LAWRENCE A. CUNNINGHAM’S QUALITY INVESTING
Clinton and Obama said you can. Trump said you can’t. Biden says you must.
Many Americans say, “back off.” The shorthand captures much of the ideological poison infecting Washington, where politicians and ideologues of all stripes stick their noses in everyone else’s business.
In this case, I’m referring specifically to federal rules governing retirement fund managers.
For the decades until 1994, their sole duty was to look out for the interests of fund investors based on financial considerations, such as risk and return. The duty is enshrined in the 1974 law, ERISA, that made retirement funds an industry dedicated to protecting the savings of American workers.
But in 1994, the Clinton administration opened the door to allow managers to consider social factors in their investment picks too, then known as “economically targeted investments” (ETIs), at least when related to financial considerations. In 2008 and again in 2015, the Obama administration opened the door further by condoing “environmental, social and governance” (ESG) factors as part of an investment process.
Perceiving excessive departures from the investment mandate into contentious political topics from climate change to race to political donations, the Trump administration began to close the door. In 2018, it advised that managers should not too readily treat ESG factors as economically relevant to investment analysis. In 2020, the government functionally shut the door, prioritizing risk and return, requiring non-ESG investments be considered in every plan, and mandating specific explanations for choosing any ESG alternative.
Now, the Biden administration wants not only to reverse the Trump guidance but go further than Clinton or Obama ever did. In rules just recently proposed, the Department of Labor says it “may often require an evaluation of the economic effects of climate change and other ESG factors on the particular investment or investment course of action” (emphasis added).
In lengthy elaboration, it is therefore clear that the Biden proposal would mandate that retirement fund managers incorporate ESG factors into investment analysis. It says this is “intended to counteract negative perception of the use of . . . ESG factors in investment decisions” left by the Trump administration.
All these political incursions into investment processes and stewardship are misguided. Investment managers and funds adopt their own method of analysis and style of investing. Some believe elements of political and social factors can bear on an investment, others think none of them do, and still others think all of them might. But the bottom line is that it should be up to the investment managers to ultimately decide on their policy and explain it to the employees.
Politicians in the White House and their administrative appointees lack the competence to tell investment professionals how to conduct their investment analysis or to limit or expand their purview. It is certainly outside their competence to direct American workers how their funds should be managed. When politicians and ideologues do so, it is the investors in those funds — American workers — who lose.
The Biden administration acknowledges as much. Lacking expertise of their own, they report reaching out informally to numerous unnamed interested parties, including asset managers, plan sponsors, consumer groups, and investment advisers. In theory, outreach is the right approach, but a representative sampling across those and other relevant groups, such as employees, will not yield a consensus view favoring or opposing ESG investing (let alone agreement on exactly what that means).
Equally troubling, the endless back-and-forth of the political class destroys any long-term plan that fund managers may wish to devise. In fact, the Biden administration reports that its informal outreach revealed considerable market “confusion” or “uncertainty” and complaints of regulatory haste and failure.
Indeed, the pattern of this new politics of investing shows a dangerous direction. Starting with the Clinton/Obama shift to the left followed by Trump’s strong shift to the right, we now face Biden’s hard lurch to the left. It’s scary to imagine the backlash that awaits from the next hard lurch back to the right.
Congress enacted ERISA with a simple mandate that fund managers act as prudent fiduciaries for their investors. Courts for centuries have given rich content and support to the meaning of that legal standard. They don’t need help from a changing cast of ideologues to elaborate the content of this duty. The best thing presidents and their ideological followers can do for investing and workers is to butt out.