Congress’ recent vote to curtail environmental, social and governance (ESG) issues from consideration in retirement and pension plans is a grave error, says the US SIF, a nonprofit research organization in Washington, D.C., that advocates for socially responsible investing.
“We urge the President to quickly veto the resolution and allow the marketplace to continue to fulfill their fiduciary duty to plan participants and meet the growing demand for sustainable offerings in retirement plans,” said US SIF Managing Director Bryan McGannon, in a press release.
The congressional vote is just the latest development in what has become a political football.
First, back in 2020, a Trump administration ruling limited the ability of retirement and pension plans to include ESG factors when selecting investment options.
Then, in November, the Biden administration’s Department of Labor (DoL) removed those barriers.
This barrier removal is what Congress just rolled back, in effect reinstating the Trump policy.
Biden is expected to veto the congressional decision and reopen ESG as an option for 401(k) managers and others, supporting what McGannon calls “a sensible policy allowing retirement plan fiduciaries to consider all financially relevant information when making investment decisions.”
That policy, he added, “does not mandate the consideration of ESG criteria, as proponents … suggest. In fact, the rule reaffirms ERISA’s long-standing principle that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on relevant risk-return factors and not subordinate the interests of participants and beneficiaries.”
ERISA refers to the Employee Retirement Income Security Act of 1974, which established minimum standards of fiduciary responsibility for most private-industry retirement plans.
Socially responsible investing has been gaining popularity since investors first tried to impact corporate policies in ways that align with their personal values—either by putting money into companies that have proven themselves to be good corporate citizens or by withholding it from those that aren't—decades ago. According to a 2022 study by the Capital Group, 89% of investors now rate ESG issues as an important part of their investment approach.
Mutual funds that embrace this approach used to be somewhat niche but have become so mainstream that most fund companies now offer some mutual funds that are labeled either “sustainable,” “socially responsible,” or ESG—terms that are considered roughly equivalent.
Between 2019 and 2021, the average net annual inflow to sustainable U.S. funds was $47 billion, according to MorningStar. Last year that number fell to $3.1 billion, a decline that MorningStar attributed to the broad market environment, which saw record outflows.
Still, others decry what they see as attacks on ESG investing.
“Some politicians of late have been rallying against ‘woke’ capitalism, whatever that means,” said Joe Keefe, president of Portsmouth, N.H.-based Impax Asset Management, a firm that specializes in investments related to a more sustainable economy, in an email interview. “I frankly don’t think limiting choices available to investors is a market-based approach at all. To the contrary, I see these efforts to limit or mandate choices available to investors as politics, pure and simple.”