Politicized investing, especially of the “environmental, social, and governance” (ESG) variety, has experienced some regulatory pushback during the last year, but the incoming Biden administration is widely expected to reverse course and accelerate in the opposite direction come January. While many ESG advocates claim that their philosophy of investing is a market-driven phenomenon, it’s likely to get its biggest state-sponsored boost to date. It remains to be seen, though, whether fans of “enlightened” capitalism will ride this wave or be submerged by it.
This year, the Trump administration’s Department of Labor — which has responsibility over pension funds covered by the Employee Retirement Income Security Act (ERISA) of 1974 — published two important rules related to politicized investing. The first rule restated ERISA’s longstanding expectation that plan managers must make investment choices for plan beneficiaries solely with an eye to financial return (with one limited exception) rather than with regard to any “socially responsible” considerations, although plans that allow beneficiaries to self-direct their retirement savings are allowed to include ESG-themed funds as an option, if, in essence, those goals can be achieved without sacrificing financial return. The second rule applied to pension-fund managers voting on corporate shareholder resolutions on behalf of their beneficiaries, and it similarly reinforced that investment returns rather than politics should guide their decisions.
Unfortunately for American retirees, Team Biden is widely expected to ignore or actively undermine the enforcement of both of those rules. Because formally repealing a published regulation can be time-consuming and legally complex (as the Trump administration found out on more than one occasion), it will be much easier to simply publish a new interpretation of what the rules mean. Jon Hale of Morningstar predicted in November that “the Biden [Department of Labor] will look at ways to clarify if not reverse the [ESG pension-fund] rule. We expect subregulatory guidance such as FAQs and advisory opinions to help bring things back toward the old status quo.”
One can do a lot with “subregulatory guidance,” or — as my colleague Wayne Crews likes to call it — “regulatory dark matter.” Suffice it to say that any system under which a new rule that says “X” can immediately be reinterpreted by the next administration as saying “not X” is not going to inspire a lot of confidence in the rule of law or provide the regulatory certainty that investors supposedly crave.
Read the full article at National Review.