Opponents of DOL ESG rule violate fiduciary duty to retirement savers

In an effort to prove they're anti-woke, Republicans are ignoring risk factors that could affect returns, not to mention market signals.

If sponsors of political advertising had a fiduciary duty, a video urging Sen. Jon Tester, D-Mont., to vote to repeal the Department of Labor’s ESG rule would violate the standard by making misleading statements.

“Would you trust Joe Biden managing your retirement portfolio?” a menacing voice says at the beginning of a YouTube spot from Advancing American Freedom. “You might not have a choice. Biden issued a federal rule restricting the money you’ve invested.”

That’s not an accurate description of the DOL measure, which allows retirement plan fiduciaries to consider environmental, social and governance factors when selecting investments. It does not require that ESG principles dictate the program menu. It suggests that taking them into account may be prudent when evaluating whether a stock or fund is in the best interests of retirement savers.

That’s not what the ad says.

“Now, the federal government can dictate that your money gets invested in companies supporting radical climate and social agendas,” the voice-over warns. “Say ‘goodbye’ to high-performing stocks and ‘hello’ to going broke so Biden can go woke. Call Sen. Tester. Tell him to keep Biden’s hands off your money.”

That’s a strong — and false — indictment of the DOL ESG rule from an organization founded by former Vice President Mike Pence. But it may have helped influence Tester. He was one of two Senate Democrats to join the chamber’s Republicans in a recent vote to approve a resolution that would scuttle the DOL regulation.

Tester is one of the most vulnerable Senate Democrats facing reelection in 2024. He said he voted against the DOL regulation because he wanted to protect his constituents’ retirement savings.

“I’m opposing this Biden administration rule because I believe it undermines retirement accounts for working Montanans and is wrong for my state,” Tester said in a statement.

After 31 years in Washington — where I once worked on Capitol Hill and now cover it — I’ve come to believe most lawmakers do what they think is the right thing. That doesn’t mean their actions can’t be misguided.

That was the case for those who voted to take the DOL ESG rule off the books. The effort was more about politics — helping Republicans stoke the anti-woke movement and allowing Democrats to sidestep it — than about retirement savings.

Republicans who once elevated the importance of market signals in steering the economy were all too happy to dismiss one of the strongest market movements in investing, the trend toward ESG.

Beyond that, they weren’t good fiduciaries. A retirement plan advisor should evaluate the entire economic landscape, including how ESG factors will affect returns on certain stocks and funds.

“Over the long run, you have a positive correlation between performance and better outcome in general,” said Patrick Dinan, founder and president of Impact Fiduciary.

David Tenerelli, an advisor at Strategic Financial Planning, said using ESG is a legitimate way to evaluate investments. “The preponderance of the evidence seems to be pointing to the financial materiality of ESG,” he said.

The DOL rule will survive thanks to President Biden’s pending veto of the resolution. But congressional action to kill it — albeit by narrow margins and nearly party-line votes in the House and Senate — could have a lasting negative impact.

“It probably has had a chilling effect on advisors putting ESG out there,” Tenerelli said. “It’s a more challenging environment for having an ESG posture.”

Dinan has a similar take.

“It’s a lot of political theater at the moment,” he said. “There are a lot of advisors who might be given pause by the [congressional] vote.”

The scuffling in Washington over the DOL ESG rule shows once again that decisions on regulations are ultimately political choices.

“It’s unfortunate because ESG isn’t something that should be politicized,” said Kevin Cheeks, an advisor at ImpactFI. “It’s misunderstood. It’s a different form of risk analysis.”

Most lawmakers don’t spend a lot of time on nuance. That’s especially true when they see a political winner in an issue, which is the case for anti-ESG Republicans.

I’m trying to understand their passionate opposition. I realize that ESG funds can be more expensive than other investments because they’re often actively managed, and that many ESG funds have underperformed compared to non-ESG products.

But Republicans don’t bring up those arguments. They create chimeras like the “radical climate and social agendas” highlighted in the Advancing American Freedom ad.

Defeating the DOL ESG rule in Congress is going to fail. It’s not clear that critics will have any better luck in the court system.

“It seems like it would be an uphill battle to overturn such a non-prescriptive rule,” Tenerelli said.

The fight over ESG will continue on many fronts, as investors’ best interests compete with lawmakers’ political interests.