Investors do not have control of their retirement investments when their nest egg is gambled on Wall Street. This is becoming abundantly clear as the government is now trying to address their climate change agenda through the power of investing. Known as ESG Funds, the government is incentivizing asset fund managers to think of climate-related financial risks when making allocations in pension and 401(k) plans under regulations in the Employee Retirement Income Security Act (ERISA). ESG is a form of sustainable investing, in which companies are put under a microscope and analyzed to be given a score based on their Environmental, Social, and Corporate Governance risks — hence ESG.
Financial activists pushed ESG analyses into the forefront of investing conversations to encourage more ethical investing that not only benefits the stakeholders but ensures that money is being invested in companies that are helping the environment, serving the communities in which they do business, and taking care of their employees. Supporters of ESG and sustainable investing argue that these factors are often overlooked in traditional financial planning, which is primarily focused on earning a consistent return. Opponents to this type of financial analysis argue that ESG is nothing more than a gimmick used to boost marketing and public relations. For example, Tesla, who revolutionized the electric car business, was removed from the S&P 500 ESG Index from the sustainability benchmark over allegations of employees being mistreated in the workplace. Critics of the decision were quick to point out that Amazon, ExxonMobil, and Walmart all remained within the top 30 holdings on the ESG Index despite their substantial amounts of carbon emissions and allegations of workplace misconduct.
Despite sentiment surrounding ESG investing, the Biden administration sided with the financial activists by issuing an executive order in 2021 instructing the federal government to treat climate change as a financial threat to Americans’ retirement security. In response, the Department of Labor proposed a rule that would “make investment decisions that reflect climate change and other environmental, social, or governance (ESG) considerations, including climate-related financial risk,” according to over thirty Attorney Generals, State Auditors, State Treasury officials, and more, from across the country. Opponents to the rule believe that this could hurt investor returns by using non-financial variables to determine asset allocation in defined benefit and contribution plans. Additionally, former Blackrock CIO Tariq Fancy, raised the concern about potential conflicts of interest for fund managers who may be put into a situation where they can follow ESG guidelines at the risk of losing money, or not follow the guidelines and increase their chances of earning a higher return.
At the end of the day, the Biden administration and the Department of Labor is taking their first steps in turning asset managers — whose responsibility should be to the clients they represent to maximize their returns — into activist investors, who prioritize non-financial factors. Many who fear the economic policies of the current administration have additional concerns about this DOL rule evolving into activist investors picking winners and losers based on non-financial data, while strong-arming companies to fit the ESG mold at the potential detriment to their company’s bottom line, which in turn hurts average investors.
Although the sustainable investment market has seen billions of dollars flow into the coffers of companies listed on the ESG Index, researchers have determined that their returns have been less than impressive. The Harvard Business Review released a report that highlighted multiple studies across several different reputable financial journals and found that while ESG portfolios were supposed to promote sustainable and ethical investing, researchers found that this was not the case. Researchers at Columbia University and the London School of Economics reported that ESG portfolios actually had a worse compliance record for following environmental, labor, and corporate governance regulations. Furthermore, the University of Chicago published a paper in the Journal of Finance in which they compared the performance of the highest rated ESG funds to the lowest rated funds, and although ESG funds brought in more capital during the time of their study, their returns on investment were worse. Additional studies conducted on this comparison between ESG and non-ESG funds uncovered that ESG funds have higher investment fees which further erodes investors’ nest eggs.
Despite their intent for good, the result of investing in an ESG fund increases the risk of losses and exposes investors to higher fees. The government’s push to force more of these funds into investors’ portfolios establishes a responsibility among asset managers to consider climate related risks when making recommendations and allocations. Doing so presents a greater possibility of running into a conflict of interest as ESG funds sacrifice financial returns for a facade of environmental sustainability.
The primary goal of investing is to accumulate wealth and maximize returns to generate a larger nest egg for retirement. This is no longer the intended goal of investing based on the actions taken by the Biden administration to force asset managers to consider non-financial factors in making investment decisions. Sustainable investing and ESG standards not only threaten investors’ ability to retire with security and peace of mind, but risks worsening a growing retirement crisis here in the United States.
When Americans transition into the retirement phase of investing, they have the opportunity to take advantage of strategies that put their interests first by guaranteeing the protection of the wealth that they have accumulated during their working careers.