As if the environmental, social, and governance (ESG) investing space didn’t already have enough tailwinds, U.S. President Joe Biden is looking to reverse the Department of Labor’s previous stance on ESG, which should help the Xtrackers S&P 500 ESG ETF (SNPE).
“The Biden administration will start walking back a controversial Department of Labor rule that would curb the use of ESG, or environmental, social, and governance, funds in 401(k) retirement plans, though it may take as long as 18 months to undo it completely,” a Barron’s article explained.
SNPE seeks investment results that correspond generally to the performance, before fees and expenses, of the S&P 500 ESG Index. The index is a broad-based, market capitalization weighted index that provides exposure to companies with high environmental, social, and governance (“ESG”) performance relative to their sector peers, while maintaining similar overall industry group weights as the S&P 500 Index.
The fund uses a full replication indexing strategy to seek to track the underlying index. With a net expense ratio of just 0.10%, it gives the cost-conscious investor even more reason to act. Those expenses are 27 basis points below its category average.
More ESG for Retirement Plans?
Investors have plenty of reason to clamor for ESG components in their retirement plans given the way the sector performed during the pandemic. The S&P 500 ESG Index is up about 19% the past 12 months and could have a banner year in 2021 with President Biden’s focus on clean energy.
“The flows into ESG funds last year were huge, interest from investors is higher than ever, and asset managers are using it more than ever,” says Jon Hale, Morningstar’s head of sustainability research. “It would be precisely the time when we would see a lot more particularly defined contribution [401(k)] plans, wanting to or being interested in adding ESG. And this rule is having a clear chilling effect on that.”
That said, Biden will first have to undo the previous administration’s stance on ESG. Per the Bloomberg article, “in November, the DOL finalized a rule that made incorporating ESG funds in retirement plans more difficult.”
“The rule, which took effect Jan. 12, requires plan sponsors and other fiduciaries selecting ESG funds ‘to separate the legitimate use of risk-return factors from inappropriate investments that sacrifice investment return, increase costs, or assume additional investment risk to promote non-pecuniary benefits or objectives’,” the article noted. “The final rule doesn’t contain specific references to ESG because there is no uniform definition of the term. Instead, it refers to pecuniary and non-pecuniary factors.”
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