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ESG and ERISA

Sigma Investment Counselors

July 29, 2020

We recently posted a blog titled “What is ESG” that attempts to explain the ideas behind socially responsible investing.  ERISA (Employee Retirement Security Act of 1974) protects American’s retirement assets by implementing rules that qualified plans must follow to ensure that plan fiduciaries do not misuse plan assets.

Many investors, understandably, want to do good while also doing well.  However, the standards for ESG investing are often unclear, sometimes contradictory, and can add complications in measuring performance.  Fine, if it’s your money, you can allow your conscience be your guide.

Managing ERISA portfolios is governed by the terms of the act, which specifically dictate that plan fiduciaries act with an “eye single” to funding the retirements of plan participants and their beneficiaries.  This means that investment decisions must be based solely on whether they enhance returns, regardless of the fiduciary’s personal preferences.  This does not preclude ESG investing, but does place an additional burden on portfolio managers.

If that’s not enough, the Labor Department is currently seeking a new federal regulation that would discourage retirement funds from making investments based on ESG considerations.

Investors should recognize that retirement funds are a significant factor in trading volume and valuations.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

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