On October 30, on the eve of the U.S. presidential election, the U.S. Department of Labor delivered a punishing slap at the concept of environmental, social and governance investing with a rule whose preamble snubbed the use of ESG vehicles in employee retirement plans.

Eight days later, on November 7, Joe Biden was declared the winner of the 2020 U.S. presidential election, putting that rule in jeopardy.

Now what? ESG options are already scarce in defined contribution plans. But demand for environmentally friendly investments is increasing.

It’s hard to say what will happen if the DOL, at the moment under the thumb of Republican Secretary of Labor Eugene Scalia, suddenly goes through the looking glass and becomes a more friendly play space for sustainability investors. But in many ways, say observers, the damage has been done because retirement plan sponsors have likely been spooked by the DOL’s message.

The rule said plan sponsors are legally obligated under the ERISA law to chase one thing and one thing only: the optimal return for their investors, not the greater good offered by environment- and governance-minded specialist fund managers. (The department said, in fact, that getting top returns for retirees was itself a social imperative.)

Such words would likely find their way into future lawsuits brought by plan participants’ attorneys against anybody who pursues what they’d call a non-pecuniary (and thus non-fiduciary) misadventure for the promise of a better world. If an ESG fund stuffed into a retirement plan were to perform poorly, plan participants (and their attorneys) might smell blood.

One of the department’s complaints is that the term “ESG” itself has meant a lot of inconsistent things, parroting ESG critics who have decried “a lack of precision and consistency in the marketplace with respect to defining ESG investments and strategies, as well as shortcomings in the rigor of the prudence and loyalty analysis by some participating in the ESG investment marketplace,” the DOL said in its preamble to the rule.

But investors’ money is already walking, in many ways ahead of the regulatory regimes. Companies such as BlackRock and State Street have added their voices to the chorus and said environmental and social sustainability is a valid measure of the long-term health of companies. They’re pushing for more metric disclosures from the companies they invest in when it comes to greenhouse gas emissions, worker safety and diverse management teams.

After all, a company that wastes energy and water, that pollutes, that pursues discriminatory employment practices or generally behaves like a bad corporate citizen is eventually going to irk regulators, run up fines, get sued, and generally do violence to stock value in the long run. That’s the argument, anyway, and investors have increasingly embraced it. ESG index funds reportedly reached $250 billion in assets in the second quarter. Accounting giant PwC has estimated ESG funds will represent 60% of all mutual fund assets by 2025.

And there have been some claims of vindication for ESG measures. Merrill Lynch wrote in 2019 that companies using Thomson Reuters’ environmental and social justice scores would have avoided 90% of the bankruptcies in the S&P since 2005.

But BlackRock has also been a critic of the patchwork of mismatched disclosures and metrics, arguing the standards for ESG measures need to be much more robust and consistent. In an October 2020 commentary called “Sustainability Reporting: Convergence to Accelerate Progress,” the giant asset manager said it has been calling for a wide embrace of more rigorous reporting standards that can be widely picked up by analysts to make apples to apples comparisons. It’s hard to create standards without benchmarks.

“The proliferation of disclosure initiatives, many of which are overlapping, has led to duplicative efforts by reporters and a lack of consistent and comparable data,” BlackRock said. “We believe that this could be resolved by aligning and converging to establish a globally recognized sustainability reporting framework and set of standards. Ideally, these would be developed by those with domain expertise in the private sector and supported by public policy makers as they move to require more comprehensive corporate reporting.” BlackRock applauded a group of accounting and standards organizations that had announced plans to forge those standards into something more seamless.

But doing so is difficult because ESG is not an asset class, say experts. It’s a factor overlay, and the U.S. Securities and Exchange Commission and others are trying to get a hold on where exactly that factor adds value. It’s hard to see whether it’s the “E,” the “S” or the “G” that’s rooting out long-term value. Thus, different companies have come up with a patchwork of “scores” to determine the materiality of an environmental or governance metric, and the materiality means different things to different companies. Bloomberg might boast 700 sustainability indicators on its terminals, but not all will matter to all investors poking around all the industries.

“Not all ESG issues matter equally,” Russell Investments said in a 2018 report, “Materiality Matters.” “For example, fuel efficiency has a bigger impact on the bottom line of an airline, than it does for an investment bank.”

The SEC said in a September subcommittee report on the topic: “Traditional investment styles such as growth/value can use commercially available third-party returns-based and holdings-based performance attribution systems to easily decompose sources of returns and see what bets the fund is taking, from security selection to allocation decisions. … ESG currently does not have such attribution systems.”

