In the 2000s, corporate malfeasance damaged retail investors and pensioners, with scandals like Enron, and ultimately contributed to the financial crisis. In this decade, what’s threatening Main Street investors isn’t corporate greed but corporate vanity.
In trying to save Main Street from (yet) another of Wall Street’s excesses, the Department of Labor (DOL) has put an end to ideological publicity stunts that prize virtue-signaling do-goodery over retirees’ financial health.
Last week the DOL released regulatory guidance that prohibits investment managers from treating Environmental, Social, and Governance (ESG) criteria as an inherently good investment strategy, and noted that doing so may represent a violation offiduciary duty.
“Fiduciaries must not too readily treat ESG factors as economically relevant,” the DOL guidance states. “It does not ineluctably follow from the fact that an investment promotes ESG factors … that the investment is a prudent choice for retirement or other investors. Rather, ERISA fiduciaries must always put first the economic interests of the plan in providing retirement benefits.”
The DOL’s timing is fortuitous. Recently, investment juggernaut BlackRock issued an ultimatum to companies seeking its investment dollars: comply with the ESG criteria we have selected or suffer the consequences. BlackRock recently informed companies it has invested in that “While we are patient with companies, our patience is not infinite.” That sounds less like an investment manager and more like a super-villain with a giant space laser pointed at the Earth, as The Daily Caller pointed out .
Through this guidance from the DOL, the Administration determined that BlackRock and similarly minded fiduciaries “may not routinely incur significant plan expenses to pay for the costs of shareholder resolutions or special shareholder meetings, or to initiate or actively sponsor proxy fights on environmental or social issues.”
Moreover, the new DOL rules specify that expending resources solely to promote ESG proposals violates their fiduciary duty unless the manager can prove that the benefit to investors outweighs any promotional costs.
The Department of Labor is standing up for everyday pensioners and investors, declaring in its press release, that “fiduciaries may not sacrifice returns or assume greater risks to promote collateral environmental, social, or corporate governance (ESG) policy goals when making investment decisions.”
Investing is complicated enough for people who already feel at an information disadvantage. It doesn’t win their confidence to start throwing ESG criteria on top of terms like P/E ratio, EPS, TTM, and MRQ, particularly when ESG reporting is notoriously inconsistent, unreliable, and subjective.
Investors paying attention to the behavior of their fund managers have expressed unease with the increased politicization of their investments, especially when it has the potential to reduce their retirement wealth. A study by Verdantix found that 80 percent of retail investors remain dissatisfied, both with how their investment managers report risk to them and with the reliability of the data they receive from them.
Those who do want to “invest their conscience” certainly have the freedom to do so. However, Main Street investors don’t want their fund managers to reduce the returns on their pension in the pursuit of some sort of political agenda of their own. Thankfully, the Department of Labor is finally forcing investment managers to acknowledge this reality.
Jared Whitley is president of Whitley Political Media, LLC. He earned his MBA from Hult International Business School in Dubai.
