The Trump administration is back with another policy change affecting the environment: restricting American’s access to ESG funds. Recently, the Department of Labor (DOL) proposed a change to the Employee Retirement Income Security Act (ERISA). This amendment will block retirement fund managers’ investment decisions “that put social goals before profits.”
This decision raises many red flags for financial experts. Larry Fink, CEO of BlackRock, a company managing $7 trillion in assets, said, “90% of sustainable indexes had outperformed the market in the first quarter of 2020.”
Even though sustainable companies are now outperforming traditional fossil fuel businesses, the new ESG policies will affect investors and our future in the sustainability market.
Why ESG fund prevention damages investors
Funds that advertise themselves as ESG may face difficulties. Trump’s administration argues ESG funds underperform, but there have been multiple analyses proving this claim wrong. According to a 2015 analysis with 3700 findings, researchers state, “Based on this sample, we clearly find evidence for the business case for ESG investing.”
These findings often contradict what some investors think because of the biases in many portfolio studies. If the 2015 analysis didn’t seem convincing enough, a report states ESG funds have increased from $8.1 trillion in 2016 to $11.6 trillion in 2018—a 44% increase.
Through different reports and analyses, sustainability investments are becoming the new norm. A recent poll showed that 95% of millennials are interested in integrating ESG into their investment decision. If Trump’s ESG limitations stick, the investment trend will fade even if they yield good returns on investment.
Lisa Woll, CEO of the US SIF Foundation states, “This is not just unnecessary rule-making, but it’s damaging to the interests of long-term investors.”
Especially during Covid-19, people are beginning to understand the importance of sustainability. Companies have time to reflect on their business model, especially as we continue to face climate change and zoonotic diseases. This is why limiting how many companies and individuals can invest is a growing concern.
What this means for the future
As our world needs to focus more on sustainability, ESG funds have been popular with pension plans. Pension plan managers often believe sustainability investing limit climate change, so they emphasize sustainability funding. However, the new changes will make it even harder since “social goals” are seen as less of a priority.
Many other country powerhouses like China and Canada have taken initiative for climate change. If this policy implements, China and Canada will have more climate financing than the United States.
Especially for the U.S. huge resource spending, we should be even more supportive of ESG funds. These funds are not “underperforming” and Trump’s change should not limit our sustainability future.
Jalen Xing is a Writer at theRising and the co-founder of Students For Hospitals. You can pitch him stories at jalen.xing [at] gmail [dot] com.