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.

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