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A battle between some Republican lawmakers and proponents of ESG investing is heating up.<\/p>\n
Environmental, social and governance (ESG<\/strong><\/a>) investing is an approach that accounts for businesses\u2019 environmental and social risks and has become very popular in recent years, especially among\u00a0young investors<\/strong><\/a>\u00a0worried about climate change and social justice issues. ESG-related assets under management are expected to grow globally to $33.9 trillion by 2026, according to a recent\u00a0report<\/strong><\/a>\u00a0from PricewaterhouseCoopers.<\/p>\n A big argument from those who are pro-ESG investing is that the strategy is not only better for the planet \u2014 it also doesn\u2019t hurt long-term returns. While many investors\u00a0suffered in 2022<\/strong><\/a>, sustainable funds did better than their non-sustainable counterparts, netting more than $3 billion, according to\u00a0Morningstar<\/strong><\/a>. Advocates say investing this way helps lower certain risks, like the long-term impacts climate change will have on businesses.<\/p>\n But many critics aligned with the Republican party are pushing back on investment firms that use this approach, saying that it supports so-called \u201cwoke\u201d politics that not everyone agrees with. And that pushback could result in fewer options in\u00a0401(k)s<\/strong><\/a>\u00a0and state pensions, says Blaine Townsend, director of sustainable, responsible and impact investing at investment management firm Bailard.<\/p>\n “It will have a chilling effect,\u201d Townsend says. \u201cThe markets in general function best when elected officials or politicians aren’t using their bully pulpit to affect the way capital flows in the markets.\u201d<\/p>\n The fight for and against ESG<\/p>\n Why exactly are some GOP officials anti-ESG? It comes down to politics.<\/p>\n These lawmakers say that, by incorporating ESG, large asset managers like BlackRock and Vanguard are pushing a liberal agenda on state pension funds and defined benefit plans like 401(k)s. As former Vice President Mike Pence put it via an opinion piece in\u00a0The Wall Street Journal<\/em><\/strong><\/a>\u00a0last year, \u201cthe woke left is poised to conquer corporate America and has set in motion a strategy to enforce their radical environmental and social agenda on publicly traded corporations.\u201d<\/p>\n Wealth managers say they aren\u2019t supporting an agenda and that taking ESG issues into account is beneficial for stakeholders in the long term. Larry Fink, BlackRock\u2019s CEO wrote in his\u00a0annual letter<\/strong><\/a>\u00a0to CEOs last year that stakeholder capitalism \u2014 the idea that business should serve the interests of all stakeholders like customer and employees, not just business profits and shareholders \u2014 is \u201cnot about politics.\u201d<\/p>\n \u201cIt is not a social or ideological agenda. It is not \u2018woke,\u2019\u201d Fink wrote. \u201cIt is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper.\u201d<\/p>\n For years, there\u2019s also been debate around\u00a0how ESG compliance is measured<\/strong><\/a>. Because there are many data providers and a wide variety of metrics, there are no set standards or procedures. That\u2019s raised concerns of \u201cgreenwashing\u201d \u2014 as in, companies saying they are doing rigorous ESG analysis without actually having sustainable practices or products.<\/p>\n What\u2019s the current state of the ESG debate?<\/p>\n A recent rule from the\u00a0Biden administration<\/strong><\/a>\u00a0permitted fiduciaries \u2014\u00a0financial advisors<\/strong><\/a>\u00a0who are legally obligated to work in the best interest of their clients \u2014 to consider climate change and other social and governance issues when selecting retirement investments for their clients.<\/p>\n In response, several Republicans have moved to prohibit fund managers from considering ESG factors.<\/p>\n Around 25 state attorneys general\u00a0filed a lawsuit<\/strong><\/a>\u00a0in January alleging that the rule undermines the protection of retirement savings, and Florida Gov. Ron DeSantis\u00a0introduced legislation<\/strong><\/a>\u00a0this week that would prohibit the state from using ESG to make financial decisions. Other states, like Texas, have also\u00a0made moves<\/strong><\/a>\u00a0to block state fund managers from putting their money in funds or companies that make investment decisions based on ESG measures. Meanwhile, an anti-ESG working group was formed by the\u00a0House Financial Services Committee<\/strong><\/a>\u00a0to coordinate a response to the rise in ESG investing.<\/p>\n These Republican lawmakers say their pushback comes from wanting investors to have a choice, says Loreen Gilbert, CEO at WealthWise Financial Services.<\/p>\n Large players in the investment industry \u201ccan control a lot of what’s going on in industries and companies by imposing subjective standards versus quantitative metrics,\u201d she says. The anti-ESG sentiment we\u2019re seeing now is in support of these metrics not being imposed on investors, she adds.<\/p>\n Townsend says the demand for ESG investing isn\u2019t about ideology but about institutional investors wanting more information about systemic risks.<\/p>\n \u201cThe anti-ESG perspective that\u2019s being offered is really not new,\u201d he adds. \u201cThe way things are approached now makes this version of it probably a little bit more ideologically based and a little bit louder just because of how polarized politics have become in general.\u201d<\/p>\n What this means for investors<\/p>\n Right now, employer-sponsored savings plans like 401(k)s don\u2019t tend to offer a ton of choice to participants \u2014 including when it comes to ESG investments.<\/p>\n \u201cThe vast majority of 401(k) plans or qualified plans have no sustainable investment options,\u201d says Nick Cantrell, founder and wealth advisor at Green Future Wealth Management. \u201cSo for most investors who want to invest sustainably, they’re doing it outside of their qualified plans.\u201d<\/p>\n In other words, there likely won\u2019t be a big impact on your current employer-sponsored retirement savings plans, unless it is one of the few that includes an ESG offering.<\/p>\n But the current battle could impact any change to future offerings.<\/p>\n \u201cIt could have the possibility of limiting ESG or sustainable investment options within qualified plans, if plan administrators go back to being afraid or still are afraid that they’ll be the target,\u201d Cantrell says.<\/p>\n If you want to have a better understanding of what you are investing in via your retirement plan now, Kavan Choksi, managing director at KC Consulting, suggests reaching out to the plan administrator for details. But, he adds, \u201cunderstand that it is unlikely it will lead to a change unless there is broad support among your organization for such a change.\u201d<\/p>\n