The US Dept. of Labor claims to be worried for Americans. They are worried that your retirement fund manager – the one you picked to help you meet your future goals – might not be chasing every last financial gain possible. They don’t trust you, or your fund manager, to make choices about what you want your money to buy, now or in the future. Thus they have a new proposed rule that interprets the 1974 Employee Retirement Income Security Act (ERISA) in a way that means financial gains – and ONLY financial gains — must be the goal of retirement fund management. Here’s the news release / summary in case you aren’t into fine print.
That means, no Environmental, Social, and/or Governance (ESG) management or screening is allowed for retirement fund accounts [the ones with all the tax benefits] – except for cases that will directly affect the bottom line (e.g. toxic waste being dumped by a company who got caught dumping would be bad for business, so you could avoid investing in that). BUT you and your advisor can’t identify that company’s problem, because the rules say you can’t have management fees that would pay for the research needed to know this, because those would take away from the gains… And then – if no one is watching anyway – the chances of said company getting caught go down. So they are really likely to be quite a profitable company – having saved all that money with the illegal dumping – and you had best be invested in it! (Now are you sensing why this rule might be being promoted at this time?)
People want ESG investing. Morgan Stanley claims that globally, 1 in 4 dollars in invested in sustainability. The analysis of the proposed rule itself (see the end pages of the rule proposal for their list of benefits and costs – it’s informative!) admits this would be a ‘major regulatory action’ affecting hundreds of millions of dollars or more to move in the markets from ESG funds to e.g. index funds, and that there has been tremendous growth in ESG investing in the last few years.
ESG investing also is not proving to lower returns. Recent research analyzing data from ESG funds vs unscreened funds suggests there has been no systematic tradeoff of ex-post returns. The proposed rule is arguing that DoL knows better than both you and your financial advisors – that ESG investing must risk your financial returns, which must be your only goal, and thus it cannot be allowed to be a principle for retirement funds.
There is still time to comment on this and try to make it clear that this short-sighted, limited vision for the future is an unacceptable hamstringing of your own long term plans and vision for a future for yourself and the world. The 30-day comment window at www.regulations.gov will open soon. Make your voice heard – I will update with commenting info here soon.