Mid-Terms Could Lead to More Regulation than Legislation

This year’s midterm elections resulted in Democrats keeping their narrow lead in the Senate but losing control of the House to Republicans.

Republicans are expected to have a nine-seat majority in the House, and Democrats will either have a one-seat majority or the tiebreaking vote in an evenly split Senate, pending the result of the Georgia runoff election on December 6.

With the House changing hands, some key committee gavels will switch from Democrat to Republican control. What does that mean for the retirement, tax and investment issues that Chief Investment Officer has been covering?

ESG Issues

First, Republicans taking control of the House means Rep. Virginia Foxx, R-North Carolina, who has frequently expressed opposition to government initiatives to encourage environmental, social and governance-informed investing, will likely become the next chair of the House Committee on Education and Labor, which has jurisdiction over the Department of Labor.

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Foxx has described the recent DOL rule to permit retirement plan fiduciaries to use ESG strategies as an attempt to “satisfy the woke mob” and has said it will put Americans’ retirement at risk in order to prioritize left-wing political goals. Foxx is currently the ranking member of the committee, and a spokesperson for the committee confirmed she intends to seek the position.

The House Committee on Financial Services is currently led by Rep. Maxine Waters, D-California, who will likely be replaced by Rep. Patrick McHenry, R-North Carolina, the current ranking member. A spokesperson for McHenry’s office confirmed that he intends to seek the position.

Like Foxx, McHenry is also known for his opposition to ESG and to the Securities and Exchange Commission’s proposed climate-related disclosure regulations. McHenry was critical of the SEC’s proposal from March to require issuers to disclose their climate-related risks to investors. He argued that climate policy should be set in Congress, not from the executive bureaucracy. The SEC proposal has not yet been finalized.

Republican control of the House could lead the administration of President Joe Biden to pursue executive-branch regulation more aggressively, since legislative reform would be harder to achieve with divided government.

This observation applies not only to ESG, of course, but other regulations put forward by the DOL and SEC, such as those concerning swing-pricing and qualified personal asset manager reform.

In reaction to such an effort, Republicans could hold hearings and summon the heads of executive branch departments or business executives to hearings that carry headline risk. They could also use the federal budget and appropriations process for leverage in a wide range of negotiations. Concern over such action might be informing recent statements from Democrats on the need to increase the federal debt ceiling before the next Congress.

There has also been legislation proposed in the Senate that seeks to reign in ESG. The Maximize Americans’ Retirement Security Act, proposed by Senator Mike Braun, R-Indiana, is a bill that would essentially codify the Trump-era DOL guidance on ESG investing, which required fiduciaries to only consider financial factors and was understood as a challenge to ESG strategy. Braun’s bill would also require that a fiduciary distinguish between two investments on a pecuniary basis alone before considering other factors, but they must disclose to investors why pecuniary factors were insufficient.

Senator John Boozman, R-Arkansas, introduced legislation in October that would prevent the SEC from requiring corporate disclosure related to climate and emissions, and it was referred to the Senate Committee on Banking, Housing and Urban Affairs yesterday.

These bills are not expected to pass this year, but both indicate that Republican skepticism of ESG also exists in the Senate.

Retirement

The consequences of the election for the retirement reform package dubbed SECURE 2.0, which is still expected to pass during the current Congress, is less dramatic.

The changing composition in both chambers is unlikely to alter the trajectory of SECURE 2.0. The package has little opposition from either party, and the only challenge would be reconciling its conflicting terms before the next Congress.

If it fails to pass during this Congress, it can be re-proposed in the next Congress, but the new bills would have been informed by months of negotiating and could therefore move faster through the legislative process. SECURE 2.0 would likely receive the same widespread support it enjoyed during this Congress.

SECURE 2.0 is expected by insiders to be attached to a must-pass bill this December and to be signed into law by President Biden.

Tags: Climate Risk, ESG, SEC, United States Department of Labor (DOL)

Oregon’s Public Employee Pension Fund plans to transition its $90 billion investment portfolio to halve its carbon emissions by 2035 and become net-zero as a greenhouse gas-emitter by no later than 2050. Oregon joins a growing list of states that have pledged to meet the goals of the Paris Agreement on climate change.

The pledge “is the first step in what will be a comprehensive and strategic effort to address the impacts of climate change on the funds we manage on behalf of Oregonians,” said Oregon State Treasurer Tobias Read in a statement. “Our investment decisions must be driven by financial considerations and investment returns, not politics. The reality is we must reduce the risks that climate change poses to our investments.”

Read, who also serves as the state’s chief investment officer, is among five voting members of the Oregon Investment Council. The other four voting members are appointed by the governor and approved by the Oregon Senate. Read said he will present to the OIC a comprehensive proposal to implement the net-zero plan by early 2024.

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“Addressing the risk of climate change to our investments is critical to our mission to provide a secure retirement to Oregon’s teachers, firefighters, nurses, and other hardworking public servants,” Read’s statement added. “It will not happen overnight and must be done in a manner that acknowledges both the complexity of our global economy and the urgency of the emerging climate crisis.”

Read said the plan to reach net-zero status will center around four components consistent with his fiduciary responsibilities:

Outlining strategies for reaching net zero carbon emissions by 2050 or earlier.
Establishing a baseline emissions measurement and key interim targets for managing climate risks, as well as methodologies and frameworks to gauge progress on meeting the targets and timelines.
Prioritizing a review of portfolio investments in carbon intensive activities, such as thermal coal, tar sands and natural gas derived from fracking.
Creating transparency and reporting mechanisms to demonstrate progress on meeting net-zero goals.

According to a decarbonization framework released by Read, the comprehensive proposal will also include an assessment of the feasibility of reaching net-zero by 2040 and any additional impacts on returns, costs and fiduciary challenges.

While his staff develops a net-zero plan for consideration by the OIC, Read said the state’s treasury department will accelerate its existing efforts to address climate risks within the state’s investment portfolio. He said this includes expanding existing investments in renewable energy and clean tech, more fully incorporating environmental, social and governance risks into portfolio management and partnering with other institutional investors to convince companies to address internal climate-related risks.