The Biden administration plans to undo a Trump-era rule that prevented 401(k) managers from taking ESG factors into account when they picked investments. Instead, the Trump-era rule from the Department of Labor required plan managers to use actual financial metrics to judge the quality of investments for plan participants.
Biden’s new rule will allow managers to use ESG factors to weigh on their choices, and of course, big ESG money managers like BlackRock will be the beneficiaries. Biden’s economic advisory staff is loaded with former BlackRock employees. The company acted as a virtual holding ground for Obama-era advisors waiting for the next Democratic occupant of the White House to come along. Bloomberg explains BlackRock’s deep ties to the Biden administration here in an article written about Biden’s latest former-BlackRock hire, Eric Van Nostrand, who is now a senior adviser in the Treasury Department. Bloomberg’s Sridhar Natarajan and Eric Martin report:
Another BlackRock Inc. executive is joining the Biden administration, adding to the close ties between the Wall Street heavyweight and the seat of power in Washington.
Eric Van Nostrand, a BlackRock managing director who was head of research for sustainable investments and multi-asset strategies, is exiting to join the Treasury Department. He will be a senior adviser on economic issues tied to Russia and Ukraine and will report to Ben Harris, assistant Secretary of Treasury for economic policy, a person familiar with the matter said. He starts on Monday.
Van Nostrand and a representative for BlackRock declined to comment.
Larry Fink’s $8.5 trillion investing giant has been gaining clout in Washington as the Biden administration has stocked its ranks with ex-BlackRock executives. That means the company is now seen as one of Wall Street’s key conduits to the power center in Washington — a tag that was more closely associated with Goldman Sachs Group Inc. through prior administrations.
That growing clout has invited criticism from both ends of the political spectrum, with the firm frequently targeted for its investing policies tied to climate, its business in China and its role as one of the largest stock owners of most major public companies.
Shortly after winning the election in November 2020, President Biden tapped two BlackRock executives for senior roles on his economics team: Brian Deese, the former head of sustainability at BlackRock who now runs the National Economic Council, and Adewale Adeyemo, the deputy Treasury secretary. Deese was most recently in the spotlight for his defense of what defines a recession.
Mike Pyle, BlackRock’s former chief investment strategist, joined the administration to serve as Kamala Harris’s chief economic adviser and is now a key player on Russia sanctions. All three had previously worked in the Obama administration, like Van Nostrand, before moving to BlackRock and then returning to Washington.
The moves are a reversal of the flow in recent years, when BlackRock tapped more than a dozen alumni of former President Barack Obama’s administration, including his national security adviser, senior adviser for climate policy, a former Federal Reserve vice chairman he appointed, and numerous other economists from the White House, Treasury and Fed.
When Donald Trump’s administration created the rule barring managers from considering ESG factors for weighting 401(k) investments in 2020, one of the big criticisms was that ESG was performing so well and that the Trump Department of Labor had, according to the Financial Times, “trotted out the old argument insinuating that ESG funds underperform.” BlackRock chimed in, saying, “climate-integrated portfolios can provide better risk-adjusted returns to investors.”
With the advantage of hindsight, the Financial Times reported in July 2021 that, in fact, ESG will underperform over time. The FT‘s Emma Boyde wrote:
Investors who believe that investing sustainably will also deliver higher returns over the long run should be prepared for an imminent change in that narrative, academic research suggests.
Abraham Lioui, professor of finance at Edhec Business School and an expert in the strategy of investing according to good environmental, social and governance principles, believes he and his co-authors have found signs that the ESG market is reaching maturity and could become a victim of its own success.
“We are going to the zone where the positive impact of the ESG buzz on prices is coming to the end of its cycle,” Lioui said. “Soon we will be at the stage where the relationship between ESG and performance will be negative as it [logically] should be.”
The ESG buzz Lioui refers to has resulted in exponential growth in ESG and impact investing, partly due to a huge rise in passive investment that has been buoyed by mounting evidence over the past few years that a corporate focus on material ESG issues leads to improved returns.
Despite the new evidence that proves the Trump administration was at least not wrong, the Biden administration is pushing forward in an effort to reward its ESG financial backers and to use ESG power to push the progressive agenda.
Thankfully, Republicans in states like Texas, West Virginia, Louisiana, and elsewhere have begun to fight back against the ESG agenda. The Wall Street Journal reports on Governor Ron DeSantis’s efforts, writing:
Republicans have accused investors of trying to force companies to follow a liberal agenda at the expense of a pursuit of profit. In recent months, Florida Gov. Ron DeSantis and other officials banned state pension fund managers from incorporating ESG factors into investments. Supporters of ESG say data suggest that socially responsible investments can provide competitive returns.
Action Line: Remember, when money managers get to vote your shares for their progressive policies, you invest, but they win. When politicians get to pick winners in the economy, everyone else loses. The best way to avoid the dangers of ESG is to invest in a portfolio of individual securities with a manager who has a fiduciary duty to you. If you need help, let’s talk. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter and get to know me better before we talk.
