The US government wants to push a law through Congress that will make it more difficult for pension funds and fiduciary managers to allocate assets to ESG-driven funds or investments. The plan has sparked the ire of the asset management sector.
Last week the Employee Benefits Security Administration, which is part of the Ministry of Labour, sent the bill ‹Financial Factors in Selecting Plan Investments’, which imposes these provisions, to the White House.
This bill takes the view that ESG is detrimental to returns and pursues goals other than just financial returns, and proposes to amend the so-called Employee Retirement Income Security Act of 1974, so that all pension and 401(k) plans must give priority to economic interests over ‹non-pecuniary goals›, reports Bloomberg quoting the proposals of the Department of Labor.
As many as 130 asset managers and consultants in the US have now written letters to the US government protesting against the plan. ‘You cannot simply separate ESG from the risk/return analysis of the 21st century,› Jonathan Bailey, head of ESG investments at Neuberger Berman, voices the sectors main concern.
Fragmented legislative process
President Trump is trying to get the changes to the law through Congress in four months, a process which, according to lobbyists in Washington, normally takes 18 months. Investment Officer first reported on the upcoming bill in July.
Critics point out that the Department of Labor does not take seriously any of the (scientific) information provided that suggests that ESG does contribute to a better risk-return ratio.
Morningstar states the bill is so shoddily constructed that it will not survive a challenge in court. ‘It has very far-reaching consequences for the accumulated pension assets of millions of Americans,’ said John Hale, head of ESG research at Morningstar. The bill has been rushed through the legislative process, says Hale, with the aim of amending the law ‹before the current administration gets tossed out of office›. The Ministry of Labour took just one month this summer for a round of consultations following the bill that was publicly presented on 30 June.
Energy sector
The attack on ESG-focused investments follows strong criticism of the American energy sector, which has so far made little progress in making their businesses more sustainable. The sector, which supports President Trump in his re-election campaign, describes the growing attention among institutional investors as a ‹witch-hunt›, according to Bloomberg.
In the US, like in Europe, investors are increasingly turning to ESG. This year, US investors have already invested $20 billion in ESG ETFs – much more than the $9.2 billion in 2019.
China
As early as May of this year, Trump opposed the intention of an American pension fund to invest in Chinese companies. According to Trump, this is contrary to US national $ 600 billion Federal Retirement Thrift Investment Board (FRTIB), a pension fund for civil servants, to follow a different benchmark for the international part of its equity portfolio. This benchmark - the MSCI All Country World ex-US Investable Market index - also includes Chinese listed companies.