The recent Norfolk Southern train derailment disaster in East Palestine, Ohio, illustrates why socially responsible investing is so important.
Norfolk Southern, owned by a who's who of Wall Street banks, ranks poorly on corporate Environmental, Social, and Governance (ESG) guidelines that socially responsible investing promotes:
- They killed almost 44,000 fish, amphibians, and reptiles by burning over 1 million pounds of toxic chemicals following the derailment.
- They laid off a third of their workforce while multiplying stock buybacks to boost profits.
- They have long fought rail safety regulations such as labeling flammable chemicals hazardous and upgrading train brakes.
Does this sound like a company you’d like to invest your retirement funds in? Me neither.
ESG helps us put our money behind our values
Socially responsible investing helps us align our money with our values by applying rigorous financial analysis of companies, including an overlay of ESG criteria such as climate risk (environmental), labor issues (social), and political lobbying (governance).
ESG commitments are booming. In 2022, socially responsible investing reached $8.4 trillion in the United States and is expected to top $50 trillion globally by 2025.
Unfortunately, socially responsible investing has also become the target of intense attacks – with bills on the federal and state levels and lawsuits in federal courts attempting to limit or ban investors from taking ESG considerations into account.
These attacks are being propagated by a large network of right-wing front groups funded by enormous amounts of money from undisclosed sources. But also emerging from this pitched battle is backlash to anti-ESG attacks and even some pro-ESG initiatives.
We will explore these dynamics in future blog posts. For now, let’s look at last week’s vote in Congress on a resolution to repeal the Department of Labor’s rule allowing investors to consider ESG factors in their investment decisions.
A neutral rule
Last week Congress passed a joint resolution expressing disapproval of the Department of Labor’s rule Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, which came into effect on January 30. The resolution used the Congressional Review Act, which gives Congress 60 days after an administrative rule goes into effect to repeal it.
The DOL rule allowed – but did not compel – retirement plan fiduciaries to take environmental, social, and corporate governance considerations into account in their investment decisions. It reversed two rules issued by the Trump administration that required retirement plans to invest solely based on “pecuniary factors” and made it difficult to vote on ESG-related shareholder resolutions.
In preparing its rule, the Department of Labor heard from thousands of stakeholders including almost 7,000 members of Green America who signed our petition in support.
In preparing its rule, the DOL heard from thousands of stakeholders, including asset managers, labor organizations, corporate America, consumer groups, service providers, workers, investment advisers, and almost 7,000 members of Green America who signed our petition in support.
An analysis by Harvard Law School found the DOL rule to be neutral because it allows – but does not compel – investors to use ESG considerations on top of basic financial analysis to help gauge risk and return. The rule levels the playing field for all financially relevant factors, Assistant Labor Secretary Lisa Gomez said at a recent discussion hosted by Ceres and the Environmental Defense Fund.
Biden vows to uphold sustainable investing in retirement plans
None of this was enough to sway Congress. On February 28 the House voted 216-204 in favor of the disapproval resolution, and on March 1 the Senate voted 50-46 in favor. All Republican members of Congress voted for the resolution. Three Democrats voted for it: Rep. Jared Golden of Maine in the House and Sens. Joe Manchin of West Virginia (a co-sponsor) and Jon Tester of Montana in the Senate.
Republican Reps. Andy Barr of Kentucky and Mike Braun of Indiana tried to link ESG investing to inflation, blaming the lack of fossil fuel shares in socially responsible portfolios despite the fact that energy prices have experienced some of the worst inflation rates. Others such as Rep. Virginia Foxx of North Carolina accused the Biden administration of using retirement plans to push a “woke agenda.”
In response, Democratic Sen. Chuck Schumer of New York (right) pointed out that asset managers have long used ESG to minimize risk and maximize return, and that 90% of S&P 500 companies publish ESG reports. “I say let the market work. If that naturally leads to consideration of ESG factors, then Republicans should practice what they’ve long preached and get out of the way,” Schumer said.
President Biden has vowed to veto the resolution to repeal the rule allowing sustainable investing.
Why is this happening now?
This attack on socially responsible investing in Congress did not happen spontaneously; rather, it has long been planned. Rebecca Leber of Vox explained three triggering events:
- BlackRock chair and CEO Larry Fink’s 2020 statement that “Climate risk is investment risk” and 2021 announcement of BlackRock’s net zero commitment. BlackRock is the world’s largest asset manager with $10 trillion in assets under management.
- The Securities and Exchange Commission’s proposed rule requiring publicly traded companies to disclose how their operations contribute to carbon emissions. Green America generated 15,000 signers on a statement in general support of the rule while calling for additional provisions to protect Indigenous Peoples and to further protect the climate.
- Hedge fund Engine No. 1’s coup at Exxon’s 2021 shareholder meeting electing three new board members focused on the risks climate change poses to the company.
By late 2022, Republicans were planning a surge of attacks against ESG investing, with four main tactics beyond the anti-ESG vote in Congress last week.
- Hauling leaders of financial institutions that use ESG in investments before Congress on claims they are violating antitrust laws and fiduciary duty.
- Pulling state funds from BlackRock and other investment firms that practice ESG (more on this in a future blog post).
- Pushing a model bill through red state legislatures that would divest public pension funds from companies on a boycott list (this is not going well – more in a future blog post).
- Creating a so-called boycott list so states can seek contracts only with companies that do not consider climate change in their operations and investments (this is also not going well).
Together these tactics can be considered “redwashing,” argues Freya Williams of Climate and Capital. Whatever they are called, they are not based on sound science or business practice. They are political.
For example, Republicans are using the Congressional Review Act to challenge not just ESG investing but a multitude of Biden administration rules, including on Waters of the United States and solar tariffs.
Anti-ESG attacks have been dubbed ‘redwashing.’ Whatever they are called, they are not based on sound science or business practice. They are political.
They see these votes as messaging tools. “It’s not going to drive much policy, because the president will veto anything he doesn’t like,” Sen. Kevin Cramer (R-N.D.) admitted. “It’s largely politics.”
One final anti-ESG tactic is court challenges. Currently we are watching two lawsuits:
- Republican attorneys general from 25 states filed a lawsuit in U.S. District Court in Amarillo, Texas, against the Department of Labor rule allowing ESG investments. Among the plaintiffs were several oil and gas corporations.
- Four state attorneys general are suing over a separate SEC rule that requires investment funds to disclose more about executive pay and other ESG matters. The lawsuit was filed in the Fifth Circuit Court of Appeals, where most judges were appointed by Republican presidents.
What you can do for socially responsible investing
Stay tuned for future blog posts on the anti-ESG campaign, including a pitched battle in the states, massive funding from undisclosed donors, public opinion, and cracks in the anti-ESG foundation.
Meanwhile, the most important thing we can do in the face of political attacks on ESG is to keep supporting socially responsible investing. Check out our guide on how you can add socially and environmentally responsible investment options to your employer’s retirement plan.
Cathy Cowan Becker is Responsible Finance Campaign Director at Green America.