US Republican congressmen have proposed a new legislation, the Ensuring Sound Guidance (ESG) Act, intended to restrict ESG investing in retirement funds.
This latest move follows the previous reversal of a Trump-era rule by the Biden administration which allowed ESG considerations in the investment processes of ERISA plans.
The proposed legislation introduces a series of regulations aimed at restricting ESG factors in investment decisions. It places emphasis on the use of “pecuniary” or financial risk and return factors and minimises non-pecuniary elements such as environmental or social considerations. Exceptions are only allowed in certain cases and with comprehensive documentation on the impact of the chosen non-pecuniary factors on the investment portfolio.
For investment advisors, the bill permits the inclusion of non-pecuniary factors such as ESG considerations only with explicit written consent from the investor. Advisors would then be required to disclose the expected financial impact of the investment for up to a three-year time horizon, compared with an alternative index or basket of securities, including fees related to the consideration of non-pecuniary factors.
The proposed legislation also mandates government studies, examining the “potential impact” of the use of ESG considerations by state and local pension plans.
Congressman Allen said in his statement, “Retirement plan sponsors have a duty to invest their clients’ hard-earned money in a manner that maximises returns and minimises risk. Yet, President Biden’s DOL is desperately clinging to its flawed rule that would allow financial advisors to invest Americans’ retirement savings in climate-related ESG funds, which are proven to carry higher risk and charge steeper fees.”
Congressman Barr, referring to ESG as “the cancer within our capital markets,” commented, “Asset managers should be in the business of maximising returns for investors, not pushing their own political agenda at the expense of everyday Americans.
“Our proposed legislation safeguards the savings efforts of hardworking Americans. This critical legislation not only guarantees that advisers make prudent investment choices based on financial factors, but also empowers savers to decide how their money is invested, contrary to the Department of Labor’s (DOL) finalised rule.”
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