Wall Street Rolls Out the Red Carpet for ESG Funds

Because of its relative newness in the capital markets, environmental, social, and governance (ESG) investing had a tough time trying to get past the old guard. Now, Wall Street is rolling the red carpet for ESG ETFs.

Former president Donald Trump’s administration put a barrier around 401(k)s, but now, the government is looking to walk back previous policies on ESG. Given the strong rise of ESG of late, this could continue opening the floodgates for the industry.

“Money managers are lobbying to scrap a Trump-era rule that makes it difficult for 401(k) plans to invest in socially focused funds,” a Wall Street Journal article said. “The Labor Department rule, announced in October, imposed restrictions on what can and can’t be offered as company 401(k) funds. One result is that plans can’t use funds with nonfinancial goals as default investments for employees.”

While many sectors languished in 2020 during the pandemic, ESG thrived.

“Lobbyists representing managers, pensions and retirees began making calls to the Biden transition team in the weeks after the rule was announced,” the WSJ article added. “Some lobbyists urged the incoming administration to agree not to enforce the rule and place it under review, said people familiar with the matter. The rule was slated to be rolled out starting January. That month, the Biden administration flagged it for review.”

Giving Retirees the ESG Exposure They Crave

Once a niche corner of the capital markets, ESG has exploded in popularity.

“U.S. ESG funds attracted a record $51.1 billion of new money in 2020, more than double from the previous year, according to Morningstar. But they are a tiny part of 401(k)s,” the WSJ article noted. “Only 2.6% of U.S. corporate plans offered ESG funds as investment options in employee-benefit plans in 2019, according to the survey data by Plan Sponsor Council of America.”

See also: Biden Could Reverse Rule against ESG Retirement Funds

Nonetheless, ESG lobbyists are taking notice and calling for changes.

“We don’t want to have people being deterred from looking at investment options where clearly there is a lot of investor demand,” said Eric Pan, chief executive of the asset-management industry’s main lobby group, Investment Company Institute.

For more news and information, visit the ESG Channel.