Several high-profile Democrats in the U.S. House of Representatives have introduced bills aimed at promoting the acceptance and use of environmental, social and governance (ESG) investments by individuals and institutions.
The lawmakers are Representatives Andy Levin, D-Michigan, vice chair of the House Education and Labor Committee and member of the Subcommittee on Health, Employment, Labor and Pensions (HELP); Brendan Boyle, D-Pennsylvania, member of the House Ways and Means Committee; and Cindy Axne, D-Iowa, member of the House Financial Services Committee.
The trio are the lead sponsors on two distinct bills: the Sustainable Investment Policies Act and the Retirees Sustainable Investment Policies Act. According to Levin, Boyle and Axne, the bills would give workers a bigger say in how they invest their retirement savings by requiring plan investors and fiduciaries to take ESG factors into account and explain to beneficiaries how they consider such factors when making investment decisions.
“The investment process should be transparent to them and in line with workers’ values,” Levin says. “Fortunately, we are seeing that there is a convergence of sustainability values and diversity priorities in governance with durable performance over time. Companies perform better if they are aimed at where the economy is going, which is toward sustainability and inclusion across all aspects of how we build, how we make things, how we live and how we move about.”
Boyle says the legislative package “allows Congress to give teeth to what industries, Wall Street and individual investors have made increasingly clear.”
“Taking environmental, social and corporate governance principles into consideration isn’t just good public relations, but is the viable, responsible and profitable approach for America,” Boyle says.
Axne adds that it is “obvious that companies that invest in their future will do better over the long run, and that’s what sustainable investing is all about.
“We as investors should understand how our advisers are evaluating these risks, and having this information will help ensure people can control what their savings is supporting,” the lawmaker says.
Technically speaking, the Sustainable Investment Policies Act amends the Investment Advisers Act, while the Retirees Sustainable Investment Policies Act amends the Employee Retirement Income Security Act (ERISA). Both bills, as is the normal course, would have to be passed by committee and then the full House and Senate prior to becoming law—a prospect that is frankly unlikely so late in the current Congress, especially with a major debate about a coronavirus relief package taking up a lot of lawmakers’ time and attention. However, it is also likely the bills will be reintroduced during the next term.
The introduction of the bills comes shortly after the Department of Labor (DOL) published its own final regulations pertaining to the use of ESG factors by retirement plans. Sources say the final DOL regulations include some significant changes compared with the department’s initial proposal. Chief among these changes is the fact that the text of the final rule no longer refers explicitly to “ESG.” Rather, it presents a framework that emphasizes that retirement plan fiduciaries should only use “pecuniary” factors when assessing investments of any type—which is to say that they should only use factors that have a material, demonstrable impact on performance.
In this sense, the rule does seem to leave ample room for the use of ESG-minded investments, presuming these types of investments are assessed in a purely economic manner and that their financial features make them prudent investments.
These government actions come at a time when demand for ESG investing is growing among American individuals and institutions. A survey by Willis Towers Watson found that while only 27% of employers currently include ESG investments in their executive compensation programs, this figure is slated to double to 54% in the next three years.
“Pressure has been mounting for companies to demonstrate a commitment to ESG,” says Heather Marshall, senior director, executive compensation, Willis Towers Watson. “Some investors are becoming increasingly vocal on environmental issues, while the pandemic and social unrest are accelerating the focus on social issues by many boards. This is driving companies to consider incentive plan metrics that link variable pay outcomes to the successful execution of ESG aspects of their business strategies.”
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