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A Boon for ESG Investing

It is no secret that ESG investing has grown substantially in popularity in the U.S., and according to data from GSIA and Bloomberg, it could exceed European ESG assets by 2022. According to US SIF: The Forum for Sustainable and Responsible Investment (US SIF), ESG investments now represent 33% of “total U.S.-domiciled assets under management.”

Historically low ESG in retirement plans
ESG asset growth potential could receive a huge boost if proposed legislation regarding ESG investing in ERISA plans is passed. To date, ESG investments in ERISA plans have been sporadic, with a lack of clarity around whether investing in ESG is compatible with guidelines and with the requirement to act as a fiduciary and in the investor’s best interest. Policy tends to change with each new administration and shift in Congressional power, and current times are no exception.

Times may be changing
A recent bill, The Financial Factors in Selecting Retirement Plan Investments Act, proposed by two senators and one member of the House of Representatives, would reverse a similarly named bill enacted not long before the elections, The Financial Factors in Selecting Plan Investments Act. This proposed bill would allow plans to consider ESG factors when selecting investments, although still in a prudent and fiduciary manner, just as a plan would evaluate non-ESG investment criteria and choose investments. The bill would also formalize the principle that plans may apply ESG factors as “tiebreakers” when considering comparable options. While this approach was informally understood to be in place previously, it was officially repealed by the late 2020 policy enacted. This bill, if passed, could prove to be a huge benefit to investment managers offering ESG investment options, as well as provide companies with plans that could be potentially more attractive to a younger, more diverse work force.

Long road ahead to passage
The path to passage, however, is by no means certain, and the bill will most likely face opposition from those who were advocates of the previous bill. It remains to be seen if and in what form the passage of a bill will take. The bill does have the support of a number of industry groups, including the Securities Industry and Financial Markets Association (SIFMA), US SIF, the CFA Institute, Morningstar, and the American Retirement Association, which could add pressure to pass it.