It is in the best interest of all Americans to get as much out of their retirement plans as possible. Eliminating political virtue signaling from investment decision-making is the best way to do it.
But the Biden administration is weaponizing environmental, social, and governance (ESG) investing strategies to both subsidize wind and solar special interest groups and cut off capital to the oil and gas industry. This push for ESG is reducing returns for retirement savings.
Within his first week in office, President Biden issued an executive order on “Tackling the Climate Crisis at Home and Abroad.” Among the provisions in the EO, one directive mandates the Export-Import Bank, the U.S. International Development and Finance Corporation, the State Department, Treasury Department, and Energy Department to develop a plan to “[promote] the flow of capital toward climate-aligned investments and away from high-carbon investments.”
In May, Biden issued another order on “Climate-Related Financial Risk.” The EO aims to redistribute capital away from oil and gas companies that employ hundreds of thousands of Americans to subsidize special interest groups backed by the top 1 percent.
SEC Chairman Gary Gensler has wasted no time in carrying out Biden’s missive.
Earlier this year, Gensler told his staff to look into requiring companies to disclose more climate risk information in annual 10-K reports. Gensler claims that this is what investors want. He is right in the sense that many large institutional investors support these disclosures, but a good number of them have an ulterior motive for doing so. Additional climate risk disclosure information is aimed at shaming companies into changing their behavior, such as finding ways to lower carbon emissions. This makes companies more ESG-compliant and able to be included in ESG ETFs and other financial products. The more companies that are ESG-compliant, the more capital that will flow into ESG funds.
Greater capital flow to ESG funds is beneficial for institutional investors because they offer high fees. As the Wall Street Journal aptly pointed out, exchange-traded funds that invest in ESG products have 43 percent higher fees than other ETFs.
At the same time, returns on ESG-driven investment strategies risk being lower than is the case with their more traditionally run counterparts. According to Pacific Research Institute research, $10,000 invested in an ESG fund would be around 44 percent lower than an investment in a fund that tracks the S&P 500 for ten years.
In fact, some industry experts such as Tariq Fancy, a former chief investment officer for sustainable investing at BlackRock, believe that “the ESG industry today consists of products that have higher fees but little or no impact and narratives that mislead the public.”
So, if employees’ retirement savings accounts are being invested in ESG funds, they are not getting the best bang for their buck.
The Trump administration’s Department of Labor saw the issues with exposing retirement accounts to ESG investments and issued two rules to mitigate their politicized investing. The first rule would have ensured that plan fiduciaries, or asset managers handling the retirement plans, make investment decisions based on “risk-adjusted economic value” when considering investment options. The second rule would ensure that plan fiduciaries maintain their duty of loyalty and focus solely on creating economic value for the retirement plan beneficiaries during proxy voting.
Together these rules would have reduced the risk that social and political objectives would dilute the returns to retirement plan beneficiaries, meaning, in other words, that it would no longer be run solely for their benefit, as intended by section 404 of the Employee Retirement Income Security Act of 1974 (ERISA).
Unfortunately, Biden’s Department of Labor decided to reverse course and prioritize woke investing strategies over maximizing returns for retirement accounts. Biden is effectively allowing pension plan managers to redefine their fiduciary duty to the plan beneficiaries, in the name of ESG and other forms of socially responsible investing, a move that may well mean that could hit the amount in a beneficiary’s pension pot when the time comes to retire.
However, there are solutions to ensure that Americans are secured after retirement. The Texas legislature passed, and Gov. Greg Abbott signed, a bill that would aim to maximize returns for state employee pensions and retirement funds by punishing governmental entities from contracting with or investing in financial institutions boycotting fossil fuel companies. The bill went into effect in September.
Under the new Texas law, retirement funds will not be subjected to using taxpayer dollars to pay high fees for ESG products more focused on political initiatives than creating real economic value for employees.
If Biden had the best interests of the American people in mind, he would seek to improve access to high-yielding retirement savings for all Americans. Instead, Biden seems to be more interested in encouraging ESG investments, which are best suited for lining Wall Street’s pockets.