Should we abandon the pension and retirement savings plans of fossil fuel companies? This practice is more and more widespread in the world. In recent years, pension funds in Scandinavia have announced the divestment of the oil and gas companies and the NEST retirement savings fund in the UK, i.e. the IRA-type fund managed by the government in which workers fail if their employers do not. Not to offer any benefits, said it would also withdraw its assets from coal mining, oil sands production or Arctic drilling. In the United States in 2020, two officials proposed a law that the Thrift Savings Plan, the 401 (k) type plan for government employees, also âdecarbonizesâ. And various state pension funds have announced divestment plans, including New York State, where last December I observed that the plan did not appear to comply with that state’s constitutional requirement that Fund investments should focus only on maximizing fund returns for pension plan members. .
With respect to individual retirement savings in the United States, by contrast, the Department of Labor had ruled during the Trump administration that the fiduciary duty to maximize returns for investors precludes such divestment actions in the ERISA-regulated retirement savings (i.e. 401 (k) for private sector employers), although they left a loophole that fund managers could consider climate change as an issue. factor in determining how to maximize returns. At the time, I expressed a preference for a greater choice of workers, observing that there are many choices of providers when it comes to ARIs, from those with an environmentalist approach to those with a religious approach, such that the Catholic Ave Maria mutual funds; and that the equalization of IRA and 401 (k) benefits would allow savers more choice in their retirement savings, sacrificing some return in exchange for ethically compliant investments.
Which brings me to the rule change proposed by the Ministry of Labor on October 14. As described by the New York Times,
âThe Labor Department on Wednesday proposed rule changes that would make it easier for pension plans to add investment options based on environmental and social considerations – and allow those options to be the default setting when registration.
“In a reversal of Trump-era policy, the Biden administration’s proposal makes it clear that not only are pension administrators allowed to consider such factors, but that it may be theirs. duty to do so, especially as the economic consequences of climate change continue to appear. . . . .
“The new regulations would also allow environmental and other funds to become the default investment option in pension plans such as 401 (k) s, which the rules of the previous administration had prohibited.”
The Times insists that despite this change, fund managers would still not be allowed to sacrifice returns for ESG [environmental, social, governance] The factors.
However, despite this generic description, other sources clarify the objectives of the Biden administration. The Financial Times reports that âthe Department of Labor has said that retirement savings plans may also be actively required to factor climate change into their investments. “
The Society for Human Resources Management provided an overview from R. Sterling Perkinson, partner at the law firm Kilpatrick Townsend: âIt remains to be seen whether the DOL will go further in final regulation by making it mandatory to take certain factors into account. ESG, or whether they will maintain a more neutral stance than they are no different from other traditional investment criteria.
Is there a real harm in investing in ESG? Obviously, a lot of people agree with this change. But here are three areas of concern:
First of all, âESGâ is not a single set of universal decisions. To take an example, in a September 2021 report, the Hong Kong Watch group accused Western pension funds that claim to follow the principles of ESG / environmental, social and governance investing, of focusing narrowly on environmental causes. and turn a “blind eye” on human rights violations in China.
In addition, the rush to divest from fossil fuel companies can have serious unintended consequences. As reported at Bloomberg today, in an article titled “Shunning Fossil Fuels Too Soon May Prove Catastrophic,” investment in oil and gas exploration almost halved between 2015 and 2020, according to the IEA. . . . Current investments are unfortunately insufficient to keep pace with the likely global energy demand in the years to come. . . . Without a reasonable and realistic investment strategy – and timeline – for renewable energy production, the effects of avoiding investments in traditional energy sources are likely to be catastrophic if I only have half right. . . . Governments and ESG investors can feel as virtuous as they want. But willfully blind ignorance of the consequences of their actions – deep recessions, shattered societies, and millions more hungry – does not make them any less immoral. The road to hell, after all, is paved with good intentions.
And here’s a more practical concern: ESG investing, even taking its proponents at their word that the returns are comparable to traditional investing, is more expensive. Based on a September 2021 report the Wall Street newspaper remark:
âESG funds tend to be more expensive than other funds. According to another Morningstar study, the asset-weighted average expense ratio of U.S. ESG funds was 0.61% in 2020, compared to 0.41% for all U.S. open-ended mutual funds and ETFs.
âEven small differences in expense ratios can add up over time. For example, by my calculations, an investment portfolio of $ 100,000 with an annual return of 8% would grow to about $ 898,000 over 30 years with an expense ratio of 0.41%, compared to about $ 849,000 if the ratio expense was 0.61%, a difference of $ 49,000. “
It may seem small. But as awareness has grown, 401 (k) fund managers have come under considerable pressure to reduce their fees. It will undoubtedly be of great interest to them to increase their income by convincing employers that they are obliged to choose ESG fund options for their employees, despite the higher fund fee charges. And, of course, it will be the employees who will pay the price.
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