The U.S. Department of Labor – which has recently proposed a rule that would limit retirement funds’ investments based on environmental, social, and governance (ESG) criteria – is unlikely to incentivize more funds to invest in oil and gas companies, Bloomberg Green Columnist Kate Mackenzie says.
At the end of last month, the U.S. Department of Labor proposed a new rule, which explicitly says that retirement plan fiduciaries must select investments and investment courses of action “based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.”
“The Department is concerned, however, that the growing emphasis on ESG investing may be prompting ERISA plan fiduciaries to make investment decisions for purposes distinct from providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan,” it said in the proposed rule.
According to Bloomberg’s Mackenzie, it looks like the Department of Labor sees ESG investment strategies as underperforming the market, while in reality, they have outperformed them in recent years, studies have shown.
“Generating more hurdles to the incorporation of ESG criteria will have a chilling effect, leading to plan participants losing access to ESG options---many of which have outperformed their indices over time and especially during the market shock related to COVID 19,” Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment, said, commenting on the proposed rule.
A US SIF 2018 survey of sustainable investment firms in the United States showed that three-quarters of 141 money managers of total assets of over $4 trillion said that their motivation for incorporating ESG criteria into their investment process was the desire to improve returns and to minimize risk over time, Woll said.
According to the Environmental Defense Fund, the proposed rule ignores the ESG investment strategy as a core driver of financial performance.
“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 fund said.
