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ESG and Fiduciary Responsibility: Complementary or at Odds?

Running the plan and investing its assets in a way mindful of environmental, social and governance (ESG) concerns is a practice some plans follow. But a recent commentary questions whether that complements — or compromises — fulfilling fiduciary responsibility.

In a commentary that recently appeared in Investor’s Business Daily, American Council for Capital Formation President and CEO Mark A. Bloomfield argues that they may be mutually exclusive, at least under current circumstances. Bloomfield does not question the worth of the causes a plan may seek to support through ESG; he questions its application given challenges pension plans face today. “These efforts may be well and good if they were actually delivering financial results,” he writes.

The mitigating circumstances Bloomfield cites are unfunded liabilities. His commentary includes a discussion of CalPERS, the largest U.S. public pension plan; however, private-sector pension plans also grapple with unfunded liabilities and many of the same circumstances that gave rise to those public plans face — so his discussion has broader implications beyond just public sector plans.

Bloomfield notes that the Council for Institutional Investors (CII), whose members include more than 125 public, union and corporate pension plans (including CalPERS), with collective assets of more than $3 trillion. He notes that CII members collectively have an unfunded liability of almost $4 trillion and “is larger than the GDP of Germany, the world's fourth-largest economy.”

Bloomfield says that in recent years, CII members “have increasingly focused on political ‘feel good’ initiatives, rather than policies and proposals aimed at improving the performance of the funds they manage,” adding, “Fiduciary responsibility has taken a back seat.” He also posits that while CalPERS “admits it is underperforming,” it “has only ramped up its focus on ESG as its assets dwindle.”

“The primary obligation of pensions is a fiduciary one,” argues Bloomfield. “Workers rely on them to help make retirement easier, not to develop a cutting-edge message on social justice,” he concludes.