The Biden administration recently pulled back some investing restrictions companies were tied to. Now, businesses can look at the environmental and social implications of investing in a particular fund, choosing whether to put money into areas such as fossil fuel production.
Environmental, social, and governance (ESG) investing means looking at how companies behave and how socially conscious they are about topics such as the environment and social causes. The loosening of the previous Employee Retirement Income Security Act (ERISA) amendment changes where money flows and could impact the economy and job opportunities within growing brands.
Can ESG Investments Perform Better?
In a recent Goldman Sachs analysis of 1,200 organizations, researchers found brands with a substantial ESG rank performed at 9%, while those with less focus on social causes performed at 2% or less.
More research is necessary, but ESG investments have the potential to outperform non-ESG ones. Anyone managing retirement investments should therefore keep a close eye on performance and make adjustments as needed. Here are some ways the loosened ESG restrictions will impact retirement investments.
1. Broaden Options
Employers and financial advisors can now consider social impact factors part of their investment asset evaluation. An Executive Order changed this rule, so keep in mind it could change with a new administration. For the time being, there are more opportunities to look at ESG investments.
When you have more options from which to choose, you can fill out part of a 401(k) with a wide range of options, including some ESG-focused stocks. The new Executive Order expands the number of choices for businesses rather than limiting them.
2. Understand Company Rank
You’ll need to understand and explain ranking if you make ESG investing part of your retirement portfolio recommendations. For example, the Bloomberg ESG Data Service scores companies out of 100 based on 120 different factors. It also looks at elements such as resource depletion, use of renewable energy, commitment to climate change, and stance on human rights.
3. Embrace Freedom
Biden’s Executive Order isn’t forcing retirement funds to invest in ESG; instead, business owners and HR departments have more options for where they can move money. You can choose to make part of your portfolio ESG-focused, or you can avoid ESG investments if they aren’t suitable for your retirement portfolio.
4. Show You Care
Many employees complain that organizations don’t seem to care about the same causes they do. People worry about the tons of carbon dioxide big businesses add to the environment each year, so becoming carbon neutral is the minimum brands can do to keep their top workers and attract new candidates. Investing in ESG companies shows you care and commit to your own ESG practices—right down to how you run your 401(k).
5. Use ESG as a Tiebreaker
When comparing stocks for retirement portfolios, you’ll often see several performing similarly. If the age of stock, performance, and other indicators are all the same, you can always use ESG as your tiebreaker, leaning toward the option that protects the Earth or social causes. If your ESG investment performs worse than the non-ESG one, you can always move funds around and adjust your portfolio accordingly.
Balance ESG Investments and Profit
Managers must find a balance between ESG investments and increasing the net worth of portfolios. Spend time researching which stocks perform best, and sprinkle in some with an ESG focus. Don’t stray so far to the side of protecting the environment that you lose your stakeholders’ money, though; keep a nice balance between smart investing and sticking to the causes you care about. Your 401(k) should be profitable and help the world at the same time.
Jane Marsh is Editor-in-Chief of Environment.co.