Trump administration’s 401(k) rule ignores ESG as core driver of financial performance

The Trump administration is once again ignoring the experts. Despite investment professionals’ widespread agreement that ESG integration bolsters financial performance and is essential to financial decision making, the Administration is pushing to limit Americans’ access to ESG funds.

Over the past few months, financial experts from BlackRock to Morningstar to MSCI have stressed that sustainable investing helps improve long-term portfolio performance. ESG funds not only thrive in bull markets; they help investors weather precipitous financial downturns. At this week’s BlackRock Global Summit, Larry Fink told the crowd that 90% of sustainable indexes had outperformed the market in the first quarter of 2020.

Tom Murray, Vice President, EDF+Business
Tom Murray, Vice President, EDF+Business

Yet on Tuesday, the Department of Labor (DOL) proposed an amendment to the Employee Retirement Income Security Act (ERISA), forcing retirement plan fiduciaries to base their investment decisions only on traditional financial factors. Although the DOL admitted that ESG factors can affect portfolio performance, it framed ESG as secondary to conventional financial metrics. This politicization of ESG and sustainable business more broadly could hurt millions of Americans who depend on their 401(k)s and pensions to plan for retirement.  

According to the Financial Times, “In justifying the proposal, the Trump administration trotted out the old argument insinuating that ESG funds underperform, an assertion that has been repeatedly debunked…”

In a 2015 meta-analysis of more than 2,000 studies on ESG investing, researchers determined that “there is a business case for ESG investing.”

BlackRock echoed this sentiment in January 2020, stating that “climate-integrated portfolios can provide better risk-adjusted returns to investors.” As the former Governor of the Bank of England Mark Carney said, investors must “bring climate risks and resilience into the heart of financial decision-making.”

Ben Ratner, Senior Director, EDF+Business

Neglecting ESG factors heightens systemic risk and threatens the long-term stability of retirement plans.

Investors have demonstrated their confidence in ESG by channeling billions of dollars to ESG-screened assets. Between 2016 and 2018 alone, ESG investing in the U.S. increased by 38%, jumping to $12 trillion in assets under management.

McKinsey & Company declared sustainable investing “the new normal” in 2017, while the Swiss investment bank UBS reported in a 2019 survey that 95% of fund managers globally either integrate or plan to integrate ESG metrics in their investment decisions. The DOL is wrong to assume that ESG investing merely furthers “social goals or policy objectives.” Instead, ESG integration has become a key facet of contemporary investing that must be considered foundational to fiduciary duty.

The DOL’s amendment comes despite rising demand for ESG products — both among institutional investors and plan participants. Deloitte predicted that ESG-screened assets will “comprise half of all professionally managed investments in the U.S. by 2025,” growing at three times the rate of non-ESG assets. COVID-19 will likely intensify this demand.

Representatives from major investment firms including JP Morgan and Goldman Sachs indicated that the pandemic will trigger a long-term shift towards ESG investing that persists well after COVID-19 has subsided.

Under the DOL’s proposed rule, plan fiduciaries — constrained by unnecessarily restrictive ESG regulations — would not be able to meet growing client demand for secure, high-performing sustainable funds. According to GreenBiz, nearly 75% of employees at Fortune 1000 companies believe their employers should offer socially responsible retirement options. The amendment would prevent the DOL from achieving its stated goal: “to act solely in the interest of the plan’s participants and beneficiaries.”

And glaringly, the DOL’s amendment runs counter to international conceptions of fiduciary duty. In its report “Fiduciary Duty in the 21st Century,” the United Nations Environmental Programme Finance Initiative makes clear that “fiduciary duty requires investors to take account of ESG issues in their investment decisions.” “Most markets,” according to the UN, “have seen progress on the incorporation of ESG issues into…fiduciary duty…with the exception of the U.S.”

The DOL’s proposed rule would cement the U.S. behind other global powers on climate finance, including Canada, China, the United Kingdom, and the European Union. While pensioners around the world benefit from proactive ESG integration, plan participants in the U.S. continue to miss out.

Retirement planning depends on long-term thinking and an appreciation for systemic risks. As we confront the effects of climate change and COVID-19, we need policies that recognize the present and future impact of ESG factors on financial performance. The DOL’s outdated position on fiduciary duty isn’t just bad policy, it’s bad for hard-working Americans saving for their future. 

Gabe Malek, Research Fellow on Investor Climate Advocacy at Environmental Defense Fund, contributed to this post.

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