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President Biden exercised his first veto on March 20, 2023. It took him over two years to “dismiss” a bill worthy of an executive.
I’ll go into more detail about what happened on Capitol Hill, but here’s the gist: Biden blocked efforts to repeal retirement investment rules that allow trustees to use ESG factors to select investments, a move that could help retirement fund managers consider investment opportunities. , it means we can still take her ESG into consideration.
What happened, how it happened, and why it matters to investors across the country.
What is ESG?
ESG stands for Environmental, Social and Governance. ESG investment It is a type of investment that focuses on companies and companies striving to address environmental, social and governance issues and causes. This includes policies and standards, initiatives and projects, disclosures and investigations, etc.
ESG factors can be anything within these areas. Here are some examples.
environmental factors Includes energy consumption, waste and greenhouse gas emissions.
social factor This includes employee compensation, community involvement, safety and quality standards.
Governance factor It includes corporate leadership, executive salary structure, and business ethics.
Selecting ESG investments involves using quantifiable metrics and often rigorous criteria. These indicators assess a company’s performance in terms of sustainability. You can research companies yourself to find out how they behave, use ESG scoring platforms to compare investments, or both.
However, just because a company has a high ESG rating does not mean it is more sustainable than others. Different platforms score businesses differently. It’s also easy for companies to make claims about their standards that don’t give the full picture. ESG investment involves due diligence.
Retirement fund managers are legally obligated to consider the economic risks and rewards of each opportunity. The entire discussion that follows is about whether ESG considerations are appropriate.
If you are interested in ethical investing, please click the link below.
>>> Click here for details: Demystifying Ethical Investing (ESG vs. SRI vs. Impact Investing)
Reason for veto
There’s quite a bit of history leading up to this veto, and it’s important to understand where it all started and how we got here.
It all started with prudence and loyalty in choosing planned investments and enforcing shareholder rights rules. Let’s call it the Prudence and Loyalty Rule.
Essentially, the rule, created by the Department of Defense in 2022, puts language in place to allow fiduciaries to use ESG factors to select investments.
Over the past few years, fiduciaries have already used ESG-related information to make investment decisions that promise planholders the best returns and lowest risks. But under the Trump administration, this has become even more difficult.
In 2020, the U.S. Department of Labor issued a rule requiring pension and 401(k) fund managers to prioritize monetary factors (those strictly related to money) over non-monetary factors. We have put up barriers to ESG investing. ESG considerations were not included unless they were economic in nature.
Also, when fiduciaries choose between economically equivalent investments that ultimately result in differences in non-monetary considerations (such as ESG), extensive documentation of these decisions avoids unnecessary You have to go through a procedure.
The Biden administration issued rules of prudence and loyalty to overturn this plan. The final version of the new rules will be released in November 2022, allowing trustees to select the best investments for planholders, taking ESG into account where appropriate.
On February 7, 2023, the Republican-led House School and Workforce Committees introduced a bill (HJ Res. 30) to overturn the rules of prudence and loyalty. The anti-ESG bill narrowly passed the House and then the Senate.
But it got to the president’s desk.
President Biden stopped the bill halfway through. Without his approval, the rule could not be overturned. The House tried to override his veto, but got only a 219 to 200 majority when a two-thirds majority was needed to override it.
“There is extensive evidence that environmental, social and governance factors can have significant impacts on markets, industries and businesses. […] Retirement plan fiduciaries need to be able to consider all factors that maximize the financial benefits of retirees nationwide. It’s uncontroversial and common sense. ”
This controversy is nothing new
What is this controversy Biden is talking about?
Republicans and Democrats have been debating the benefits of ESG investing for years. This is a highly partisan topic with at least two distinct sides.
On the one hand, some believe that allowing fiduciaries to use ESG factors is a political minefield. They feel that ESG investing has the potential to push a liberal agenda and allow fiduciaries to prioritize political causes and social values over returns and performance.this side agrees capsize Rules of prudence and loyalty.
On the other hand, some believe it is safer to allow fiduciaries to use ESG factors. They said his ESG investments over the long term are likely to bring better returns to investors as they can account for external risk factors that can affect the market, such as climate change and global warming. I feel This side is for the rules of prudence and loyalty.
You can see why the government had so much difficulty formulating policy on this issue.
Biden has used his veto to support the ESG campaign.
read between the lines
In a letter accompanying the veto, President Biden said:
“[The rule] Retirement plan fiduciaries can make well-informed investment decisions by considering all relevant factors that may affect future investments.
[…] The resolution prevents retirement plan fiduciaries from factoring in factors that could affect investment returns, such as the physical risks of climate change and poor corporate governance. ”
The president shows support for ESG investing, but the reason is not about values.he believes that no Considering ESG factors is risky for investors, as these factors are likely to impact your business.
At its core, ESG is about the “external factors” that matter to the economy. Climate change, environmental threats, social events and movements, and governance developments have far-reaching implications for the world. Therefore, this should be reflected in your investment portfolio. Otherwise, these portfolios are subject to change, but cannot protect or prepare for it.
Imagine someone who knows it might rain and decides to go for a walk. They can pack an umbrella or take a chance, but risk getting drenched. Investors who support ESG hold an umbrella.
While this veto is good news for ESG proponents, it is currently impossible to determine what it means for investment as a whole.
I don’t know what the future holds for the Biden administration. But for now, it’s important to note this veto. The debate will continue as lawmakers from both sides continue to work on the topic.