August 2020
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August 2020
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Analysis: After opening up 401(k) to private equity, Scalia looks to bar ESG

green ESG button on keyboard
By Paul Mackintosh  
July 2, 2020

Already widely criticised for opening up 401(k) pension plans to private equity investment, the US Labor Department is now looking to bar plan fiduciaries from using environmental, social and governance (ESG) investing criteria.

The department has proposed a rule “to confirm that ERISA [the Employee Retirement Income Security Act] requires plan fiduciaries to select investments and investment courses of action based solely on financial considerations”. In other words, not ESG criteria.

“Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan,” Labor Secretary Eugene Scalia said in a statement. “Rather, ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”

The proposal has drawn at least as many objections as the move to open up 401(k) plans to private equity investments in that it’s inconsistent and hypocritical. If ESG criteria are so suspect, why aren’t private equity’s often questionable returns and valuation calculations? And does the Labor Department really have a pressing need to rule on the issue?

ESG assets as a whole haven’t exactly had a hard time demonstrating outperformance lately. The Financial Times noted in an article in early June that the majority of ESG funds outperform the broader market over ten years, which looks pretty good compared to some of the latest academic analysis of private equity performance. Does the Labor Department really want to block off access to that?

There is an arguable, but intellectually respectable, case to be made that investors with fiduciary responsibilities should focus only on those when allocating assets, most of all for pensions. Warren Buffett is just one investor to have taken that position.

But the timing and the inconsistency of the Labor Department’s moves don’t smack of that level of analysis and policymaking. And if Mr. Scalia is simply looking to stake out a conservative position in his office and antagonise liberals, well, people’s pensions are a pretty dumb place to play culture wars.

I have an alternative interpretation of his actions. Some of President Donald Trump’s more pragmatic, hard-headed and conservative backers in the financial community may already be factoring in presumptive Democratic nominee Joe Biden winning the presidential election in November. Accordingly, they’re pushing hard to squeeze as many favourable moves as they can out of the administration in return for all their campaign donations and other pork, before it shuts up shop.

If this is so, expect to see more rushed, slanted and damaging US policymaking over the summer and in the autumn.