ESG Investing

DEAR TRUST OFFICER:  I saw this headline: “White House Reviews DOL’s Alternate ESG Rule.” What does it mean?—NOVICE INVESTOR

DEAR NOVICE:

Some investors hope to use their investments for more than making money, they want to promote their social values at the same time. Years ago, that might have meant deliberately not investing in tobacco or liquor companies, but now there is a more complex and nuanced approach: ESG investing.  Three categories are involved: environment, social, and governance (that’s where ESG comes from). An environmental focus may look at carbon emissions, water stress, renewable energy, or pollution. Social factors might be diversity, inclusion, labor, employee welfare, or data security. Governance issues might touch upon independent directors, audit standards, women in leadership, and executive compensation.

Companies may be scored for their ESG performance. They may self-report, or data may be gathered by third parties who then sell the data. These scores may be combined with traditional financial analysis tools in determining which companies are likely to have the desired impact while still providing strong returns to shareholders. Those who promote ESG investing believe that it will provide superior long-term returns, but that has not been demonstrated.

The promoters of ESG funds wanted as wide an audience as possible for their product, and they hoped to be able to offer such funds to retirement funds, such as 401(k)s and pension funds.  They suffered a major setback when the Department of Labor (DOL) in the first Trump administration ruled that fiduciary rules governing the investment of ERISA plan assets precluded consideration of such non-financial factors.  The trustees of such plans must invest for prudent financial returns.

Although the law did not change, the DOL had a change of heart after President Biden took office, and gave the green light to ESG investing by retirement plans.  Now another reversal is in the works, and the new rules are expected to be similar to those of the first Trump administration.

ESG investing has become somewhat controversial, as some believe that it has become a means to inject political factors into investment decisions, as well as a mechanism for bringing political pressure to bear on company management.  Several states have explicitly disavowed ESG investing and removed their pension funds from firms that promote that strategy.

ESG may be a fine idea for some individual investors, perhaps not so much for others.  Generalizations are not appropriate, and more information is needed to determine whether ESG factors should be a part of your investment planning.  ESG factors may be taken into consideration in managing trust assets, but evaluating financial risk and reward must remain paramount in the fulfillment of fiduciary duties, unless the trust creator or trust beneficiaries stipulate otherwise. 

If you would like a professional review of your portfolio strategies, we would be pleased to meet with you at your convenience.

(July 2026)

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