How ESG Advocates Want to Redefine Your Retirement

E conomic policy is changing fast in Washington, and your retirement account may soon experience the whiplash. One of the best policies enacted by the previous administration was a rule that made it clear to the people who manage pension funds that, when selecting investments, they need to prioritize returns for beneficiaries instead of pursuing their own political agendas. Unfortunately, Joe Biden’s Department of Labor is currently in the middle of repealing that rule. This effort, while obscure to the average American, is part of a much larger effort to redefine the world of saving and investing to permanently serve progressive policy goals. That should alarm not just conservatives, but anyone who wants to be able to enjoy a comfortable retirement someday.

The rule in question has to do with pension funds that are regulated by the Employee Retirement Income Security Act (ERISA). Congress passed ERISA at a time when there was widespread concern that both private employers and unions officials were mismanaging the pension funds that had been entrusted to them, and that American workers were being shortchanged on retirement benefits that they had been promised. The default of the Studebaker Corporation on its pension obligations in 1964 was an especially high-profile example that served as a “focusing point” in the emerging political movement for pension reform. Later, the NBC News 1972 special report “Pensions: The Broken Promise” also elevated the issue in the public conversation.

In response to these concerns, Congress passed ERISA in 1974. As the 2020 Trump administration rule about pension fund investing reminded us, the law requires pension fund managers “to act solely in the interest of the plan’s participants and beneficiaries, and for the exclusive purpose of providing benefits to participants.” That’s it: nothing in there about staving off climate change, advancing gender diversity, or trying to drive tobacco companies out of business. Pensions should be dedicated to funding the retirements of workers, and that’s it — that’s the law.

In the interest of enforcing that law, the current rule was shepherded through the notice-and-comment process by former Secretary of Labor Eugene Scalia, and it reminded all of the relevant players of their responsibilities. It specifically warned them against the increasingly popular practice of using environment, social, and governance (ESG) factors to select investments, rather than traditional calculations of risk-adjusted return. Managers who did choose to include ESG factors in their investment decisions were expected to be able to demonstrate that these political considerations weren’t resulting in lower profits, but were only being used as a tiebreaker among options with otherwise identical expected returns.

But the same people pushing ESG-focused investing before the advent of the Trump rule are now promoting the Biden effort to repeal those safeguards. To the average reader, the language of the two rules will sound similar, but the difference is clear: Pension fund managers will now have a green light to use the retirements savings of beneficiaries to promote their own environmental and social policy goals. The language of the new rule actively encourages this, claiming that, for example, “Climate change is particularly pertinent to the projected returns of pension plan portfolios,” and encourages investment managers to emphasize the “long-term investment horizons” associated with pension plans in general. Is it impolite to ask whether workers retiring in five years really want their monthly checks to depend on what their plan manager is hoping the global average temperature will be in 2095?

Theoretically, even the new proposed rule doesn’t allow pension-fund fiduciaries to accept lower returns because of ESG motivations: The environmental and social goals are supposed to be tied to financial performance. But in the era into which we appear to be moving, the definition of the R (‘return’) in ROI (return on investment) may be rather more flexible than was once assumed. Many of the people promoting ESG-integrated investing are the same ones who have shown a highly suggestible ability to redefine long-standing legal concepts when it is ideologically convenient.

Consider what happened last summer, when many public demonstrations and protests (some of which degenerated into riots) were violating Covid-inspired bans on large public gatherings. If the pandemic is so serious that all church services were banned, many Americans asked, why are anti-law enforcement protests allowed? The logically flexible answer was easy: racism is itself a public health threat, thus there was no conflict between forbidding all other public gatherings because of Covid and allowing protests against abuse of police powers. A single sentence simultaneously moved the goalposts on the two biggest public-policy issues in the country, all with no new laws or regulations having to be proposed, much less debated or enacted.

The same thing can happen to your retirement savings. All a pension-fund manager will have to do under the proposed rule is to make the argument that society, and therefore the economy, will be better off in a world where ESG goals are enacted. Over the extended time horizons that the Biden rule encourages, that will be easy and non-falsifiable. ESG-motivated investment managers will then have a free hand to invest in any ideologically motivated venture that, say, promises to end racism and create unlimited solar power, whether or not a conventional analysis would find those to be reasonable investment considerations for a pension fund. If it’s going to make the world a better place in the future, that’ll be good for everybody, including pension beneficiaries, right?

This argument would likely generate enthusiastic nods around the conference table at the next World Economic Forum meeting in Davos, but the market itself is not so easily gamed. This inconvenient reality will no doubt lead to further rhetorical contortions when it comes time to explain why pension investment returns inevitably end up declining. Expect to see a financial version of the CNN screenshot from 2020 in which correspondent Omar Jimenez stood in front of multiple burning buildings in Kenosha, Wisconsin with the now-infamous chyron “Fiery But Mostly Peaceful Protests.” If this Biden pension rule goes forward, we may be about to find out what happens when millions of American workers end up with “under-performing, but mostly profitable” pensions. It’s not going to be pretty.