Despite the pandemic and ensuing economic crisis, socially responsible investments (SRI) have received higher inflows of capital in 2020 than in any other period of American history. That’s right: investors have poured more than $21 billion into 300+ publicly available domestic SRI funds, well before the year’s end. All told, investors have already purchased more sustainable investments in the first half of this year than in all of 2019––a year that had already seen inflows that were a whopping 4 times higher than any previous year.
Nevertheless, this administration’s most prominent regulators are behaving as if conscientious shareholders are ruining our financial system. Just weeks before the presidential election, the Department
of Labor and the Securities and Exchange Commission are attempting to slip in new, nonsensical rules. These rules would stifle investing that prioritizes environmental, social, and governance (ESG) criteria, even as such investment offerings become more firmly established in the financial system––at least until the rules can be reversed by the next administration (he wrote with confidence).
First, the context: last month the Commodity Futures Trading Commission released a report stating unequivocally, “Escalating weather events also pose significant challenges to our financial system and our ability to sustain long-term economic growth.” The report stresses the urgency of mitigating climate risks to financial markets and concludes that global heating threatens the stability of the US financial system. Cue the scary music.
Enter the Securities and Exchange Commission, which regulates investments in the broadest sense. Last month, the SEC issued a highly contentious rule that requires shareholders hold at least $25,000 of a stock for one year in order to be able to file shareholder resolutions (the threshold is currently $2,000). Penalizing small investors is an anti-democratic way to reduce shareholder activism on topics like climate. In addition, the new rules make it much more difficult to re-file a proposal that has been voted on. To keep a proposal before a company’s shareholders in subsequent years, resolution resubmission will now require 5% support on a first vote, 15% on a second vote and 25% on a third vote. These higher thresholds diminish the likelihood of shareholders learning about and addressing important issues affecting companies, such as climate impacts.
Not to be outdone, the Department of Labor proposed a new rule last month to curtail how retirement plans are governed, despite overwhelming opposition from the professional investment community (94% opposed the new rules). The rule limits the scope of ESG investing and bans ESG funds as qualified default investment alternatives in 401(k) plans, with the DOL concluding erroneously and without evidence that ESG investing is politically motivated, non-financial, and irrelevant to profitability and share value.
It is clear that these rules are designed to deprive investors of ESG-screened options and limit the influence of conscientious investors. These rules are, of course, being issued at the behest of special corporate interests whose industries are threatened by the ongoing exodus of shareholders and capital from destructive investments and efforts to rein in irresponsible practices.
Such rules represent the last gasp of the old economic guard that has practiced exploitation without conscience or consequence for generations––and who now sees the writing on the wall. But as ESG investing continues to be embraced by mainstream investors, such antiquated notions of irresponsible capitalism are dying a little more every year—just like their proponents.