ESG Investing

For the past few months, all eyes have been on the Department of Labor as the agency began releasing guidance on fiduciary considerations when considering social factors related to an investment. Socially responsible investing is broadly known as “ESG” investing—making investment decisions based on environmental, social and governance issues. Many retirement plan fiduciaries consider factors such as a company’s community involvement, commitment to paying workers fairly and environmental impact. In the first round of DOL guidance, the agency focused specifically on ESG issues. The final regulations step back slightly and focus on whether fiduciaries can consider non-financial (non-pecuniary) factors in making investment choices.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions on the DOL’s position regarding ESG investing.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Byrnes

Bloink

Their Reasons:

Byrnes: Allowing retirement plan fiduciaries to focus on ESG and other non-financial issues when investing plan assets is a dangerous proposition. The DOL rule recognizes this. Plan fiduciaries should be focused on making responsible investment decisions that protect the retirement assets of hardworking Americans. That should always be their primary consideration regardless things like community involvement that have no real bearing on the business’ financial performance.

Bloink: We all know that environmental, social and governance issues can impact a business’ eventual success or failure. Companies don’t operate in a vacuum. It’s not only socially responsible for plan fiduciaries to consider these factors—examining ESG issues when choosing investments can also lead to stronger financial performance in the long run.

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Byrnes: Retirement plan fiduciaries have an obligation to do everything they can to secure plan assets. Sure, some plan fiduciaries might want to support environmental causes or workers’ rights—and they can engage in ESG investing strategies using their own personal funds. When it comes to handling investments on behalf of Americans who depend upon them, fiduciaries should be laser-focused on all issues related to securing the best financial outcome available. ESG investing can blind the plan fiduciary to that obligation.

Bloink: Plan fiduciaries have to consider every potential investment option as a whole in order to adequately live up to their responsibilities. Limiting consideration of non-financial factors can remove important pieces of the puzzle. I’d argue that social issues should be considered when evaluating every investment option.

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Byrnes: Non-financial factors might be something to consider when all other financial factors are equal. Despite this, plan fiduciaries shouldn’t have authority to invest other people’s hard-earned assets to further their own social agenda. In reality, if the DOL hadn’t acted to limit the ability of plan fiduciaries to invest based on their social beliefs, these fiduciaries would be using someone else’s money to support the causes that they believe in personally. That’s not a fiduciary’s role.

Bloink: ESG factors can actually increase the odds that an investment will perform well over time. A company’s stance on things like renewable energy and equal pay can give the company an edge over the competition as time goes by—especially in this rapidly changing market. DOL guidance should seek to encourage this type of investing, not scare fiduciaries into avoiding socially responsible investments altogether for fear of fiduciary liability.