Biden’s pro-ESG veto will err on the side of free markets

US President Joe Biden has been in the Oval Office for just over two years, which has seen the Covid-19 pandemic, high inflation and Russia’s invasion of Ukraine. Yet it’s only now that he’s drawing near to the use of his first presidential veto, and it’s over something relatively obscure: pension funds. 

A presidential veto of congressional legislation is not lightly used in the US system of checks and balances. Biden’s three predecessors used between 10 and 12 throughout their tenures. Biden is set to use his inaugural one to protect a White House rule that allows — but does not mandate — fiduciaries of private pension funds to include environmental, social & governance (ESG) considerations when choosing investment options, and use shareholder rights such as proxy voting for plan-held securities. 

It is representative of the polarised state of US politics that a veto would be needed to protect a rule that allows — but does not require — fiduciaries to take ESG considerations into account. Republican (and two Democratic) senators feel that allowing private firms to take ESG considerations into account would prioritise politics over maximising commercial returns on retirement funds.  

It all feels like an oxymoron. Republicans, and fiscal conservatives more broadly, have built their foundation on a free market economy in which the laws of supply and demand dictate economy activity, without government intervention or regulations on market transactions. Forcing fiduciaries to exclude ESG considerations from investment decision-making is short sighted, for both commercial and political reasons.

Here are my top three reasons why:

·        Prohibiting funds from taking into consideration issues like climate risk preparedness or fair labour practices ignores a ticking bomb that will inevitably undermine profitability. There are dozens of examples to choose from: clothing manufacturers that use sweatshop labour to produce clothes; businesses in coastal cities with high exposure to climate disasters and few resilience mechanisms in place; and firms that are doing businesses in countries with poor governance.  

Evidence shows that while there is significant room to improve the formal ESG system — particularly the establishment of standards and monitoring of performance — the considerations that underpin it (good ESG practices) have a direct effect on profitability. 

·        Banning fiduciaries from taking ESG into account is a dangerous precedent to set. The relationship between the government and the private sector on social values is becoming increasingly inflamed. Look no further than the acrimonious relationship between the state government in Florida and Disney (yes, Mickey Mouse’s home).

Governor Ron DeSantis ended Disney’s 55-year long tenure of self-governance for the area around its theme parks as a special district because Disney openly came out against some of his discriminatory policies, specifically his “Don’t Say Gay” law, which came into effect in 2022.

If Florida continues on this trajectory it’s not unfathomable that a day will come in the medium-term future where efforts are made to ban fiduciaries from investing in firms with certain values or social positions. 

·        Maximising commercial returns and investing sustainably are not mutually exclusive. In the US, analysis from a fiscal watchdog in Indiana shows that a bill mandating divesting from firms in ESG investing would cost the state pension system $6.7bn over the next 10 years, which would lower returns from defined benefit pensions from 6.25% to 5.05% annually. The idea that profitability and sustainability are an “either-or” decision facing investors is a surefire way to lose. 

The case to overturn the White House rule is not actually to maximise returns for pensioners — it’s to protect the shareholders of firms that are not “ESG friendly”. Consider senator Joe Manchin of West Virginia, one of just two Democrats to side with the Republicans. In 2020 Manchin received $492,000 from Enersystems, a coal brokerage company he founded with his brother in 1988 and is now run by his son. That is roughly triple his congressional salary for the year. Between 2010 and 2020 Manchin received $5.6m from his side hustle. 

There is no shortage of politicians such as Manchin, in SA and many other places, who are in favour of eliminating ESG considerations. They’re clever enough to know that the mainstreaming of ESG considerations on a large scale will steadily erode their personal business interests over time. 

Biden’s veto isn’t about forcing ESG down pension funds’ throats, it’s about preserving the free market. While some have argued that he is imposing “woke capitalism”, I’d suggest he’s erring on the side of generations of free market thinking.