E.S.G. Funds Could Be a Default Option for Retirement Plans, Labor Dept. Says

The proposed change indicates that plan managers are allowed to consider E.S.G. factors in their initial analysis of investments instead of only at the very end — a change that Labor Department officials argued still maintains that principle, because managers still are not permitted to sacrifice returns for those kinds of ancillary benefits.

For example, the proposed rule said that accounting for climate change, “such as by assessing the financial risks of investments for which government climate policies will affect performance,” can benefit retirement portfolios by mitigating longer-term risks.

“If an E.S.G. factor is material to the risk-return analysis, that is something we think fiduciaries should be taking into account,” Ali Khawar, an acting assistant secretary in the department, said in an interview. “That carries different weight than five or 10 or 15 years ago,” he said, given the increase in data quantifying the risks of ignoring E.S.G. and the benefits of taking it into account.

The investment category has grown significantly in recent years. Total assets in E.S.G. funds rose to $17.1 trillion at the start of 2020, up 42 percent from the start of 2018, according to the U.S. SIF, a nonprofit focused on sustainable investing. That investment total represents one in three dollars under professional management.

Just a small fraction of those investments are held by retirement plan investors, a U.S. SIF report said, even as interest is rising, particularly among younger investors.

The growing interest has prompted the Securities and Exchange Commission to seek public comment on requiring companies to disclose climate risks.

Other E.S.G. factors are harder to analyze, some experts said. Phillip Braun, clinical professor of finance and associate chair of the finance department at Northwestern University’s Kellogg School of Management, said societal and environmental benefits were more difficult to uniformly measure.

Article source: https://www.nytimes.com/2021/10/13/your-money/biden-esg-retirement-investing.html