The Department of Labor has chosen to wade into the ESG controversy by stating that pension plan trustees can consider Environmental, Social, and Governance (ESG) criteria when making their investment decisions.
By doing so, DOL has chosen\ to take sides in the political battle over ESG investment standards.
The governors and attorneys general of several Red states, including Texas and Florida, have taken strong public stands against ESG, acting to the extent of withdrawing from investment plans like Black Rock which originally led the way in the private market by requiring companies they invest in to embrace ESG principles.
Critics of ESG have asserted that it is not really in the best interests of their state pension plan beneficiaries to follow ESG priorities that promote “woke” political objectives at the expense of purely fiduciary principles, which are designed to focus exclusively on obtaining the best financial return for their beneficiaries.
This is why several states with Republican leadership are choosing investment opportunities that do not utilize ESG while withdrawing from investor services that do, like Black Rock.
Among the ESG factors that can come into play when plan managers make investment decisions are negative screening, where investments that score poorly based on ESG factors are excluded (such as carbon emissions) or positive screening, where they pick investments that score highly on ESG factors (such as sustainability).
Fund managers also can embrace an “integrated” strategy, blending together selected ESG principles into their overall investment analysis.
Republicans see ESG as an unwarranted intrusion into the free market to impose controversial political stands. Expect this high-profile battle to continue and even intensify over the course of 2023, as both Democrats and Republicans position their parties in preparation for 2024 elections.
