A look at the fight over ESG investing.
President Biden has issued his first veto to protect a once-obscure financial practice. Why should that matter to you? It has the potential to impact millions of Americans. We’re taking a look at the fight over ESG investing and how it could affect your retirement.
What did Biden veto?
The president vetoed a measure that would have blocked a Department of Labor rule known as the ESG (environmental, social, governance) rule. The policy allows retirement plan managers to consider factors like climate change or pending lawsuits when making investment decisions, and it was intended to undo a Trump-era ban on the practice.
In a letter to Congress, President Biden wrote that the ESG rule lets fiduciaries make “fully informed investment decisions by considering all relevant factors.” As he told Congress, “This Republican-led bill would force retirement managers to ignore these relevant risk factors, disregarding the principles of free markets and jeopardizing the life savings of working families and retirees.”
What’s the big fuss over ESG?
ESG investing used to occupy a relatively small corner of finance, but in recent years it’s moved into the mainstream. Now, more than $18 trillion is held in funds that claim to follow ESG principles.
Many of the popular ESG funds invest in companies that are environmentally friendly or do some measurable good for society, and exclude stocks like big oil or firearms. Proponents say ESG is a way for investors to support causes they care about — and they also say it’s just good business.
“Investing for the long term requires taking a long view of what will impact returns, including demographics, government policy, technological advancements, and the transition to a low-carbon economy,” BlackRock CEO Larry Fink, one of the loudest ESG supporters, wrote in a recent letter to investors. “For years now, we have viewed climate risk as an investment risk. That’s still the case.”
But recently, a subset of conservatives have attacked the practice as “woke.” They claim it’s a political ploy to fund liberal causes and only serves to hurt retirees. Republicans in a handful of states have already pushed through their own anti-ESG legislation.
“Biden just sided with woke Wall Street over workers,” House Speaker Kevin McCarthy tweeted. “Tells you exactly where his priorities lie.”
How does the veto affect your retirement savings?
The ESG rule likely won’t have much of an impact on retirement plans. For one, the policy does not force financial advisers to adopt an ESG-focused strategy — it simply gives them the flexibility to employ one. It’s also pretty narrow: It tweaks what’s known as the “tiebreaker” test, which is used when managers are forced to choose between stocks that are fiscally indistinguishable. The rule says that, in this circumstance, a fiduciary can choose between an investment based on a benefit (like an eco-friendly policy) but not if they expect lower returns or greater risk.
“The remarkable thing about the final regulations is they are so unremarkable,” one attorney specializing in retirement benefits told Forbes.
Now, when it comes to how ESG funds stack up compared to regular old funds performance-wise, it’s not clear. ESG actually outperformed its traditional counterparts in the years leading up to and during the early part of the pandemic. But it had a rocky 2022, mostly because these funds tend to be tech-heavy, and that sector hasn’t fared well lately. But what is clear is that, despite the conservative pushback, there’s still a healthy level of interest in sustainable investing — particularly among young consumers. It seems this practice won’t be going away anytime soon.