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Nicklaus: Do-good investing is gaining ground fast. Trump's Labor Department wants to slow it down

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David Nicklaus is a business columnist for the St. Louis Post-Dispatch.

Do-gooder investing has caught on with both the public and Wall Street, which now manages $17 trillion in funds that pay attention to social and environmental issues.

That’s one-third of all professionally managed money in the U.S. Clearly a lot of investors want their portfolios to be aligned with their values.

Regulators in Washington, though, seem leery of what’s sometimes called sustainable or socially responsible investing. The Labor Department issued a rule this month that will make it more difficult to include do-gooder funds in a 401(k) or other retirement plan.

The rule says plans must choose investments based solely on pecuniary, or financial, factors. If a plan wants to use a fund that screens for, say, a company’s carbon footprint or record in hiring and promoting women, it must document how that information has “a material effect on risk.”

That creates extra hoops for a plan sponsor to jump through, and it may have a chilling effect on the popular category of ESG funds, which focus on environmental, social and governance issues.

There’s a healthy argument over whether these funds can achieve superior returns while claiming the moral high ground. Fans of ESG funds say they avoid big risks, such as discrimination lawsuits and pollution cleanup costs, that sink less virtuous companies.

Larry Swedroe, chief research officer at Buckingham Strategic Wealth, says such risks are already reflected in stock prices. An ESG manager has different preferences than other investors, but not necessarily superior information.

“If a lot of money flows into the ESG field, the stock prices of the ‘good’ companies will outperform in the short term,” Swedroe said. “That happens until a new equilibrium is reached and everybody is invested where they want to be. Then the ‘good’ stocks should get lower returns, because they’re priced higher.”

That’s not an argument against ESG investing, Swedroe said, but it is “the price you should expect to pay for expressing your values.”

Measuring actual performance of ESG investing is difficult because there’s no uniform definition of the strategy. One study found 70 different providers of ESG ratings, with wide variance in scores for the same company.

MSCI’s 400-stock ESG index, one of the best known, has outperformed the broad market in six of the last 10 years and lagged in the other four. That’s hardly a resounding victory, but it’s enough to give investors hope that they can invest in line with their values without too much sacrifice.

Now, though, the Labor Department is trying to make it harder for 401(k) investors to access the ESG strategies. Daniel Elfenbein, professor of organization and strategy at Washington University’s Olin Business School, wonders whether the department’s decision is really about protecting investors.

“The types of companies that are excluded from socially responsible funds are typically tobacco, alcohol, firearms and oil and gas firms,” Elfenbein said. “My cynical version of this is that the lobbyists from the industry groups have been active, and this is about trying to protect the interests of those industries.”

President-elect Joe Biden will, of course, soon appoint a new Labor Secretary with a different vision of how to protect retirement-plan investors.

This issue is one where social progressives and Wall Street are on the same side. When the Labor Department took comments on its new rule, money-management firms were overwhelmingly against it.

They’ll be cheering enthusiastically if the new administration finds a way to open the door wider for do-gooder funds.


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David Nicklaus is a business columnist for the St. Louis Post-Dispatch.

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