Republicans in Congress are forcing President Biden to issue his first veto, and they're getting bipartisan help. The Senate and House this week voted to overturn a Labor Department rule that lets retirement fund managers use worker savings for political causes.

Democratic Sens. Joe Manchin and Jon Tester on Wednesday joined Republicans to pass a resolution repudiating the DOL rule. As Mr. Manchin explained, the rule lets retirement plan fiduciaries consider environmental, social and corporate governance (ESG) factors and "prioritizes politics over getting the best returns for millions of Americans' retirement investments."

The Biden rule reversed a Trump-era clarification of the 1974 Employee Retirement Income Security Act (Erisa), which required retirement plan fiduciaries to consider solely "pecuniary" factors that have a "material effect" on investment risk or return. Erisa is intended to prevent retirement funds from using savings for their own purposes.

The Biden rule protects fiduciaries from lawsuits for considering ESG factors that could be "relevant" to investment performance such as a company's greenhouse-gas emissions or workforce diversity. 

In late 2022, the Department of Labor under President Biden promulgated a new rule on "Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights," superseding the Department's 2020 rule promulgated under President Trump. Numerous media reports suggested that the 2022 Biden Rule permits or even encourages ESG investing, in contrast to the 2020 Trump Rule, which was reported to be hostile to ESG investing. These reports are wrong. This summary aims clarify the effect of the Biden Rule and what has changed from the Trump Rule.

In brief, the 2022 Biden Rule largely reaffirms the Department of Labor's longstanding position, compelled by binding Supreme Court precedent, that an ERISA fiduciary may use ESG investing to improve risk-adjusted returns but not to obtain collateral benefits. Subject to a few nuanced changes of limited practical import, the Biden Rule is largely consistent with the 2020 Trump Rule and earlier regulatory guidance.

Robin Nuttall, who leads McKinsey's ESG and regulatory work has said that a McKinsey analysis of over 2,000 research papers suggested a better ESG ratings score should equate around a 10% lower cost of capital, although the definition of 'better' remains fairly flexible. Alternatively MSCI analysis from 2020 shows only fractional differences between cost of capital for the highest performing and lowest performing companies, in terms of ESG factors.

What's interesting here is that there is a stronger correlation between low performing ESG scores and a higher cost of capital. The MSCI analysis showed higher ESG-rated companies were more competitive and generated above normal returns, often leading to higher profitability and dividend payments, especially when compared to low ESG-rated companies.

At the very least, research suggests that high performing ESG scores correlate to greater resilience in the face of systemic risk - certainly ESG stocks performed well during COVID, losing less than companies operating under BAU approaches.

At the same time, previous research from Bank of America Merrill Lynch showed a correlation between companies with poor environmental and social records and bankruptcy filings. Fifteen out of 17 bankruptcies in the S&P500 from 2005 to 2015 were from companies with a poor track record.

For the third year in a row, more big global companies disclosed environmental, social and governance (ESG) matters than in previous years, with 95 percent having done so in 2021, the latest year available. The percentages were 92 in 2020 and 91 in 2019.

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