By ESG Analyst Cameron Toy Kluger
Via Yahoo Finance
Are ESG investments too risky to include in retirement plans?
This is the essential question fueling a battle between the Department of Labor (DOL) and Republicans in the U.S. House of Representatives. On March 21, Representative Greg Murphy from North Carolina introduced the Safeguarding Investment Options for Retirement Act, which would effectively restrict retirement investment managers from considering any factors apart from profit when making financial decisions. This would outlaw ESG, sustainability, and corporate responsibility from inclusion in the $36.7T currently tied up in U.S. retirement assets—a huge loss for the industry. House Republicans explain their reasoning by arguing that ESG holdings are too risky and unprofitable to ensure the safety of retirement funds. They contend that metrics for measuring impact such as sustainability and ESG ratings are unreliable and jeopardize the savings that millions of Americans rely on upon finishing their careers.
The Republican fight against ESG inclusion in retirement plans is not a new development. In June 2023, Representative Andy Barr of Kentucky introduced legislation specifically targeting the Investment Advisers Act of 1940 and the Employee Retirement Income Security Act (ERISA). Despite fiduciaries already being liable to the best interests of their trustees, Barr aimed to limit the ability of advisers to place money in any ESG-inclusive industry. Later that year, in hearings over ESG policy, Republicans insisted that the “radical ESG agenda” represented a threat to the retirement savings of seniors nationwide.
The DOL’s View
Also on March 21, the DOL submitted a brief to the U.S. Court of Appeals regarding a suit filed by several Republican attorneys general. In the brief, the DOL upholds its view that ERISA allows investment managers to include ‘non-pecuniary,’ or non-profit-related, goals while making financial decisions. In the case of two investments having the same risk and return, they would expect that considerations such as ESG could play a role in breaking the tie. Their regulations have long been analogous to this view.
The DOL previously had its regulatory decisions regarding the inclusion of non-pecuniary factors upheld by the U.S. District Court. In Jan 2023, they released a final rule which stipulated the right of fiduciaries to consider ESG factors whenever they see fit.
What’s Next?
Republicans have introduced over 165 pieces of anti-ESG legislation in the past few years, and there’s no end in sight. While retirement savings represent a large portion of household financial assets, they are by no means the only target of anti-ESG legislation. In the future, more challenges will be launched against ESG, specifically pushing back against rating systems, profitability metrics, and the management of public sector funds. The battles will likely rage on in the courts, where regulatory bodies will fight lawsuits upon the creation of any new legislation permitting or enforcing ESG factors in financial decisions.
References
Athanassakos, G. (2023, April 20). ESG investing: The good, the bad and the ugly, or just the bad and the ugly? The Globe and Mail; The Globe and Mail. https://www.theglobeandmail.com/investing/investment-ideas/article-esg-the-good-the-ba d-and-the-ugly-or-just-the-bad-and-the-ugly/
House Lawmakers Trade Barbs over ESG Policy. (2023, November 7). National Association of Plan Advisors.
https://www.napa-net.org/news-info/daily-news/house-lawmakers-trade-barbs-over-esg-policy
Legislation to Restrict ESG Investing in Retirement Plans Resurfaces. (2024, March 22). National Association of Plan Advisors. https://www.napa-net.org/news-info/daily-news/legislation-restrict-esg-investing-retireme nt-plans-resurfaces
Release: Quarterly Retirement Market Data, First Quarter 2023. (2023, June 15). Investment Company Institute. https://www.ici.org/statistical-report/ret_23_q1
The debate over ESG and retirement plans continues | GreenBiz. (2023). Greenbiz.com.https://www.greenbiz.com/article/debate-over-esg-and-retirement-plans-continues