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The problem of mandatory “socially responsible investing” – Dateway

The term environmental social governance (ESG) invest is relatively new. As described in Forbes,

[An] The slowly advancing approach is ESG activism, where an activist fund will take a stand in the security of a company with the aim of campaigning to make its business better in terms of governance, less hostile to the environment and more socially. responsible.

But the concept of morally selective investing is not entirely new, as it gained popularity in the 1950s, especially among unions. The unions recognized that their shared capital could be focused on investments that, ideally, would provide beneficial returns (at least in their view) in areas such as affordable housing or education.

Unions and the ESG concept remain connected today. An ESG-centric investment selection, if made mandatory, could become, to provide a vague comparison, the equivalent of a syndicate’s range of funds.

Here’s why:

Currently, companies have the ability – and indeed the obligation – to fire underperforming fund managers as part of their pension plans. In fact, federal law requires fund managers to manage funds with a view to maximizing returns. When it comes to managing pensions, fund managers are not allowed to pursue political goals, but must maximize returns from employee pensions in dollar terms.

If ESG-focused investing becomes mandatory, fund managers will mirror unions in how unions reduce worker productivity and company efficiency in pursuing policy goals – that is, that is, if a fund manager working in a mandated ESG environment sacrifices a fund’s monetary income in order to pursue goals set by politicians.

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At the moment, however, federal legislation stands in the way.

ERISA as an obstacle to ESG

On September 2, 1974, following a series of hearings convened by Congress to discuss pension reform in response to so many companies that mismanage their employee pension plans, Gerald Ford enacted the Employees Retirement Income Security Act (ERISA). The objective of ERISA was to increase the accountability and transparency of employers with regard to their fiduciary approach to their employees’ pension plans.

At the time, the unions opposed it because the law limited their flexibility with regard to their available investment offers. Specifically, unionized workers were no longer able to prioritize their own social ends over any investment that would yield the highest monetary return.

ERISA has played a central role in maintaining Zeitgeist for a socially responsible investment in failure. If an employer wants to brag about their passion for the environment, or their loathing for the tobacco industry (and in the age of to satiety “Signaling virtue” many are eager to do so and shout it from the rooftops, returns be damned), the burden of proof is on them to show that the “virtuous” aspect of their fund selection coincides with their legal obligation. – optimal return on investment. In other words, when choosing which of the two competing funds will be selected for the range, the ESG fund must be at least exactly substitutable with (and ideally more beneficial than) its potential non-ESG alternative.

On June 23 of this year, the US Department of Labor (DOL) proposed a rule to further strengthen an employer’s responsibility to subordinate the “virtue” of a fund to its pecuniary advantage. The final decision, which will come into effect on January 12, 2021, “will require the plan’s trustees to select investments and investment action plans based only on financial considerations relevant to the risk-adjusted economic value of the plan. a particular investment or an investment action plan ”.

Now plead for let it go might object and argue that it would be better to let each company decide for itself how its pensions and other funds should be managed. If employees are willing to work in a company where pension managers are known to accept suboptimal returns in search of a virtue signal, then employees should be free to do so.

It’s enough.

But the danger we now face is that fund management will go in the opposite direction, and it is conceivable that fund managers could be faced with mandates in terms of investing employee pensions in ways that promote investment. environmentalism.

Unsurprisingly, fervor for ESG investing is expected to increase with the Biden administration. Democrats’ prioritization of environmentally-focused investments, even if immediate action “involves significant costs,” was further reinforced by President Trump’s decision to withdraw the United States from the Paris Agreement, decision that the majority of Democrats viewed as anti-environmental. In addition, confidence in ESG-centric portfolios has increased due to the expectation that these portfolios will decline due to the US withdrawal from the Paris Agreement (which has not been the case until now). ‘now).

But global policymakers may now pave the way for mandatory ESG-style investing. According to the United Nations Framework Convention on Climate Change (UNFCCC):

The Paris Agreement reaffirms that developed countries should take the lead in providing financial assistance to less endowed and more vulnerable countries, while for the first time encouraging voluntary contributions from other Parties. Climate finance is needed for mitigation, as large-scale investments are needed to dramatically reduce emissions. Climate finance is just as important for adaptation, as significant financial resources are needed to adapt to adverse effects and reduce the impacts of climate change.

Considering that, in particular over the past year, perceived threats to public health or the environment have increasingly become exponentially ‘quick passes’ to advancing the globalist agenda, ERISA seems less and less likely to prevent “altruism” constrained fund management. With “social justice” increasingly diminishing the ability of business owners to structure their businesses as they see fit, it would not be shocking to see a paradigm shift when it comes to the regulation of investments, “better” fund managers obtaining a “right” not to be fired despite sub-optimal financial returns.



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