Are legislators in Big Oil's pocket?

The first veto of the Biden presidency strikes down a law aiming to force 401(k) participants to invest in the fossil fuel industry.

March 22, 2023
Shlomo Bernartzi

First, some background: the Biden administration’s Department of Labor issued a rule in November (the “ESG rule”) that clarified that 401(k) managers can offer climate-friendly investment options to employees. 

Then in a surprise turn of events, this month the House and Senate passed a law overturning that rule. Two Senate Democrats and notable fossil fuel industry allies Joe Manchin and Jon Tester voted with Republicans to overturn it, bringing the issue to Biden's desk for a veto. This move elevated a social movement that has been taking place on Slack channels and online petitions to give regular people climate-friendly investment options, to the nation’s highest office. 

On Monday Biden vetoed the law, the first time he has taken such an action in his presidential career. Fossil fuel lobbyists have put the full force of their power into a campaign to prevent climate-friendly options from getting into retirement plans. What are they so scared of? 

How much retirement money is invested in fossil fuels?

Over $1 trillion is invested in fossil fuel companies from US retirement savings alone. With endowments and foundations pulling their money from the fossil fuel sector, the retirement savings industry has become an important last source of capital for the outdated industry. Given the $1 trillion at stake, it is perhaps not surprising that the fossil fuel industry flexed its lobbying muscle when a government agency released a rule making it clear that 401(k) plan managers are allowed to give employees the option to do what the Harvard endowment and Rockefeller institute have already done and protect their life savings from the risky fossil fuel industry.

How are employers supposed to choose the funds that go in 401(k) lineups?

At its core, 401(k) law, also known as ERISA law, requires employers to offer investment options to employees that make good financial sense: the mutual funds offered in retirement plan menus should have reasonable fees and they should perform well compared to peer benchmarks. 

The fossil fuel lobby narrative is that investors must choose between climate-friendly investments or investments that perform well. 

The data, however, shows that Environmental, Social, and Governance (ESG) and climate-friendly investment options have performed better than traditional benchmarks on the timescales that matter for retirement savings. 

Learn about Sphere’s climate-friendly option.

Why are lawmakers voting against the DOL’s ESG rule?

The false choice the fossil fuel industry offers is at the crux of the politicization of retirement investing. When presented with the evidence that fossil-free investments perform well, the idea of repealing a rule that allows them in retirement plans becomes absurd. And yet, every Republican and several Democratic Senators and Congressmen voted to repeal it anyway.  Why? Maybe it’s as simple as the fact that they are up for reelection, and big oil has big money to fund reelection campaigns. 

The success of the fossil fuel lobby in shaping the retirement investing narrative to pit investment returns against climate-friendly investing has been impressive. Even articles in Politico and CNBC devote the majority of their stories to quoting fossil fuel industry mouthpieces. 

Should climate-friendly options be allowed in 401(k) plans?

To be clear: fossil fuel companies have underperformed the market at large over 3, 5, and 10-year time frames, and the fossil fuel industry has been the most volatile of all industries over the past decade. Data shows that investing in fossil fuel companies has resulted in billions of dollars in losses on retirement-appropriate timescales, as the fossil fuel industry has consistently underperformed the economy at large over the long-term timeframes that are appropriate for retirement planning.

The DOL rule in question does not require employers to take any action related to climate change or environmental, social, and governance investing norms, known as ESG. What the rule does is state that, if climate-related or ESG factors are relevant to the employers’ decisions in assessing whether funds are financially safe investment choices for participants, they are allowed to incorporate those factors.

The irony is that everyone agrees: the financial wellbeing of retirement plan participants should be the top priority of those deciding what funds they can invest in. Technically, because there is so much data showing that climate-friendly investment options perform well, and fossil fuel investments are volatile and risky, those funds that do perform well and avoid fossil fuel risk should be able to be added to retirement plans, even if the ESG rule gets repealed. With that said, many employers choose not to make changes to their 401(k)s out of fear of lawsuits. However, with appropriate documentation and fiduciary controls, these objections can be easily  managed.

What now?

A rule that does not require divestment from the fossil fuel industry, but only permits it, was enough of a threat to the fossil fuel industry that they launched a full-blown lobbying campaign to bring not only Republican lawmakers into line, but also enough fossil fuel money-backed Democratic lawmakers to get the law passed. 

All this because there has been a growing movement of regular people asking their employers for climate-friendly investment options.

So, what is the fossil fuel industry so scared of? We must be doing something right ;)

Learn more about Sphere's climate-friendly option for 401(k)s.

The materials and information in this article have been prepared bySphere, represent opinions, and are intended for informational purposes only.