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Sustainable Investing and the Election

Part I of our series on the election and ordinary investors.

It is a common refrain this time of year: a laundry list of items that are “on the ballot,” beyond the decision to vote for candidates for president, Congress, and statehouses across the country. Here is another: The availability of sustainable funds, and those that use environmental, social, and governance metrics and information to guide their investment decisions, is on the ballot in November as well.

To be clear, no matter the outcome of this election, we do not believe that investor interest in sustainable funds will go away. Investor demand is high and growing, and we do not see that trend reversing. However, should President Donald Trump win re-election, the administration will advance policies that lead to slower growth in sustainable investing than we would otherwise see in a Democrat Joe Biden administration. Similarly, professional asset managers are increasingly incorporating ESG considerations into their investment decisions and will do so regardless of the outcome of the election.

Nonetheless, the election will have concrete consequences for sustainable funds and strategies, as will be explained here. If Trump wins, it will be harder for plan sponsors to offer these funds in their retirement plans, and it is unlikely that the SEC will require more robust disclosures of the kinds of ESG considerations and metrics that many investors increasingly look for. Furthermore, foreign regulators will set the policy direction on ESG that U.S. policymakers will eventually need to follow when they inevitably embrace ESG investing after a future shift in control of Washington.

If Trump wins reelection, we expect that the Department of Labor will finalize a rule it proposed in June that would make it more difficult for 401(k) plans to include investments that consider ESG factors in their retirement plans. The proposed rule would require employers that offer a retirement plan to go through additional steps to offer ESG plans, which the Labor Department assumes most employers will not do.

Further, the DOL’s proposed rule would block funds with ESG mandates from being defaults. That is a potentially important rule change because most retirement savers in 401(k) plans and other defined-contribution plans use the default investment option. These options are typically target-date funds, which adjust their asset allocations as investors get closer to their retirement dates.

We responded to this proposal by writing to the department with a simple message: The rule is a bad idea that would take away important options from retirement investors and deny them access to the best analysis on mitigating ESG risks. We were joined in this analysis by many other companies: The DOL received thousands of negative comments on the proposed rule.

Similarly, we expect that an SEC with an additional appointee by Biden would be much more sympathetic to sustainable investing. While SEC commissioner terms are staggered, the election will determine whether there is a majority Democratic or Republican commission. A Democratic commission would almost certainly work to remove barriers to ESG investing such as inconsistent disclosure metrics, and such a commission would probably be less skeptical than it is today about deploying sustainable strategies.

One key point on all of this: Momentum toward the continued mainstreaming of ESG considerations into investing practice is inevitable. If U.S. regulators do not get their arms around sustainability metrics, we may need to follow the lead of regulators abroad, particularly the European Union. American companies will not want to disclose multiple metrics, and to the extent they are required to disclose certain metrics for the EU market, they will want U.S. regulators to align their requirements with existing EU regulation. The EU is already moving ahead at a rapid pace on these regulatory requirements, and its decisions may become the standards if the U.S. does not start thinking about ESG as more than a niche issue.

Over the next half-decade, sustainable investing will continue to grow in popularity, with or without regulatory help. But a key question on the ballot is whether ordinary investors will be at the forefront of these developments or not.