The Case for Getting Politics Out of Retirement Investing

In recent years, investing based on environmental, social, and governance (ESG) considerations has become a hot-button political issue. Few acronyms have equaled ESG’s ability to increase investment capital while simultaneously creating a political firestorm.

Despite ESG driving trillions of investment dollars—largely through retirement investments—and numerous corporate commitments over the last two decades, financial traction has not translated into widespread tolerance. Individual states, a growing number of politicians, the Securities and Exchange Commission (SEC), the private sector, and even the European Union have taken varying positions and actions, leaving investors and asset managers—including those managing the American public’s hard-earned retirement savings—with questions and confusion as they attempt to reach a common path forward.

The central question: Can politics be removed from retirement investing?

How did we get here?

The concept of ESG itself has no one accepted definition. First coined in 2005 by the United Nations, its factors have been analyzed and evaluated for decades before transforming in the 2010s into a new investment concept of “doing well by doing good.” How companies defined and measured risks became increasingly important as institutional investors and the international community pressed for more comprehensive disclosure. But as political issues became intertwined with the assessment process, investors began to evaluate ESG-related risks, including climate change, that they might not have otherwise considered material.

The traditional concept of evaluating financially material risks has been replaced on one side by a vehicle through which to facilitate social and political change and on the other side by conflating it with “wokeism” and allegations of circumventing the legislative process. The divide could not be more stark, with some political stakeholders arguing that ESG-related-risks are always financially material, while others say that they are never financially material.

To fully understand the related risks, however, one must focus on their connection to a shareholder’s long-term value, keeping politics—though not policy—aside.

Policy over politics

The investment conversation must be centered around risk management and competitive advantage. Traditionally, most agreed that the analysis of risks was best handled as a balancing act through a dialogue between a company’s board, executives, and investors. The oversight of this evaluation and subsequent public disclosure falls squarely within the SEC’s legislatively granted authority. The historic process for disclosure has usually been a principles-based approach unless otherwise mandated by Congress. The U.S. Supreme Court has also previously weighed in, finding that a factor (or a risk) must be disclosed if there is a substantial likelihood that a reasonable investor would find it important to make a sound decision.

These have been the “ground rules” for helping to ensure that political influence on investment decisions is kept at a minimum. Today, at a time when many state pension funds are severely underfunded and face questions over their long-term ability to meet commitments, any deviation from that fiduciary duty is malpractice. American retirees should not have to pay a virtue premium if the underlying metrics used to support that premium are shaky. Investors have a duty to take material risks into consideration when making investment decisions on behalf of those who depend on their support and expertise for their retirement planning.

Setting boundaries

While politics can certainly impact any stage of the investment risk assessment process, understanding the boundaries of all relevant stakeholders would help diminish the impact of political influences. Further, the more that political influences can be constrained to those who understand how all risks are assessed and disclosed, the greater the likelihood that everyday Americans will continue to have sound investment opportunities and sustainable retirement savings.

It is vitally important to understand the difference between political rhetoric and sound investment policy discussions. Fund managers must be free to keep their fiduciary obligations front and center to ensure the long-term security of Americans’ retirement savings.