(The Center Square) – The U.S. Department of Labor this week proposed a new investment duties rule that would mean fiscal goals cannot be subordinate to environmental, social and governance investing (ESG) criteria in private employer-sponsored retirement plans.
The new rule is necessary “in light of recent trends involving” ESG, the department noted.
ESG, sometimes called sustainable or socially responsible investing, is “a set of standards for a company’s operations that socially conscious investors use to screen potential investments,” according to Investopedia.
It takes into account environmental factors, such as a company’s “green footprint” or environmental impact; social factors, such as a company’s position on social justice issues or its workplace diversity; and governance factors regarding how a corporation is structured, including executive pay and political lobbying.
Critics of ESG argue that it injects progressive politics into investing ahead of maximizing profits, and has caused corporations to become outwardly more political.
ESG also signals a shift from a “shareholder” model, where a company acts to maximize returns in the interests of shareholders, toward a “stakeholder” model in which companies also take into account how their decisions affect its investors.
“The proposal is designed, in part, to make clear that [Employee Retirement Income Security Act of 1974] plan fiduciaries may not invest in ESG vehicles when they understand an underlying investment strategy of the vehicle is to subordinate return or increase risk for the purpose of non-financial objectives,” the Labor Department said.
“Private, employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan,” U.S. Secretary of Labor Eugene Scalia said.
Scalia added that “ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”
Stephen Sokoup, vice president and publisher of The Political Forum, a research and consulting firm for investors, said the rule is meant as “an explicit reminder – or a ‘confirmation,’ as DOL puts it – that the responsibility of the fiduciaries for company retirement plans (that is, the advisors contracted to invest the money on behalf of companies’ employees) is, first and foremost, to ensure that plan beneficiaries have as much money in their retirement plans as is possible.”
BlackRock, the world’s largest investment management firm that earlier this year began handling the Federal Reserve’s debt-buying programs, operates under the “stakeholder” model, according to the Shareholder Equity Alliance, a group made up of conservative shareholders.
The alliance sent a letter to BlackRock CEO Larry Fink in April urging him to abandon the “stakeholder” model and ESG out of fears that it will serve as a barrier to economic recovery after the COVID-19 pandemic.
“In light of your influence, we are especially concerned that your support for some ESG shareholder proposals and investor initiatives brings political interests into decisions that should be guided by shareholder interests,” the letter stated. “Shareholders and society at large benefit when companies are guided by values such as producing quality products and services, having integrity in dealing with customers and vendors, and developing the talents and skills of employees.”
“But when a company’s values become politicized, the interests of the diverse group of shareholders and customers are overshadowed by the narrow interests of activist groups pushing a political agenda,” the letter added.
In a webinar last week that was hosted by Life:Powered, an energy initiative of the Texas Public Policy Foundation, Rupert Darwall, a senior fellow at RealClearFoundation, said ESG investing “represents the biggest threat to American capitalism since the 1930s.”
“It’s threat is because it turns dynamic, innovative, competitive organizations whose focus is on the market and serving customers and generating profits for their shareholders, it essentially turns them into tools of public policy outcomes,” he said.
ESG has led to investors and banks “divesting” from companies over their perceived environmental impacts, particularly in the oil and gas industry.
In January, Reuters reported that more than 40 investing groups sent a letter to energy and mining companies warning them not to take advantage of regulatory rollbacks approved by the Trump administration.
Life:Powered’s Jason Isaac cited an example of a red state pushing back on “corporate virtue signaling” after the Bank of the West said in 2018 that they would divest from the oil and gas industry.
In response, then-Wyoming Treasurer Mark Gordon, who’s now governor, said the state would no longer do business with the bank.
“Red states should be doing that as a counter,” Darwall said, noting that the SEC could also change regulations to “narrowing the scope” of what's considered a lawful shareholder resolution.
* This article was originally published here
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