Debate: Should Social Responsibility Be Factored Into Retirement Planning?

Opinions differ on considering ESG factors when selecting retirement plan investments.

The House Committee on Ways and Means in November held a hearing called “Ensuring that ‘Woke’ Doesn’t Leave Americans Broke: Protecting Seniors and Savers from ESG Activism.” The goal of the hearing was to allow congressional Republicans to argue for banning (or minimizing) the use of environmental, social and governance factors when asset managers and plan sponsors are selecting their retirement plan investments. 

Retirement plan fiduciaries are currently permitted to consider factors such as a company’s community involvement, commitment to paying workers fairly, environmental impact and other ESG factors as a part of their overall evaluation of whether an investment is prudent. 

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about continued challenges to the consideration of ESG options in retirement investing.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink
Byrnes

Their Reasons:

Byrnes: Consideration of ESG factors in making retirement plan investment decisions goes counter to plan sponsors’ duties of prudence and loyalty. Plan sponsors have an obligation to make decisions with the sole goal of maximizing profits and returns for plan participants. 

Bloink: Plan sponsors are not currently able to rely solely on ESG considerations when making their investment decisions. Consideration of ESG factors is a part of the larger analysis of an investment’s potential to generate returns. We cannot say that ESG factors will be irrelevant in every case — that’s simply not the world we live in today. When plan sponsors do consider ESG factors, they must document how those factors play into their overall investment analysis.

Byrnes: Studies show that ESG investments often underperform when compared with other investments. Financial performance should be the only metric that plan sponsors are focused on — because their sole responsibility is to protect the investments made by hardworking retirement investors.

Bloink: We can’t rely on studies outlining past performance as a way to ban consideration of ESG factors. You can also point to studies that show that ESG investments outperform other investments. The fact is, companies that compensate their employees fairly, embrace diversity and consider the environmental impact of their actions are often more likely to succeed than those who continue to cling to outdated ideas.

Byrnes: Plan sponsors shouldn’t have the ability to factor in their own political and social views when making investment selections — essentially  forcing participants to support them as well. Some plan fiduciaries might want to support ESG issues — and they can engage in ESG investing strategies using their own personal funds. When it comes to handling investments on behalf of Americans who depend upon them, fiduciaries should be laser-focused on all issues related to securing the best financial outcome available. ESG investing can blind the plan fiduciary to that obligation.

Bloink: We cannot ignore the fact that ESG factors can increase the odds that an investment will perform well over time. A company’s stance on things like renewable energy and equal pay can give the company an edge over the competition as time goes by — especially in this rapidly changing environment. Department of Labor guidance should seek to encourage this type of investing, including consideration of long-term impacts, rather than scare fiduciaries into avoiding socially responsible investments altogether for fear of fiduciary liability.

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