The Trump Administration is moving to dramatically curtail "socially responsible" investments, an area that has seen ain recent years amid mounting 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 run 401(k) or pension plans would be required to consider only the financial return an investment offers — not other factors such as its environmental impact. The proposal also bars Environmental, Social and Governance (ESG) investments from being the default choice in any public or private retirement plan.
The rule, which potentially affects more than $10 trillion held in U.S. retirement plans, poses "the biggest single threat that the responsible investment industry faces," according to Fiona Reynolds, CEO of Principles for Responsible Investing, a United Nations-affiliated investor initiative.
Social goals, financial goals
Over the past decade, ESG investing — sometimes also called "ethical investment" — has moved squarely into the mainstream. In the first quarter of this year, a record $10 billion flowed into sustainable funds, according to Morningstar research. The spurt came even as stock markets around the globe were plummeting, with most ESG funds offering better investment returns during the coronavirus pandemic than their conventional counterparts, research shows.
The Trump Administration has made it clear that it sees ESG as a threat to investment in fossil fuels. In an 2019 executive order aimed at encouraging fossil-fuel development, the White House asked the Department of Labor to report on "trends in energy investments" by retirement plans, and to review rules regarding such plans.
More recently, President Donald Trump has accused banks that declined to fund oil and gas development of "discriminating against these great energy companies."
Echoing that view, Secretary of Labor Eugene Scalia in June described ESG funds as "vehicles for furthering social goals or policy objectives that are not in the financial interest" of private employer-sponsored retirement plans.
While the Labor Department proposal doesn't outright forbid ESG options in retirement plans, it doesn't allow them to be a "default" for any investment option. It also requires plan sponsors to document their choice of an ESG plan to show that it's "economically indistinguishable" from alternatives.
In practice, that means the $3.2 trillion held in U.S. pension funds would be barred from environmentally friendly or socially responsible investments. Defined-contribution plans like 401(k)s, which hold about $8 trillion in retiree savings, would also likely offer fewer ESG options, financial experts say.
The rule would deter companies from inserting political and social goals into employee retirement plans, defenders of the DOL proposal say. It would also make it nearly impossible for employers to include any investments that tout social benefits in their retirement plans — even if those investments are highly profitable.
The rule is open for public comment until July 30. More than 150 comments have been submitted so far, though none have been made public.
Daniel Yerger, owner of MY Wealth Planners in Longmont, Colorado, said he sometimes sees local companies start an employee retirement fund with certain social or political goals in mind, much as you might see in a startup's mission statement.
"Often plan sponsors will say, 'We're trying to set up a fund' and they'll have a laundry list of either their personal or organizational politics attached to it, like, we don't invest in cigarettes or oil and gas," Yerger said. "You have to do some education. If this is a retirement plan specifically, you can't use your employees' retirement plan for political statements."
But such cases are rare, according to financial advisers. Indeed, the federal law governing pensions and 401(k) plans already requires their managers to make decisions in the best interest of workers and retirees.
"I don't know of a single case — ever — where plan fiduciaries have selected ESG investments they believe would underperform," Jon Hale, head of sustainability research at Morningstar, wrote recently. "This simply does not happen."
"Thumb on the scale"
The recent popularity of ESG investing has surged as investors realize that companies' environmental impact are a critical factor affecting their long-term profitability.
Indeed, the world's largest companies expect to lose hundreds of billions of dollars to runaway climate change, as floods, storms and other other extreme weather events destroy data centers, warehouses and corporate offices. Last month, Royal Dutch Shell and BP collectively wrote down nearly $40 billion of assets amid plummeting oil and gas prices.
"Think about where investors would be if this [rule] has been out two years ago. A lot of investors would have lost a ton of money on fossil fuel stock," said Gregory Wetstone, president and CEO of the American Council on Renewable Energy.
He added: "This affects investors across the country and it makes it harder for them to make smart decisions, which the market has already acquitted. There's all this talk about the free market, but when the time comes, they put their thumb on the scale."
At the same time, investments in clean energy can be highly profitable — a fact many investment managers recognize regardless of their politics.
"If Microsoft saves money by using solar panels to power their servers, well, they're saving money. That's good for the bottom line," said Daniel Tobias, a certified financial planner based in Cornelius, North Carolina.
Tobias isn't concerned about the proposed rule's impact on his clients, saying that the socially conscious funds he recommends already outperform their alternatives. However, he and others in the field predicted that the extra scrutiny given to such funds will scare off investment advisers.
"Most people will probably not want to pursue the additional due diligence steps" for socially conscious investments, said Chris Stuckhoff, a wealth 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's unclear if they'll need to reverse those changes to comply with the Labor Department rule.
Heather Slavkin Corzo, head of U.S. policy at Principles for Responsible Investing, has heard this concern from at least one investment firm.
"The Department of Labor is moving in the polar opposite direction from what we're seeing in other advanced economies, where the direction to investors is more toward encouraging them, if not requiring them, to integrate ESG factors," she said in a recent seminar.