Last Wednesday, the Labor Department announced it will not enforce a Trump-era rule that makes it harder for managers of 401(k) plans to consider environmental, social, and governance factors (ESG) in investment decisions. ESG funds, which are increasingly popular with investors, recently surpassed $31 trillion in market value. One reason for their popularity? ESG-minded funds outperform their competitors.
The Trump rule, which was rushed through at the end of 2020, discourages managers of pension and 401(k) plans from offering ESG funds to investors. In doing so, Trump practiced a reverse form of the “political correctness” he likes to criticize. The rule will reduce consumer choice, plan diversification, and, ultimately, investment performance.
The Trump administration justified the rule by saying ESG-related concerns were non-financial, but banks, investment advisors, and economists filed comments that expressed the opposite opinion. For a summary of comments submitted by asset managers like Vanguard, State Street, and Blackrock, you can read the blog we posted after Trump’s Labor Department first proposed the rule.
The Biden Labor Department’s decision moves us back towards a system that allows managers to maximize long-term returns for their clients. Instead of discouraging ESG offerings, we should encourage plan managers to factor ESG-related concerns into their analyses. Companies that ignore the regulatory and material risks associated with climate change or the reputational risks that accompany poor labor practices are oftentimes worse off financially.
This is also about consumer choice. According to Morningstar’s research, 72% of the U.S. adult population is interested in sustainable investing. By creating unnecessary red tape, Trump’s rule restricts retirees from choosing plans that align with their values.
Last year, Business Forward submitted a comment, including local business leader statements, urging the Department of Labor to withdraw the rule. Moving forward, the Department of Labor should consider issuing guidance that encourages the consideration of ESG concerns, promoting consumer choice, plan diversification, and ultimately, investment performance.