Senate Follows House in Rejecting DOL ESG Rule

The U.S. Senate followed the House of Representatives in approving a resolution that overturns the Department of Labor rule paving the way for the consideration, but not the requirement, of environmental, social and governance investing in retirement plans.

The Senate vote on House Joint Resolution 30, overturning the rule, passed with a 50-46 vote, with all Senate Republicans voting yes, as well as Senator Joe Manchin, D-West Virginia, and Senator Jon Tester, D-Montana. Three Democrats where absent. The act will now move to President Joe Biden’s desk, where he said Monday he will veto it in order to keep the DOL rule intact.

The vote follows a House vote yesterday in which the resolution passed along party lines with a tally of 216 to 204. The DOL rule was finalized in November 2022 after more than a year of public comment and review. The rule removed what was essentially a chilling effect on recommending ESG-focused investment in retirement plans governed by the Employee Retirement Income Security Act that was enacted under the administration of President Donald Trump. That rule said that plan fiduciaries should only consider “pecuniary” factors in investment decisions. 

The Congressional move comes amid a national Republican-led movement against ESG-focused investing that has included lawsuits, both state and federal, seeking the removal of the DOL retirement investing rule. It also comes on the same day that Biden officially nominated Julie Su to be the new Secretary of Labor, with a Senate confirmation hearing to come. In his remarks about the nomination, Biden urged a swift vote, saying: “I asked the United States Senate to move this nomination quickly, so we … can continue the progress to build this economy that works for everyone.”

The debate over ESG investing may extend that confirmation hearing, according to some experts. The Biden Administration argued in its statement on Monday that incorporation of ESG investing does serve a fiduciary purpose, as “there is an extensive body of evidence that environmental, social and governance factors can have material impacts on certain markets, industries and companies.”

Dissenters, such as Tester, have said the potential to use ESG factors in plan investing will jeopardize the investments of everyday retirement savers.

“At a time when working families are dealing with higher costs, from health care to housing, we need to be focused on ensuring Montanans’ retirement savings are on the strongest footing possible,” Tester said in a statement on Wednesday. “I’m opposing this Biden administration rule because I believe it undermines retirement accounts for working Montanans and is wrong for my state.”

Senator Patty Murray, D-Washington, spoke in favor of the rule on the Senate floor, arguing that her colleagues misunderstand the DOL’s position regarding ESG investing in plans.

“This is a really important point I think folks are missing: the Biden rule is fundamentally neutral on how ESG factors are taken into consideration so long as the investment fund is meeting its fiduciary obligations to its beneficiaries,” she wrote in a statement. “The rule we are talking about is neutral on whether a fiduciary is considering these factors from a particular perspective.”

A February post by two legal scholars on the Harvard Law School Forum on Corporate Governance agreed with that assessment, noting that “the 2022 Biden Rule largely reaffirms the Department of Labor’s longstanding position, compelled by binding Supreme Court precedent, that an ERISA fiduciary may use ESG investing to improve risk-adjusted returns but not to obtain collateral benefits. Subject to a few nuanced changes of limited practical import, the Biden Rule is largely consistent with the 2020 Trump Rule and earlier regulatory guidance.