New House Bill Suggests ESG Is to Blame for Underfunded Pensions

Representative Andy Barr, R-Kentucky, introduced legislation called the Ensuring Sound Guidance Act in the House on Wednesday, a bill which would require advisers, broker/dealers and ERISA fiduciaries to act in a client’s or participant’s best interest, based solely on pecuniary factors.

The language of the bill closely mirrors legislation which would have overturned the Department of Labor’s rule permitting the use of environmental, social and governance factors in selecting retirement plan investments from November 2022, which President Joe Biden vetoed in March, as well as a Senate bill from the last Congress proposed by Senator Mike Braun, R-Indiana.

The Ensuring Sound Guidance Act would amend the Investment Advisers Act of 1940 to require advisers and broker/dealers to only consider pecuniary factors, unless a client consented in writing to the consideration of other factors. In that case, the fiduciary would be required to explain the potential costs of considering those other factors.

The Employee Retirement Income Act would also be amended to likewise require ERISA fiduciaries to only consider pecuniary factors. The only time a non-pecuniary factor could be considered is “If a fiduciary is unable to distinguish between or among investment alternatives.” Even then, the fiduciary would have to document why pecuniary factors were inadequate and how the non-pecuniary factor(s) considered were in the participant’s interest and provide a comparison of the investment options, using economic criteria such as diversification and liquidity.

The language of “unable to distinguish” closely tracks the rule enacted during former President Donald Trump’s term concerning ESG factors and is considered a tougher standard than that of the Biden-era rule which permits “collateral” factors to be considered in choosing investment options if both options would equally serve the interests of the plan.

The Biden-era rule, currently being challenged in at least two lawsuits, also permits collateral factors to be considered if they are considered by popular participant demand and if including such an investment would increase participation.

The “pecuniary” language is said by multiple administration officials to have a “chilling effect” on ESG investing. The primary reason is not that defenders of ESG think ESG factors are irrelevant on a risk-return basis, but that a future Republican administration could determine ESG factors as non-pecuniary, and that language favored by Republicans could be ambiguous enough to invite litigation.

Barr’s bill demonstrates this posture. The bill also requires the U.S. comptroller general, who heads the Government Accountability Office, to study “underfunded state and local pension plans” and their impact on the federal government, specifically by looking at “the extent to which such pension plans subordinate the pecuniary interests of participants and beneficiaries to environmental, social, governance or other objectives.”

The implication of this study is that some pension plans could be underfunded in part due to their consideration of ESG factors. The bill also requires the comptroller to investigate “legislative and administrative actions that, if implemented at the federal level, would prevent such pension plans from subordinating the interests of participants and beneficiaries to environmental, social or governance objectives.”

Barr’s bill is unique in that most bills reported as “anti-ESG” rarely make explicit mention of ESG in their text, but Barr’s does. The file distributed to media was even named “BARR_ESG_Act.pdf.”