When it comes to investors in retirement plans, the safer bet might be active managers who use ESG as part of the investment process but compete with mainstream benchmarks, says Sarah Bratton, head of sustainability, North America at Schroders. “Thematic, impact and screen strategies are likely inappropriate,” Bratton says. “An issue for plan sponsors is how they are going to handle passive ESG solutions. Many of these indices are constructed utilizing third-party ratings that are a bolt on to the investment process rather that the embedded approach focused on materiality that active managers take.” So the passive approach—simply buying an ESG fund rather than going to an active manager who is looking at ESG as just one material aspect of a company—could be seen as non-pecuniary and thus scary to, say, a plan sponsor looking to avoid trouble.

Vikram Gandhi, a senior lecturer of business administration at Harvard Business School, teaches an MBA course called “Investing—Risk, Return, and Impact” that looks at how these factors come into play in a company’s analysis. He says the SEC has been hesitant to mandate some kind of consistent disclosure on ESG so that it becomes easier for investors and other stakeholders to “compare performances, measure and quantify externalities of companies.”

He notes the work of the Sustainability Accounting Standards Board, which has created a cross-listed “map” of industries next to a list of checkboxes enumerating which sustainability issues they might run into (the map is at https://materiality.sasb.org/). It includes a list of five broad categories, the environment and social capital being just two, which are then broken down further into subcategories such product safety, air quality, greenhouse gas emissions, cybersecurity, among others. These are then marked as either being material or non-material items across a broad swath of industries—health care, food and beverage, financials, etc.

Companies like asset management firms are going to require questions about consumer-initiated complaints about financial products. Tech companies are going to be asked about their data security and employee diversity. Iron and steel producers are going to be asked about their supply chain management. Miners are going to be asked about wastewater.

A lot of time, the problems of figuring out the value to a company depends on whether the management teams are thinking short term or long term. Because in the short term it might be hard to see how the value is created and the risk measured, Gandhi says.

“If I have to accelerate my carbon transmission program where my entire supply chain, my sources of energy, how much I emit myself, I need to reduce that … well, that’s not going to come free of cost,” he says. “You’re going to have to make an investment in the next three or four years to make that happen, but in the longer term that would be the right thing to do.

“Now, if I am one player in an industry of five, and two industry participants do that and therefore it hurts their short-term profitability, and the other three do not, how do investors look at this?” Gandhi adds. “Which investors will say ‘Oh my God, these guys missed their quarterly earnings. Let’s dump the stock.’” Some companies might resist the criticism, but many companies can’t or won’t put up the near-term capital and risk damaging earnings metrics for a greater good.

Gandhi says the success here depends on three things: investors’ demand for these metrics; company management teams stepping up and discussing how these metrics will affect their long-term value; and finally, the regulators’ requirement that the metrics be furnished—which is currently the missing piece. The reporting is currently voluntary for ESG framework reports. The SEC has created guidance for reporting material factors, but these disclosures aren’t required, which would help, says Gandhi. “If there could be a regulation that said, by industry, here are the standards that you need to disclose, which are relevant for your business, I think that would be a big, big step in the right direction.”

Democratic commissioners on the Securities and Exchange Commission have started nosing in that direction, which could be a harbinger of change under a Joe Biden administration. In a speech on November 5, Commissioner Allison Herren Lee called for more standardized reporting on climate risk.

“The SEC should work with market participants toward a disclosure regime specifically tailored to ensure that financial institutions produce standardized, comparable, and reliable disclosure of their exposure to climate risks, including not just direct, but also indirect, greenhouse gas emissions associated with the financing they provide, referred to as Scope 3 emissions,” Lee said in the speech.

In early September, five standard setting organizations made a joint statement that they were driving at creating performance reporting standards where they were all on the same page (the organizations included the Global Reporting Initiative, the Sustainability Accounting Standards Board, the International Integrated Reporting Council, the Climate Disclosure Standards Board and CDP—the former Carbon Disclosure Project). Also in September, the International Federation of Accountants called for the creation of an International Sustainability Standards Board.

Another SEC commissioner, Caroline Crenshaw, spoke to the need for sustainability reporting in August of this year in a discussion about the modernization of reporting requirements.

“The question of whether climate change and human capital are material concerns of investors is no longer academic,” Crenshaw said. “The 2019 PG&E bankruptcy after the tragic California fires and the more than $220 billion in damages to the U.S. economy from the 2017 hurricane season demonstrate that the risks posed by climate change are here, real, and quantifiable. Companies know how climate change is impacting their businesses, supply chains and the economy overall; so should their investors.”