by CLAIRE SHARP JULY 30, 2020
The Trump administration positions itself as a
deregulatory force to be reckoned with, and it’s not been for lack of trying,
either. By the government’s own admission. it
has authorized seven deregulatory actions for every new regulation it enacts.
While the rationale behind each of these moves can certainly differ, the Trump
administration consistently likens them to “gifts” for target industries.
But the administration’s intended
beneficiaries don’t always feel the same way. Scores of deregulatory moves have
been met with clear condemnation by industry voices making clear their
preference for regulatory stability and certainty as opposed to unpredictable
and likely impermanent executive governance.
In June, the Labor Department unveiled plans
to “update and clarify” its
investment duties regulation under the Employee Retirement Income Security Act.
These proposed amendments are, ostensibly, designed to restrict private pension
plan fiduciaries’ consideration of environmental, social and governance factors
when investing on behalf of their plan participants and beneficiaries.
Affected fund managers have been unequivocal in
their response — should the proposed changes go
into effect, we can expect to see the performance of retirement plans suffer as
a result, and with them, the capital that would otherwise flow to climate
change-mitigating investment options.
It’s no wonder nobody asked for this. In the
U.S., net quarterly inflows into open-end and exchange-traded sustainable funds
reached a record $10.5 billion in
the first quarter, a nearly 50% increase over the record set in the preceding
quarter according to Morningstar.
These heights, of course, were reached despite
the COVID-precipitated market rout. A recent analysis from S&P Global Market
Intelligence found that of 17 ESG-weighted exchange-traded and mutual funds
tracked, 14 fared better than the wider
market. In Europe, where the majority of the
world’s ESG funds are domiciled, Morningstar found more than half of
sustainable funds consistently outperformed non-ESG funds over the
last decade.
It’s no surprise, then, that when US SIF queried
141 money managers on their reasons for incorporating ESG criteria into their
respective investment processes, 75%
pointed to their seeking higher-yield, lower-risk investments.
A similar, more recent survey — conducted by the government’s own
accountability watchdog, no less — found that 12 of 14 institutional investors routinely
seek more information regarding a listed company’s ESG strategy when deciding
whether to invest.
Another aspect of the proposed ERISA
amendments that we ought to consider is the effect it will have upon
ESG-leaning companies, whose “candidacy” for investment the new rules
effectively restrict. This is particularly concerning for the clean energy
industry, its investors and advocates who understand just how crucial pensions
and other institutional investors are to closing the global renewable energy
financing gap and, in turn, driving the transition toward
a low-carbon economy.
For fiduciaries, the Labor Department’s
revised ERISA interpretation creates new and expensive headaches. And for the
clean energy industry, the revision of pension managers’ legal obligations
amounts to little more than an ill-conceived attempt to support
fossil fuels and other typically non-ESG-aligned sectors.
The question that remains, then, is whom this
proposed change is meant to advantage? Whatever the answer, it’s best we don’t
look a gift horse in the mouth.
Indeed, while the explicit impetus behind this
is categorically absurd, the implicit purpose that we can glean offers
some cause for reflection. Specifically, it is the process through which
fiduciaries will be required to prove their sustainable investments are
economically indistinguishable from similar non-ESG investments that
underscores a perennial challenge in sustainable investing. And that is the
notoriously insufficient identification, collection, standardization and
inter-institutional sharing of relevant ESG data by investors, companies and
regulatory bodies.
Various institutions have undertaken efforts
to combat this, though. In just the last few months, notable initiatives have
ranged from the EU’s adoption of
its “common language” for stakeholders to
disclose the environmental sustainability of their activities, to the recent
launch by a group of international pension funds of their highly
anticipated AI-powered green investing tool,
which tracks companies’ adherence to the UN’s Sustainable Development Goals.
And in the few short weeks since the DOL made public its proposal, four of
America’s largest banks signed on to the Center for Climate Aligned Finance,
and Morgan Stanley became the first U.S.-based global bank to join the
Partnership for Carbon Accounting Financials, a “financed emissions” reporting
project.
Perhaps the proposed ERISA update is a gift in
that it reminds observers in sustainable finance of the work we have cut out
for us. However, beyond stressing the advantages of better data, the proposed
ERISA amendment is a recklessly conceived and hastily deployed obstacle in
renewable energy’s path. Thankfully, those of us in the know can confidently
say that, in the end, it will take more than this to derail the green
transition’s momentum.
Claire Sharp is managing director for the Americas at Kaiserwetter, an energy asset management
company.
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