Republicans use scare tactics on Americans about the impact of new investing rule that allows retirement funds to consider climate risks - The Boston Globe

Republicans use scare tactics on Americans about the impact of new investing rule that allows retirement funds to consider climate risks - The Boston Globe

WASHINGTON — Democrats’ relentless assault on Republicans as a threat to Social Security and Medicare has hit a theme that resonates strongly with voters: fears about how they will fund their retirement.

The GOP has dismissed the attacks as nothing more than scare tactics. But now they’re taking a page from the opposition’s playbook, warning of threats to Americans’ golden years from a new Biden administration investment rule that could hurt the fossil fuel industry.

In the Republicans’ horror story, retirement savings are at risk because of a Labor Department directive that allows managers of pension and 401(k) plans to consider the effects of climate change in their investment decisions. The dispute comes as the financial industry practice known as environment, social, and governance investing, or ESG, has become the latest flashpoint in the nation’s culture wars.
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“We are committed to protecting American families’ retirement savings,” said Senator John Barrasso, a Wyoming Republican, who has referred to ESG as “extreme socialist greed” that will force investments based on a “woke” agenda instead of financial performance. “Joe Biden is giving the middle finger to middle class Americans who are concerned about the returns on their retirement funds.”

Following efforts in several GOP-led states to restrict or outlaw ESG investing, Republicans are trying to use their new House majority to elevate the practice into another three-letter political bogeyman after their efforts to define and demonize the academic concept exploring America’s racial disparities known as critical race theory, or CRT.

House Republicans approved a measure last week to overturn the new Labor Department rule, with Ways and Means Chairman Jason Smith, a Missouri Republican, warning that Biden’s “corporate political crusade threatens the $20 trillion American retirement saving system.” Republicans also predicted that ESG, if unchecked, would starve the fossil fuel industry of investment, reducing American energy production and causing prices to rise and jobs in the industry to plummet.

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Only one Democrat, Representative Jared Golden of Maine, joined Republicans in voting to axe the rule.

The Republican focus on retirement savings helped lure two Senate Democrats, Joe Manchin of West Virginia and Jon Tester of Montana — both facing reelection next year in strongly Republican states — to buck Biden and provide the votes needed in the Senate to also pass the disapproval resolution last week.

“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 announcing his vote.

Biden has promised to veto the House measure and keep the new rule in place. Democrats said Republicans are spreading misinformation about the new rule.

“The problem is that successful money managers have come to realize that they need to account for climate change and the risk that that imposes on a lot of businesses that are in their portfolios,” said Senator Elizabeth Warren, a Massachusetts Democrat. “It’s as if the Republicans are trying to repeal reality on behalf of a fossil fuel industry that knows it’s on the wrong end of history.”

The Labor Department rule revises one from the Trump administration that tried to limit retirement fund managers from taking climate change and other ESG matters into account. Democrats point out the new rule does not force any investment decisions but simply lets those managers consider it as part of “a risk and return analysis” in performing their fiduciary responsibility to put the interest of their investors first.

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“The hard right has made a lot of noise trying to make ESG their dirty little acronym,” Senate majority leader Chuck Schumer, a New York Democrat, said in urging his colleagues to reject the disapproval measure. “But this isn’t about ideological preference — ESG is about looking at the biggest picture possible so that investors can make decisions that decreases risk while increasing returns.”

Republicans see the ESG debate as a way to change the political dynamic on retirement savings after they were pummeled on the issue during the midterms, said GOP strategist Doug Heye.

“It allows them to talk about that issue in a different way that doesn’t touch on Social Security ... a good pivot for them, which they frankly need,” he said. ESG “wasn’t something anybody heard of three years ago, really, but it’s picked up a lot of steam.”

ESG was coined by the United Nations nearly two decades ago as an alternative to so-called “socially responsible investing,” which involves making decisions based more on ideology than financial considerations, said Witold Henisz, faculty director of the Environmental, Social and Governance Initiative at the Wharton School of the University of Pennsylvania.

“At its heart, ESG investing is supposed to be about going through fundamental analysis on financially material factors, which the market isn’t investigating enough,” he said. “So the idea that somehow it’s political or ideological, it’s exactly the opposite.”

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There were about $18.4 trillion in ESG-related assets under management by financial institutions or investment advisers globally in 2021, a figure expected to nearly triple to $33.9 trillion in 2026, according to a report last fall from the accounting firm PricewaterhouseCoopers. With growing concern about climate change, conservatives fear the movement will drain investment from producers of fossil fuels.

The American Petroleum Institute, a trade group representing the oil and natural gas industry, supported the effort to overturn the new rule, arguing that, “America’s economy and energy sector needs more investment, not less.”

Heritage Action, the advocacy arm of the conservative Heritage Foundation think tank, made the disapproval measure a key vote on its annual legislative scorecard.

“From establishing race-based, discriminatory quotas to granting board seats to activists who undermine the company’s core business, implicit in ESG investing is the idea that decisions are made for political reasons to bring about the Leftist ideals of “equity” and “social justice,” Heritage Action said in a statement urging lawmakers to overturn the rule. ”Unsurprisingly, ESG funds tend to underperform the broader market.”

To make the point on underperformance, the statement linked to a November Bloomberg News article about a survey of its readers that found 65 percent expect ESG funds to underperform the market this year. But the article also noted that at that time, the average ESG fund “had lost slightly less money this year than products that track vanilla benchmark indexes such as the S&P 500″ and added that researchers at investment research firm Morningstar found “about 56% of US sustainable funds beat rival category groups in the three-year period ended Sept. 30.”

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“Depending on the sample you pick and the time frame you pick, they underperform, they overperform,” said Robert G. Eccles, a visiting professor at Oxford University’s Saïd Business School, who has studied ESG.

Eccles, a retired Harvard Business School professor, said ESG funds that are light on oil and gas stocks haven’t performed as well over the last year as energy prices have risen because of the Ukraine war. But he said retirement fund managers would be violating their fiduciary responsibility by not taking into account factors such as climate change.

“To think that an asset manager is going to hold stocks in companies that could be affected by climate change, whether it’s an oil and gas company that needs to do an energy transition, or it’s an insurance company paying out all these claims ... why would you not pay attention to that?” he said. “You pay attention to cyber risk, you pay attention to geopolitical risk, you pay attention to economic risk.”

Eccles said he’s been frustrated by the scare tactics by Republicans on the issue.

“They don’t want to talk about material risk factors because there’s so much political mileage out of spinning the ideological story about ESG,” he said. “It’s political theater.”

Jim Puzzanghera can be reached at jim.puzzanghera@globe.com. Follow him on Twitter: @JimPuzzanghera.