The Labor Department has suggests that considering values other than traditional measures like profits and losses when running a retirement plan could be a violation of a company's fiduciary responsibility. Chris Farrell, a Marketplace senior economics contributor, spoke with David Brancaccio about what this means for the future of socially conscious investment. The following is an edited transcript of their conversation.
David Brancaccio: Wait, social investment in the crosshairs of the Labor Department here?
Chris Farrell: That's right. ESG — that's a jargon term that it goes by: environmental social governance. The Labor Department came out with this warning, this caution, that this may not be appropriate for people in retirement savings plans because you're promoting collateral social policy goals and that could sacrifice returns.
Brancaccio: This is a big thing though. I mean it's not just a progressive, I-really-care-about-the-earth thing. ESG also is embraced by some religious conservatives who don't want alcohol, gaming or family planning companies in their portfolios.
Farrell: You know back in the '80s and the '90s, it used to be called ethical investing, socially responsible investing, now we use the term ESG. And you talk to this grizzled Wall Street veteran and they just growl that it doesn't make sense to try and do good and make money. And the classic example they'd always throw out there: you don't like smoking? Don't like tobacco stocks? But they pay a high dividend. So invest in tobacco stocks and then take your profits and give that to charity, a smoking cessation program or something like that.
Brancaccio: Yeah, well, the people who didn't like nuclear power because as part of their personal values, they worried about that, pull those companies out of their portfolios and probably did okay.
Farrell: That's right. And here's the thing: the grizzled, Wall Street veterans were wrong. You can kind of boil it down to this way: so you are a firm, a company, that takes the environment seriously. You take society seriously and your workers seriously. And you have good corporate governance. Well guess what? Over the long haul, that's probably going to be a good investment.
Brancaccio: Now, to be fair the Labor Department did not outlaw putting social screens into a portfolio. This is what it said: "it does not ineluctably follow from the fact that investment promotes ESG factors or that it arguably promotes positive general market trends, etc. that an investment is a prudent choice for retirement." I had to look up ineluctably.
Farrell: I was just going to say, I'm most impressed by the fact that you could say that.
Brancaccio: It means it's not an inescapable conclusion. It can be resisted. So there's a little bit of tentativeness. In other words, the Labor Department seems to be saying, don't just assume that a company that embraces certain values is good for a retirement plan.
Farrell: All right, here's the thing: billions and billions and billions of dollars is flowing into ESG funds. There's no financial penalty for going that route. And more and more employees want this option in their plan. And guess what: the market works. Employers are going to respond to what their employees want.