- While the U.K. moves to ask retirement funds to disclose their portfolios’ carbon footprint, U.S. authorities may limit pension plan managers’ ability to factor in environmental, sustainability and governance issues in their investment decisions.
- The moves are happening as more investors are interested in value-aligned assets and ESG investment offerings have surged in the last few years.
- The Department of Labor says ESG investment vehicles are vaguely defined and ESG funds often charge higher fees than other financial instruments.
While the U.K. moves to ask retirement plans to disclose their portfolios’ carbon footprint in an effort to combat climate change, U.S. regulators are considering restricting asset managers from focusing on environmental, sustainability and governance issues when investing pension funds.
The divergent trends on both sides of the Atlantic are happening as more investors are interested in value-aligned assets and ESG investment offerings have surged in the last few years. The issuance of green, social and sustainability bonds is expected to rise 24% to $400 billion in 2020, according to the credit rating agency Moody’s.
In a move supported by some financial activists, the U.K. government is considering legislation that would require pension plans to disclose their climate change plans as the country moves to become carbon emissions neutral by 2050.
There is about £3 trillion ($3.77 trillion) invested in the country’s pension sector and the funds should be used to promote investments that have positive social or environmental effects, says David Hayman, the campaign director for Make My Money Matter, a group urging pension plans to invest money in ESG-friendly portfolios.
“What we’re trying to do is encourage people to engage and understand where their money is invested and make deliberate choices which better align with their individual values,” Hayman told Karma. “Whether that is excluding tobacco … or focusing on climate and sustainability.”
The organization has attracted signatories such as Oxfam, the World Wildlife Fund and the financial institution BNP Paribas. The group is trying to get U.K. pensions to commit to net-zero carbon emissions in their portfolio by 2050 and halve those emissions in the next decade.
In the U.S., ESG investors are grappling with a tougher regulatory climate.
The Department of Labor is considering changes to the Employee Retirement Income Security Act (ERISA) that would require fund administrators to solely consider financial criteria when making investment decisions and not take into consideration environmental, social or governance matters unless they directly impact the financial returns for investors.
The DOL says ESG investment vehicles are fraught with problems. The agency says “ESG rating systems are often vague and inconsistent,” and ESG funds often charge higher fees because of the need for additional monitoring and evaluation of the specialized targets.
Josh Zinner, the chief executive officer for the Interfaith Center on Corporate Responsibility, says the DOL’s argument does not consider that ESG factors often positively affect the gains made by investors.
“This is really an attack on the concept of ESG investing,” Zinner told Karma. “The economic evidence they cite is so thin and flies in the face of an overwhelming amount of academic literature and investment strategies by some of the world’s biggest investors.”
BlackRock, the world’s largest asset manager, recently unveiled a watchlist of companies that it says have not made sufficient progress in the fight against climate change. The company has vowed to hold such firms accountable. Financial institutions are relying on data from the United Nations’ Intergovernmental Panel on Climate Change, which advises governments on climate science. The IPCC says rising carbon emissions are leading to global warming and more extreme weather that may disrupt economic activity worldwide.
Activist investor organizations such as the ICCR are preparing to respond to the DOL over its proposed changes to the retirement income law. The DOL says the public’s comments have to be submitted by July 30, which Zinner says is a very short time period. He foresees that investors may take legal action against the DOL if the changes are made.
“I would be very surprised if there were no legal challenge to this rule making,” Zinner said.