US government looks to curb responsible investing enthusiasm

“This proposed change in the US is completely out of step with where global financial markets and responsible investing are headed,” one financial leader says.                      

Responsible investment advocates have slammed a Trump administration proposal  which would discourage pension plans in the US from considering environmental, social and governance (ESG) issues when picking investments.

The US Department of Labor is proposing a new rule to “provide clear regulatory guideposts” for pension plan investments.

In effect, it would prevent those running pension plans from investing in ESG vehicles when they believe this investment strategy may limit financial returns or increase risk for the purpose of non-financial objectives. 

“Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan,” Secretary of Labor Eugene Scalia said.  

“Rather, [pension] plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”

But the plan has come under fire from responsible investing advocates.

Fiona Reynolds, CEO of Principles for Responsible Investing, told CBS this was “the biggest single threat that the responsible investment industry faces”.

Financial services company Morningstar has also criticised the move, noting that its own research has shown ESG investments have consistently outperformed conventional offerings.

Morningstar research last year also found that more than 70 per cent of Americans were interested in ethical investing.

Jon Hale, the head of sustainability research at Morningstar, told the New York Times that the move to discourage ESG investments didn’t make sense.

“Not only could investments that focus on the long-term sustainability of companies lead to truly long-term outperformance because you’re picking better quality companies,” Hale said.

“But there is also the systems argument, that you’re helping to create a financial system and economy that will be more successful.” 

Australian advocates are also concerned. Responsible Investment Association Australia (RIAA) CEO Simon O’Connor told Pro Bono News the proposed change “beggars belief”. 

“If implemented [it] would raise barriers and send detrimental signals to financial markets at a time when more and more investors are realising the importance of responsible investment,” O’Connor said.

“The integration of environmental, social and governance factors into investment decision making is considered the foundation of good investment practice.

“Funds which consider these factors are consistently shown to outperform their mainstream counterparts, and never has this been clearer than during the financial markets turmoil brought on by COVID-19.”

While fearful for the situation in the US, O’Connor said this was unlikely to be an issue in Australia or Europe, where financial sector regulatory regimes increasingly viewed ESG factors as a core part of basic compliance for investors.  

“These trends mirror the rapid shift we’re seeing in consumer and investor expectations, from simply avoiding harm, to creating positive change with their investments,” he said.

“This proposed change in the US is completely out of step with where global financial markets and responsible investing are headed.”