The Biden administration has quietly finalized a rule allowing employers to channel workers’ 401(k) funds into investments that support causes that address issues like climate change and diversity.
The Department of Labor recently approved a rule affecting nearly 150 million workers and $10 trillion in assets covered by the Employee Retirement Income Security Act of 1974.
The rule requires asset managers and retirement plan managers to consider environmental, social and corporate governance (ESG) factors when making investment choices.
This allows asset managers to balance financial returns with investments supporting wind and solar energy and having a diverse board of directors.
The rule also removes restrictions that block employers from using ESG funds as a default option for workers automatically enrolled in 401(k) plans. This means that workers may be supporting causes that do not align with their political views.
It will also remove Trump-era regulations that require retirement plan managers and wealth managers to make investment choices based solely on the financial interests of participants.
A Labor Department official said the Trump administration has rules that “unnecessarily constrain” fiduciaries’ ability to weigh ESG factors when choosing 401(k) investments.
“We need a final rule to overturn this. [Trump-era] The chilling effect of regulations on integrating ESG factors into investment selection and wealth management processes,” said Lisa M. Gomez, Assistant Secretary of Labor for the Office of Employee Benefits Administration. He told reporters on a conference call to discuss the rules.
Gomez emphasized that investment managers may consider ESG factors when making decisions, but do not have to.
“Climate change is a serious issue, but it is not covered by this regulation,” she said.
Republicans say it’s a concerted effort by money managers to invest Americans’ retirement money in awakened causes.
In November, a group of Republican lawmakers sent letters to 51 law firms across the country, warning them that investing in ESG issues could violate antitrust laws.
The move shows that the battle for “awakened capitalism” will be a key issue when Republicans regain control of the House next month. This makes it clear that Republicans are eager to drag lawyers, chief executives and government officials into Congress to explain why American investments should go to her ESG cause. increase.
Republicans say the plan violates antitrust laws. Asset managers are working together to shift investments to his ESG companies, making it difficult for oil and gas companies to raise capital. They say it ultimately leads to lower production volumes and higher costs.
“The ESG movement is arming corporations to reshape society in a way that Americans will never endorse at the ballot box,” lawmakers wrote. “Of particular concern are efforts to limit the supply of coal, oil and gas, which are driving up energy costs around the world and empowering America’s enemies abroad.”
Republicans are also targeting ESG at the state level. The Republican-led state has removed more than $1.5 billion of her investments from BlackRock, the world’s largest asset manager. This is due to concerns that the company is prioritizing investments in tackling climate change while discouraging investments in fossil fuels.
Republican Texas Governor Greg Abbott signed a bill earlier this year banning the state from investing in businesses that cut ties with the oil and gas industry.
Socially conscious investing has been a political yo-yo for years. Presidents Clinton and Obama have tried to force the Labor Department to consider his ESG, while Presidents George W. Bush and President Trump have tried to limit it.
Critics of ESG funds say there is no standard definition, allowing managers to make all sorts of claims, even if the fund does not actually support such strategies.
Researchers from Columbia University and the London School of Economics compared the records of US companies in 147 ESG fund portfolios with those in 2,428 non-ESG portfolios. They found that companies in the ESG portfolio had a poor record of labor and environmental regulations.
Researchers at the University of Northern Iowa and the University of South Carolina concluded that managers spoke publicly about ESG when they fell short of expectations. When earnings beat expectations, management made few public statements about his ESG.
ESG investment has increased rapidly in recent years. Total assets managed by ESG funds rose from $22.9 trillion in 2016 to $40 trillion last year, according to data from financial institution management consulting firm Opimas LLC.
According to Bloomberg Intelligence research, global ESG assets are expected to exceed $53 trillion by 2025.
Asset managers charge high fees for ESG funds, according to financial services firm Morningstar. A Morningstar study found that the asset-weighted average expense ratio for “sustainable” funds was 0.61% in 2020, compared with his 0.41% for traditional funds. This difference could reduce a person’s retirement savings by tens of thousands of dollars over decades.
Morningstar has dubbed this increase “Greennium,” a reference to high fees and the fund’s commitment to climate change.
There is no hard data to show that ESG funds are any better than traditional investment options, but proponents and detractors are willing to take their side.
“Ultimately, I strongly believe that corporate management should only focus on maximizing shareholder returns. The focus of ESG is on the interests of stakeholders. No, there is no definitive research to support the ability of ESG to deliver superior long-term returns,” said Bill Flaig, founder of an exchange-traded fund that offers conservative investment products.
A study by financial services giant Morgan Stanley found that ESG funds outperformed their peers by 4.3% last year. The company attributed the higher performance to the wider acceptance of his ESG funds among asset managers.
Researchers at France’s EDHEC business school concluded this summer that the ESG market has reached maturity and will soon decline. They said companies would incur more costs in trying to improve their environmental and social scores, leading to lower profits in the long run.
