The Trump Administration is moving to dramatically reduce “socially responsible” investments, an area that has seen a increased interest in recent years amid growing alarm about climate change.
The Department of Labor is proposing to change a rule governing employee retirement plans to discourage money managers from so-called socially responsible investing. Under the plan, employers and others who manage 401 (k) plans or pension plans should consider only the financial performance of an investment, not other factors such as its environmental impact. The proposal also prohibits environmental, social and government (ESG) investments from being the default option in any public or private retirement plan.
The rule, potentially affecting more than $ 10 billion in US retirement plans, poses “the single biggest threat facing the responsible investment industry,” according to Fiona Reynolds, CEO of Principles for Responsible Investment, a United Nations affiliated investor initiative.
Social goals, financial goals
Over the past decade, ESG investment, sometimes also called “ethical investment,” has been carried directly into the mainstream. In the first quarter of this year, a record $ 10 billion flowed into sustainable funds, according to Morningstar research. The outbreak occurred even as stock markets around the world plummeted, and most ESG funds offer better investment returns during the coronavirus pandemic than their conventional counterparts, according to research.
The Trump Administration made it clear that it views ESG as a threat to fossil fuel investment. In a 2019 executive order meant to encourage fossil fuel development, the White House asked the Labor Department to report on “trends in energy investments” in retirement plans and to review the rules regarding those plans. .
More recently, President Donald Trump accused banks that refused to finance oil and gas development of “discriminating against these large energy companies.”
Echoing that view, Secretary of Labor Eugene Scalia described ESG funds in June as “vehicles to promote social goals or policy objectives that are not in the financial interest” of retirement plans sponsored by private employers.
While the Labor Department proposal does not directly prohibit ESG options in retirement plans, it does not allow them to be a “default option” for any investment option. It also requires plan sponsors to document their choice of an ESG plan to demonstrate that it is “financially indistinguishable” from the alternatives.
In practice, that means the $ 3.2 trillion in US pension funds would be excluded from environmentally friendly or socially responsible investments. Contribution plans defined as 401 (k) s, which have about $ 8 billion in retirement savings, It is also likely to offer fewer ESG options, financial experts say.
The rule would discourage companies from inserting political and social goals into employees’ retirement plans, advocates of the DOL proposal say. It would also make it almost impossible for employers to include any investment that promotes social benefits in their retirement plans, even if those investments are highly profitable.
The rule is open for public comment until July 30. So far more than 150 comments have been submitted, although none have been made public.
Daniel Yerger, owner of MY Wealth Planners in Longmont, Colorado, said he sometimes sees local companies starting an employee retirement fund with certain social or political goals in mind, as you can see from a startup’s mission statement.
“Often, plan sponsors will say, ‘We are trying to establish a fund’ and have a list of their personal or organizational policies attached, such as, we do not invest in cigarettes or oil and gas,” Yerger said. “You have to do some education. If this is a specific retirement plan, you can’t use your employees’ retirement plan for political statements.”
But such cases are rare, according to financial advisers. In fact, federal law governing pensions and 401 (k) plans already requires their managers to make decisions in the best interest of workers and retirees.
“I am not aware of a single case, where the trustees of the plan have selected ESG investments that they believe will underperform,” wrote Jon Hale, head of sustainability research at Morningstar, recently. “This just doesn’t happen.”
“Thumb on the scale”
The recent popularity of investing in ESG has increased as investors realize that companies’ environmental impact is a critical factor affecting their long-term profitability.
In fact, the world’s largest companies expect to lose hundreds of billions of dollars to uncontrolled climate change, as floods, storms, and other extreme weather events destroy data centers, warehouses, and corporate offices. Last month, Royal Dutch Shell and BP collectively wrote down almost $ 40 billion of assets amid falling oil and gas prices.
“Think about where investors would be if this [rule] He has been gone for two years. Many investors would have lost a ton of money in fossil fuel stocks, “said Gregory Wetstone, president and CEO of the American Council for Renewable Energy.
He added: “This affects investors across the country and makes it difficult for them to make smart decisions, which the market has already cleared. There is all this talk about the free market, but when the time comes, they put their thumbs on the scale.”
At the same time, clean energy investments can be highly profitable, a fact that many investment managers recognize regardless of their policy.
“If Microsoft saves money by using solar panels to power its servers, well, they are saving money. That’s good for the bottom line,” said Daniel Tobias, a certified financial planner based in Cornelius, North Carolina.
Tobias is not concerned about the impact of the proposed rule on his clients, saying that the socially conscious funds he recommends already outweigh his alternatives. However, he and others in the field predicted that the additional scrutiny given to such funds will scare investment advisers.
“Most people probably won’t want to take the extra due diligence steps” for socially conscious investments, said Chris Stuckhoff, an estate manager based in Irvine, California.
Some investment firms, including BlackRock, the world’s largest money manager, have already decided to incorporate ESG factors into their investment decisions. It is unclear whether they will need to reverse those changes to comply with the Department of Labor rule.
Heather Slavkin Corzo, US chief policy officer on Principles for Responsible Investment, has heard this concern from at least one investment firm.
“The Labor Department is moving in the polar opposite direction of what we are seeing in other advanced economies, where the direction towards investors is more to encourage them, if they do not require them, to integrate ESG factors,” he said in a recent report. seminar.
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