Trump administration sets the clock back on ESG integration in pension investments

The US Department of Labor has issued a new rule proposal that requires pension funds fiduciaries to prove that by implementing ESG-oriented investments they are not sacrificing financial returns to social good, regardless of investors’ preferences. The PRI, Morningstar and Nuveen have already expressed their opposition to the rule, which might impair sustainable investments by pension funds.

On June 23rd, the US Department of Labor (DOL) has issued a proposal on a new rule which requires fiduciaries managing private pension funds to provide evidence that ESG-oriented investments have been chosen “solely on objective risk-return criteria”, thus to demonstrate in detail that they are not sacrificing financial returns or accepting higher risk through investment aimed to promote any kind of social good.

Through this proposed rule, the DOL reaffirms the standard interpretation of fiduciary duty in which only financial returns and risks have to be considered in guiding investment and managing decisions regarding pension funds, as any ESG fund would need to be proven to have exactly the same profile as non-ESG alternatives.

The UN PRI, with its 3100 institutional investors and corporate signatories, as well as Morningstar and Nuveen, are drafting critical responses to the proposal. According to PRI: “The primary objective of a retirement system is to provide financial security for savers in retirement. It’s easy to succumb to a narrow understanding of how to fulfill this mandate, but we also ought to consider the wider social, environmental and economic implications of the pension and retirement policies and structures that we put in place.

A paper by Albuquerque et al. shows that, during the stock market crash and increased volatility brought by Covid-19 and the consequent lockdown measures, stocks with higher ESG ratings have had significantly greater returns, with lower volatility, and greater operating profit margins, confirming that ESG integration in investment decisions serves as a valuable risk management tool and does not necessarily lead to sacrificing financial returns.

As reported by Morningstar, from 2018-19, investments into sustainable funds have almost fourfold and the number of funds stating to integrate ESG factors has increased from 81 to 564. In this scenario, the proposal has been interpreted by many as an effort by the Trump administration to uphold the fossil-fuel industry that has lost investors’ interests, especially during the Covid-19 pandemic that has brought great challenges to oil-related businesses, while progress in renewable energy technology and efficiency has continued during the period.

The proposal strikes in sharp contrast to the European scenario in which regulators are increasingly putting climate change at the top of its agenda, not only with the European Green Deal, but also through the activities of the ECB, as Christine Lagarde, the current president, recently declared to be strongly committed to greening the ECB activities and bond-buying operations.

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