Here is a sentence I never thought I would write: Investment advisers managing socially responsible retirement plans could soon risk breaking the law if they put their client’s best interests first.
The growing movement to transition retirement plans into responsible investments is under threat. Surprisingly, the danger comes from our own government.
My firm builds environmentally sustainable retirement plans. In fact, we created the first-ever environmentally sustainable retirement plan for any school or nonprofit.
But this June, the U.S. Department of Labor proposed a regulation that would make such plans illegal. It would prohibit the use of environmental, social and governance considerations when selecting the core, default investments for a retirement plan.
Why is the Department of Labor proposing such a regressive policy? Politics.
The new rule is the result of a 2019 executive order by the Trump administration for the Department of Labor to encourage fossil fuel investments in retirement plans, thereby harnessing the $30 trillion in workers’ retirement portfolios to prop up the teetering coal, oil and fracking leviathan. It’s no coincidence that the oil and gas lobby is one of the largest financial donors to Republican politicians.
Socially responsible investments often exclude oil, gas and coal companies because of risk considerations related to climate change. The fossil fuel industry considers this a threat.
The new rule modifies the existing law, which requires retirement plan sponsors to be fiduciaries, meaning they must always put their client’s financial interests first. Fiduciaries are required to evaluate every investment prudently, based on risk/return and cost criteria.
The Department of Labor is making the illogical argument that the inclusion of social or environmental criteria in the investment selection process constitutes a violation of this fiduciary duty. Therefore, environmental, social and governance factors may not be taken into consideration when choosing the core investments in retirement plans.
Yet over 2,200 studies have proven that environmental, social and corporate governance investing can often be superior to conventional investing.
The ever-growing consensus in the financial world is that ESG factors are important considerations to improve expected returns and reduce risk. Companies that care for employees, customers, communities and the planet tend to be better investments. This consensus includes industry heavyweights such as BlackRock, Harvard Business Review, Morgan Stanley, MSCI and Goldman Sachs.
A Bank of America study found that the top ESG-ranked companies recorded better stock market performance than the average S&P 500 rival. The same study also found that companies rated in the top 20 performance on ESG factors outperformed companies ranked in the bottom 20 percent by a whopping 3 percentage points.
Simply put, companies that care about the future tend to do better in the future.
Besides potential outperformance, ESG-themed retirement plans also can increase employee participation. The Massachusetts-based ratings giant Dalbar found that 76 percent of employees were more likely to contribute to a retirement plan that included ESG investments aligned with their values.
Also, the market demand for ESG products is overwhelming. A 2019 Morgan Stanley study found that 85 percent of investors are interested in sustainable investing.
In short, the financial industry wants ESG funds, the American public wants ESG funds and investment science proves ESG is a prudent way to invest.
Investment advisers and retirement plan sponsors can fully satisfy their fiduciary responsibilities to act in their client’s best interests while investing sustainably. As the data shows, ESG considerations should be a requirement of all fiduciaries.
This issue is hardly at the forefront of public awareness. But if the new rule becomes law, it will deprive most Americans’ primary savings vehicle — their retirement plan — of investment products that can help us all secure a more comfortable retirement while combating some of our worst social and environmental ills.
The Department of Labor claims it is acting in consumers’ interests, protecting them from opportunists who would sacrifice the retirement savings of hardworking Americans to advance their own social agenda. But like much of the Orwellian doublespeak emanating from this administration, the Department of Labor’s rationale primarily serves those currently in power. Regrettably, in this rule, its beneficiaries are not the American people.
In the meantime, Wall Street is coming to its own conclusion: Investing for the future while destroying the future is absurd.