Retirement fund managers were mandated by federal law up until 1994 to serve the interests of investors based on financial considerations like risk and return. Furthermore, ERISA was enacted in 1974, established the retirement fund industry to protect American workers’ savings.
It was during the Clinton administration that managers were permitted to consider social factors in investing decisions. There is also the concept of “economically targeted investments” (ETIs), at least where financial concerns are involved. Obama’s administration continued the process in 2008 and again in 2015, condoning the inclusion of environmental, social and governance” (ESG) factors in the investment process.
Trump’s administration began to close the door on excessive investment topics that are contentious political; from climate change to racial issues to political donations. It suggested managers are not to over-estimate the economic impact of ESG factors when analyzing investments in 2018. With an emphasis on risk and return by 2020, and a requirement to include non-ESG investments in every plan, the Trump government stopped allowing ESG investments, effectively closing the door.
With the new administration, the Biden administration, it aims to go beyond what Clinton or Obama have ever done and to reverse the Trump guidance.
The Department of Labor has just proposed rules that states that it “may often require an evaluation of the economic effects of climate change and other ESG factors on the particular investment or investment course of action” (emphasis added).
In lengthy elaboration, it is therefore clear that the Biden proposal would mandate that retirement fund managers incorporate ESG factors into investment analysis. The document explains that the initiative is “intended to counteract negative perception of the use of . . . ESG factors in investment decisions” left by the Trump administration.
It is misguided for the government to interfere with investment processes and stewardship in this way. Investors and fund managers employ their own unique investment knowledge, strategies and methods. There are those who believe political and social factors can influence investments, there are those who think none do, and there are those who believe all can. Ultimately, the investment managers should be responsible for deciding on their policy and explaining it to workers, not politicians with little or n insight about investment.
Political appointees and officials in the White House are ill-equipped to direct investment professionals as to how to conduct investment analyses or to limit their authority. Managing American workers’ monies is certainly outside the scope of their competence. Investors in these funds lose out when politicians and ideologues meddle into investment.
Numerous stakeholders, including asset managers, participants, plan sponsors, consumer organizations, and investment advisers were consulted informally under the Biden administration report. Theoretically, such outreach makes sense. Nevertheless, a representative sample of those and other groups, such as employees, is unlikely to disclose a consensus on promoting or rejecting ESG investing.
Fund managers, meanwhile, will find their long-term plans destroyed by the endless back-and-forth with the political class. As a matter of fact, the Biden administration report indicates that “uncertainty” or “confusion” prevailed in markets and that “regulation haste and failure” were widespread complaints.
As a matter of fact, this recent politics of investing follows a difficult path. After Clinton/Obama’s leftward shift, Trump’s strong rightward shift, and now Biden’s strong leftward shift, we now face the next difficult confrontation. We can only imagine what kind of backlash awaits if the right takes another hard turn toward the right. For the sake of investing and American workers; politicians and ideological followers should butt out of this space.