According to a Bloomberg report appearing in the November 22 issue of Wealth Management, Goldman Sachs settled a $4 million case with the SEC over Goldman’s ESG research process used to select and monitor securities. Apparently the SEC felt they weren’t properly weighing environmental, social, and governance factors in some of it’s investment products.
The Department of Labor recently announced a new ruling that reverses prior regulations approved under the former Trump administration. In late 2020, the DOL required retirement plan managers to make investment policy on solely on “pecuniary factors”. The final version adds a provision that fiduciaries do not violate their duty of loyalty ‘solely because they take participants’ preferences into account’ when constructing investment plans. The new rule eliminates the ‘pecuniary’ terminology and permits fiduciaries to factor ESG and the economic effects of climate change into the risk and return analysis.
Wall Street, of course, had opposed the old rule and like the new one – they get to create and market new products to the public. The final rule, according to Brian Graff, chief executive of the American Retirement Association, makes it clear that ESG factors do not have to be considered; but that they “may” be considered if they’re considered to be relevant as part of a principles-based fiduciary analysis.
A November 2nd Forbes article, Is ESG Really a Sham, notes that while many of the ESG funds that retail investors expect to be green are really far from it. One problem, he notes, is that so many investors are so focused on low-cost indexing that they have no choice but to include the Coca-Colas and Metas of the world. Retail investors often want solutions-based, positive impact portfolios. To them, an ESG index that has exposure to oil companies is less bad and a portfolio that eliminates oil entirely is better; but one that replaces oil with solar is the best – it’s what they want.
But, ESG indexes typically have minimal exposure to such solutions-based investments as clean energy, green transportation, sustainable real estate, and all the rest. But, the ESG acronym does sell well.
One problem, according to Marc Shoffman of Financial Advisor IQ, is that there are no standardized rules in the U.S. governing what constitutes an ESG fund. ESG is simply not well defined. That’s one of the reasons it has become a political football, as well. Florida and Texas, for example, have banned the use of ESG by state pension funds.
As Pete Krull at Forbes states, retail investors need to understand the difference between ESG investing and sustainable investing. There’s a big difference. I might add that investment outcomes just might be very different, as well.