The Texas Public Policy Foundation’s Life:Powered project submitted public comments supporting the Department of Labor’s Employee Benefits Security Administration’s new guidelines for environmental, social, and governance investing in private retirement plans.
The rule clarifies what has been uncertain guidance about the use of ESG and other “economically targeted investments” in private retirement plans covered by ERISA statutes. It states that plan fiduciaries, who are legally bound to place financial returns first, can only use ESG as a tiebreaker in choosing funds which are otherwise equal in costs and expected returns.
“ESG investing is a political movement that is antithetical to the financial well-being of retirees,” says Jason Isaac, Director of Life:Powered. “This rule is needed to put some guardrails not just around ESG investing but also around any investing trend that is not fundamentally grounded in providing the best financial returns for retirement plan participants. While the rule could go farther to more clearly outlaw the practice, it is a step in the right direction.”
“ESG funds come with higher costs, and ESG weighting schemes are not tied to factors that have been conclusively shown to affect the economic value of a stock or bond,” says Brent Bennett, policy director for Life:Powered. “As many studies have shown, divesting from fossil fuels necessarily reduces diversification and increases risk, leading to lower long-term returns.”
While this rule does not apply to state and local public employee pensions, states and localities can apply the same principles to their own investment practices, as is being done by the Employees Retirement System of Texas.