” must prioritize “pecuniary factors” over ESG factors because it is in their best interest financially.

Fifth Third Bancorp v. Dudenhoeffer determined that the benefits under ERISA-plans are meant to be financial in nature.

Other provisions of the bill include:

  • If a retiree provides consent to invest using ESG factors (non-pecuniary), brokers, dealers, and investment advisers must draft disclosures on the effects and costs of those non-pecuniary factors and how it compares to the actual financial returns.
  • A plan fiduciary may only use non-pecuniary factors when investing if:
    • Two investments are indistinguishable based purely on pecuniary factors; and
    • The plan fiduciary produces documents showing:
      • why pecuniary factors were not sufficient to make a determination;
      • how the selected investment compares to alternatives based on liquidity, diversification, cash flow, and returns; and
      • how the non-pecuniary factors are consistent with producing financial benefits for retirees.
  • Allowing retirement plan participants who control their own investment accounts to consider non-pecuniary factors
  • Prohibiting qualified default investment alternatives (e.g., target date retirement funds) from adding or retaining investments that use non-pecuniary factors.
  • The publication of a Government Accountability Office (GAO) study and report on the negative impacts of ESG investing on the solvency of state and local pension plans
  • Requiring the SEC to issue two rulemakings and subsequent studies to better understand the degree of climate disclosures for municipal bonds and conflicts of interest between elected officials, candidates, and firms underwriting municipal bonds.

Former DOL Secretary Eugene Scalia and former SEC Chairman Jay Clayton have been advising Rep. Barr on constructing the legislation.

ESG Investing

Several academic studies have found that ESG funds have performed poorly compared to traditional funds. Studies showing better performance among ESG funds have likely neglected the distortive effects from government tax credits and subsidies that artificially inflate ESG fund performance.   

Another issue with investing based on ESG factors is the struggle for investors to define exactly what ESG means. ESG is a subjective term that “does not have a single agreed-upon definition.” Ratings firms such as Morgan Stanley Capital International (MSCI) and Sustainalytics have methodologies for screening funds and companies for ESG criteria, but they are opaque and fragmented.

Past Action Against ESG

The reintroduction of the bill follows DOL’s final rule, which allows ERISA-plan managers to take ESG factors into consideration when making investment decisions. DOL claims that such factors have an impact on the financial return of the investment. The rule went into effect on February 1, 2023. However, not all provisions of the rule will go into effect until December 1, 2023.

Congress passed a joint resolution of disapproval to repeal the final rule, which President Biden vetoed. Congress attempted to override the President’s veto but ultimately did not have enough votes to do so.

Fortunately, 26 state attorneys general, led by Utah, sued DOL over the final rule. The plaintiffs have argued that the final rule allegedly violates the Administrative Procedure Act by being arbitrary and capricious. In March, the plaintiffs successfully retained the U.S. District Court for the Northern District of Texas as the venue for the lawsuit.

The outcome of this pending lawsuit could determine the ultimate viability of DOL’s final rule. In the meantime, it is imperative that Congress enact the Ensuring Sound Guidance Act to codify a prohibition on the consideration of non-pecuniary factors that offer only “collateral” benefits, not solely financial benefits to retirement plan participants.

ATR supports the Ensuring Sound Guidance Act and encourages all members of Congress to support this legislation. The Biden administration is jeopardizing the future of America’s workers and their right to a retirement plan that will provide them with the financial security they deserve. Codification of Rep. Barr’s bill will circumvent DOL’s misguided rule and further secure retirees’ nest eggs.