March 28, 2023

70. The legal right to invest according to our values

In Nov 2022 the Department of Labor passed a rule allowing 401k managers to consider climate change environmental, social and governance when they make investment decisions.

To put it mildly,  there was some push back to this. And heads up, they’re using the word “woke” incorrectly again.

US SIF Biennial report

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[Intro] Hi everyone, I just wanted to pop in before today’s episode to encourage you to stick around after you hear today’s episode. I have an update at the very end, right after the closing music.

Welcome back to Spend Donate Invest. This is where we talk about ways we can line up our values in terms of the world we’d like to build and we try to line those values up with what we’re doing with our money. I’m talking about where we invest, where we save our money, and how we spend our money. If you ever have something you’re thinking about, please drop a note and your topic might get selected for a future episode. I’ll share the email address at the end of the show.

One topic that has come up a lot on this show is socially responsible investing, sustainable investing, values based investing, ESG investing…whatever you want to call the type of investing where you take a moment to pause and consider the way the company is running itself in regards to it’s impact on the world, this type of investing continues to become more popular. For a lot of us, it isn’t enough to just try to maximize returns, we want more than that.

In 2020, in $17T of professionally managed assets, investors were considering environmental, social and governance issues. Last year, climate change was the leading issue for investors.

Most Americans invest through their 401Ks, they don’t have extra money to invest on their own. So that means if they are interested in socially responsible investing. So the DOL has been going back and forth for years over whether or not they would allow 401Ks to include ESG type of considerations.

Today’s episode is more of a current events episode. And here’s the latest at the time of recording. In short, there’s a legal fight about whether or not investment managers should be allowed to consider these values that a lot of us investors are concerned about. The environment for example.

In Nov 2022 DOL made a ruling called Prudence and Loyalty relating to selecting plan investments and exercising shareholder rights. The new rule allows 401k managers to consider climate change environmental, social and governance when they make investment decisions and vote on shareholder resolutions and board nominations. They don’t have to! The ruling is very clear about this! They don’t have to! But they are allowed to.

So there was some push back to this. And heads up, they’re using the word “woke” incorrectly again.

A few months after DOL made that ruling, in January, 25 states filed a federal lawsuit stating that the rule “prioritizes woke environmental social and governance investing over protecting the retirement savings of approx ⅔ of the US population.” And so in early March, a bill passed that sought to overturn the DOL’s new rule passed through the House and the Senate. So we will have to find out if President Biden vetoes the bill. 

They think that ESG investing is being used to impose liberal ideologies onto companies and their employees. Mostly on this podcast we have talked about how ESG doesn’t go far enough, but there are people who are sounding the alarm that it goes too far. 

They argue that considering ESG means you won’t maximize profits. But that’s not what the data has indicated. When companies have violated basic ESG tenets, they have taken financial losses. MSCI has published several studies that proved that ESG companies were more profitable, had higher valuations, less likely to suffer major drawdowns than their peers with lower ESG ratings. If you want to read more about that, I will link some sources for you.

ESG was never meant to be some kind of goodness rating at all. That’s what is so ironic about this legal battle. ESG is a risk rating. How risky is your investment in a company from an environmental standpoint? Are they likely to have an oil spill? Are they likely to cause a harmful explosion somewhere? That’s how a company gets a bad ESG score. It’s not about whether or not they are a sustainable company, if they tend to choose sustainable building materials or power their operations using renewable energy sources. No. It’s all about risk to your investment. Same with the S and the G of ESG. The S in ESG stands for Social and it is about the risk to your investment based on how employees are paid, what type of benefits they get, etcetera. And the G stands for governance and it is measuring the risk to your investment based on how the company governs itself. Are they transparent about their board, for example.

So that’s what ESG is, it is a bunch of wall street types who are looking at companies and trying to find a more robust way to let you know if your money is safe being invested in a company according to more than just how much profit have they made in the past.

Do I wish that there was a measure that actually told us if a company is exploiting the environment and our people? Absolutely! But we don’t have that yet. And I know if you’re listening to this show, you probably feel the same way.

So, honestly to me it is almost laughable that this tepid metric is inciting this much of a response. I don’t know, maybe the fact that they’re fighting back this hard means that ESG was actually on to something.

At the time of recording, we don’t know yet if President Biden is going to veto the bill that wants to overturn the right for these investment managers to consider ESG type of issues. It feels like asking for the bare minimum, but I guess that’s where we are. So let’s see what happens.

I think that’s it for today. If there’s something else you’ve been thinking about when it comes to lining up your money and your values, send me a note anytime. Did I even introduce myself today? I go by GG, that is short for Genet Gimja. You can drop me a line anytime just send your message to spend donate invest at gmail dot com.

Welcome to the new listeners, I see y’all and I hope you enjoy it here. Let’s bring more people into this conversation, please, so if you know anyone that would be interested in this episode, or another one, please do send them a link. If you don’t know which app they use to listen to podcasts, you can send them an episode link from the show’s website which you can access at spend donate invest dot world.

Alright, let’s talk again soon, take care everyone


US SIF Biennial report 

Hi everyone, thanks for sticking around for the update. Right after recording, some news came in. I’ll just read it from the new york times, this is dated March 20, 2023. 

“President Biden issued the first veto of his presidency on Monday, turning back a Republican effort to bar investment managers from incorporating climate and social considerations into their decisions.

The rule that the president vowed to protect is an obscure investing principle known as E.S.G. — shorthand for prioritizing environmental, social and governance factors. It had been a widely accepted norm in financial circles for almost 20 years until Republicans recently started assailing it as “woke capitalism” that injected Democratic and liberal values into financial decisions. More than $18 trillion is held in investment funds that follow E.S.G. principles.”

So that’s the news. The president used his first veto to make sure that investment fund managers are allowed to consider ESG risk factors but they are not required to do so.

If you listen to this podcast, you probably understand ESG better than the vast majority of people. It’s not a measure of the goodness of a company, it is a measure of the risk to your investment making as much money as possible.

Senator Chuck Schumer put it well when he said “This isn’t about ideological preference, it’s about looking at the biggest picture possible for investments to minimize risk and maximize returns.”

That’s what ESG has always been about. And that’s why it’s almost funny to hear people saying it is woke capitalism. I can’t imagine anything more capitalistic than only caring about a company’s environmental impact but only in so much as it might risk your investment returns. Caring about how employees are treated, but only in so much as it might risk your investment returns. Caring about executive compensation and transparency but only in so much as it might risk your investment returns.

SO that’s the latest, while we wait for something better than ESG to come around, fund managers will be allowed to at least use that, if they want to. Let’s talk again soon.