Is ESG Investing Illegal? And Other Sustainable-Investing Questions in the Trump Era

For sustainable investors, these are confusing times. The Trump administration’s antagonism toward sustainable investing, combined with other setbacks, have raised a number of questions about whether people can still invest sustainably.The White House declared an “energy emergency,” pledging to end policies that “impose undue burdens on energy production and use” and withdrawing from the Paris Agreement, in which nations pledged to reduce the greenhouse gas emissions that cause global warming. It has also halted tens of billions of dollars in energy and environmental spending. Meanwhile, it has targeted diversity, equity, and inclusion, or DEI, programs in the federal government.At the same time, a US District Court in Texas found that American Airlines AAL violated the law by including funds from investment companies that consider environmental, social, and governance factors. Among other things, the judge wrote, “The belief that ESG considerations confer a license to ignore pecuniary benefits is mistaken. Erisa does not permit a fiduciary to pursue a nonpecuniary interest no matter how noble it might view the aim.” (The term “ESG investing” is frequently, but not always, interchangeable with “sustainable investing” because it’s used by investors who are aware of climate and other risks that are not necessarily accounted for by traditional financial metrics.

Is ESG Investing Illegal Now?

No. But it will be more difficult in retirement plans. Nonretirement investors will be free to invest how they want.- The American Airlines decision affects the 401(k) retirement plan for the carrier’s employees and is likely to be appealed. “The investments of 401(k) plans will be at a higher level of scrutiny because of the Erisa standard of fiduciary duty,” says Lia Mitchell, senior policy analyst at Morningstar. Under the Employee Retirement Security Act of 1974, a fiduciary must act solely in the best interests of the plan participants and beneficiaries. Also, the Trump administration’s new secretary of labor is likely to overturn guidance that plans can consider sustainability factors in addition to pecuniary factors. That flip-flopping is one reason that plan sponsors have been reluctant to put sustainable funds in their plans in the first place. Fewer than 15% of 401(k) plans offer an ESG fund in their investment lineup, according to research by Jane Danyu Zhang, assistant professor of finance at the University of Oregon Lundquist College of Business.