We think Congress got it wrong -- our response to the recent vote to keep ESG out of retirement plans
On March 1, 2023, the U.S. Senate voted to revoke us U.S. Department of Labor rule allowing retirement funds to consider environmental, social, and governance (ESG) factors in their decision making. ESG Investing is not “woke” investing. It’s common sense, good decision making. The political attack against DOL rules is misguided and will hurt investors.
When a company is building a new facility - do you want it to consider how the site it chooses for that facility could be affected by fire, flood, and hurricanes in the future? Evidence says the severity, frequency, and location of those kinds of disasters is already being affected by climate change and that those impacts will continue to increase. Do you think it would be responsible for management to ignore those risks because they are “woke” environmental risks? Would it be responsible for investors not to consider whether the leadership of a company they might invest in is paying attention to those risks?
How about shifting to clean energy? Credit Suisse thinks within just a few years clean energy will be practically free (less than 1￠/KwH). With energy that cheap, an energy-intensive business that invests in its own clean energy infrastructure is not just doing something good for the planet (although it’s hard to object to that motive), but it’s also making a good business-decision. Even a business that’s not particularly energy-intensive might realize real benefit to its bottom line by converting to clean energy. Is a retirement plan adviser supposed to ignore this good business decision because it happens also to be good for the planet?
Data shows that companies with more diverse leadership teams perform better. Isn’t that a good thing for investors? Monitoring for human and labor rights concerns, data privacy, customer protections, and other social issues can also help identify companies at risk of reputational harm that can negatively affect shareholder value.
Should CEO pay, which directly affects a company’s bottom line, be a consideration for investors, when it has been documented that CEO overpayment is a leading indicator of future poor performance?
Governance factors can include a company's board structure, executive compensation, and shareholder rights. Companies that prioritize strong governance practices are more likely to avoid scandals and make decisions that are in the best interests of shareholders. When a company’s CEO is involved in a scandal it often has lasting impacts on the brand and stock value.
Simply put - ESG investing isn’t political. When done well, it is a valuable tool in an investor’s toolkit to help make better informed decisions. Companies that are well-governed, by a diverse leadership team, that consider both how they will be impacted by a changing world and how they contribute to a healthier, more sustainable planet are the companies most likely to be around and successful for the long-term.
And when we’re talking about retirement plans long-term really matters. Retirement plans are, by definition, long-term investments. ESG factors help investors think beyond the next quarterly earnings call to consider what factors, both inside a company and systemically, will affect that company’s long-term success. This misguided, politically-motivated attack is bad for everyone, but especially for ordinary Americans who rely on the managers of their retirement plans to provide responsible, long-term investment options.
Disclosures:
The opinions expressed are those of Change Finance, P.B.C., Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. This material is not financial advice or an offer to sell any product.
Change Finance, P.B.C., is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Change Finance, P.B.C., investment advisory services can be found in its Form ADV Part 2, which is available upon request. CF-2303-1.