Republicans, Democrats Continue to Speak Past Each Other on ESG

The debate in Congress about environmental, social and governance investment factors and their relationship with fiduciary duties appears to have come to a bipartisan loggerhead after testimony from both sides of the aisle on Tuesday.

The narratives of the two parties have consolidated to a degree that testimony during two House Committee on Oversight and Accountability hearings—one held on May 10, one held Tuesday—adhered mostly not just to party lines, but to party talking points. For Republican speakers, ESG was often described as a radical and “woke” leftist political agenda to move capital to preferred ideological projects and away from ideological foes. For most Democrats, ESG is a risk assessment strategy designed to capture unpriced risks and opportunities that account for ESG factors and an energy transition necessary to protect investors from both environment and economic calamity.

For the most part, the debate during these sessions has been dominated by the E in ESG, and to a lesser extent the S, whereas the G is hardly mentioned, except in very rare occasions specifying gender and race on corporate boards.

These hearings provided insight into how both parties intend to legislate and regulate on ESG in the future, with ramifications cascading from major asset managers to institutional investors to everyday retirement 401(k) savers. Below is a summary of some of those positions.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Democrats

Representative Jamie Raskin, D-Maryland, explained at the first ESG hearing in May that market actors should be free to invest using ESG factors and that the leading asset managers see ESG as long-term planning for challenges such as climate change. He accused the fossil fuel industry of lobbying to limit market freedom in this respect.

Illinois Treasurer Mike Frerichs, who also testified at the May hearing, explained that ESG is about data and additional information on risk, noting that the strategy is “about value, not values.” He continued that there is a “politically motivated attack on investors” by “blacklisting” asset management firms engaging with ESG.

Shiva Rajgopal, a professor at Columbia Business School who testified at Tuesday’s hearing, argued that ESG is essentially more data for fiduciaries that is often unavailable through mandatory disclosures. He said climate risks negatively affect industries such as energy, transportation and tourism and argued that these material risks are not properly priced in markets. Rajgopal stated that fiduciaries that do not account for ESG factors are “derelict in their duty” to their clients.

Republicans

At the May hearing, Alabama Attorney General Steve Marshall said ESG is an agenda pushed by an “unelected cabal of global elites” trying to use the financial system to effectuate policy they do not have the votes to pass through Congress. ESG forces investors to “forego profits for woke priorities” and thereby compromises retirement savings and investment returns and thereby violates fiduciary duties.

ESG also increases energy prices—by restricting investment in fossil fuels—and exacerbates inflation, many Republican witnesses argued at both hearings. A wide range of social ills, such as electricity shortages, inflation and unemployment, were attributed to ESG.

Mandy Gunasekara, the director of the Center for Energy and Conservation at the Independent Women’s Forum and a former chief of staff at the EPA, testified on Tuesday that ESG “makes the American dream contingent on acquiescing to the demands of the woke left.”

Also at Tuesday’s hearing, Representative Lisa McClain, R-Michigan, attributed declining retirement assets last year to ESG and said that “managers are investing your money in causes they believe in.”

ESG: Regulatory Ping-Pong

In the annual Form 10-K filings made by firms such as State Street and BlackRock, regulatory and reputational risk of ESG strategies were listed as material risks, which have been arguing points for the Democrats. Meanwhile, Republican-led state governments have been restricting and divesting from firms that apply ESG factors and, as State Street acknowledged in its 10-K: “Views on ESG practices, particularly those related to climate issues, have also become political issues, which can amplify the reputational risks associated with such allegations.”

The current Department of Labor rule which permits ESG factors to be included in fiduciary decisionmaking, currently being challenged in the courts, reversed a rule from the administration of former President Donald Trump that advised focusing only on “pecuniary” factors when it came to retirement plan investments, although it did not rule out ESG factors. That rule was seen by some ERISA attorneys and retirement plan advisers as having a “chilling effect” on ESG investing in 401(k) plans.

Growing Republican hostility to ESG could signal a desire to reverse the current rule established under President Joe Biden in a future Republican administration, potentially leading to a ping-pong regulatory fight between administrations and reducing regulatory clarity concerning ESG.

Tags: anti-ESG, environmental, ESG, social and governance, United States Department of Labor (DOL)

Approximately 57 million U.S. private sector workers lack access to a retirement savings plan through their employer, which could result in more than $1.3 trillion federal and state governments costs for assistance to the elderly between 2021 and 2040 as the elderly share of the population grows, according to a new study.

The study, conducted by consultant Econsult Solutions for Pew Charitable Trusts, reported that an overall lack of retirement savings could end up costing the federal government $990 billion over the 20-year period, with an additional $334 billion in costs expected to be shouldered by state governments during the same time period.

The estimates are based on estimated 2020 federal and state expenditures for selected benefit programs, including Medicaid, Medicare Part D, Supplemental Security Income, food stamps and more.

Pew Charitable Trusts hired ESI to investigate the potential economic and fiscal costs of existing trends in retirement savings. According to the study, as the elderly share of the total population of the U.S. continues to grow, it is increasingly important for households to plan ahead to maintain their standard of living in retirement. The study aimed to quantify the potential magnitude of national and state retirement savings shortfalls from 2020 through 2040 if current trends continue. The report also defined the costs of the potential shortfalls to the U.S. and each state.

For more stories like this, sign up for the CIO Alert newsletter. 

According to the report, based on population projections from the U.S. Census Bureau, the population of people aged 65 and older in the U.S. is expected to increase 50% to 81.5 million in 2040 from 54.1 million in 2020. The increase is expected to be about 10 times as fast as the non-elderly rate of growth and to account for almost two-thirds of the total population growth. Elderly Americans are expected to make up 22% of the population in 2040, up from 16% in 2020.

“As the population changes, so too will the relative composition of elderly and non-elderly households,” the report stated, projecting there will be 54 elderly households for every 100 working-age households by 2040, up from 37 in 2020. “This compositional shift will create significant fiscal pressure, since working age households form the core of the federal tax base.”

The report also said that if current trends continue, 61% of elderly households are projected to have an annual income below $75,000 in 2040, with the average annual income shortfall among the households relative to recommended replacement levels projected to be $7,050 in 2040.

According to the report, the average elderly household would need to contribute approximately $140 per month, or $1,685 per year over a 30-year period, to close the projected retirement income gap.

“As the elderly population of the United States continues to grow, it becomes increasingly important that households plan appropriately to maintain their living standards in their retirement years,” the report stated. “The retirement readiness of households also has significant implications for the trajectory of government expenditures on benefit programs.”