Expert Panel: The Economic and Political Sides of ESG

Experts caution against including political values in investment strategy, but explain that ESG is not a political agenda.



On Thursday, ISS Media hosted a series of conferences on ESG. One such conference, entitled “ESG Investing: Political Agenda or Economic Factor?” by Amy Resnick, discussed the intersection of ESG and politics.

The expert panel featured Michael Kreps, to co-chair of Groom Law’s Retirement Services and Fiduciary Group; Jeff Mindlin, the Chief Investment Officer at Arizona State University Enterprise Partners; and Timothy Calkins, a Co-Chief Investment Officer at Nottingham Advisors.

What is ESG?

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

The panel largely agreed that ESG is an investment risk strategy that includes ESG factors (environment, social, and governance). This investment lens provides additional data when considering risk and is supposed to guide investment decisions rather than dictate it. It is one of many considerations that an investor or fiduciary might use. Calkins explained that “it’s about additional data to make better investment decisions.”

However, different ESG analyses can result in different ratings for the same investment.

Mindlin lamented that different ratings for the same product makes investing more complicated, and noted that different companies have different access to data about the products they rate.

Calkins expanded and said that even with same data, different analysts will analyze it differently by weighting the same risk factors differently. He doesn’t believe ESG ratings will ever be standardized because it is value-weighted investment. Due to its more subjective nature, different analysts will produce different findings. He recommends that an investor should “find the agency where you like the process the best and then use their ratings” rather than compare multiple ratings from different analysts who are using different criteria.

For example, Calkins suggested that the “Governance” in “ESG” may be the most important of them all, since it speaks directly to management and corruption, and a failure to consider it might be a breach of fiduciary duty in itself. However, not all ESG rating services may share the view that “G” should be weighed more than “E” and “S”.

ESG vs. Divestment

ESG as a philosophy of risk management is in contrast to what Calkins calls “divestment” or intentionally pulling out of and avoiding entire sectors of investment for reasons related to an investor’s political and ethical views. Though Calkins sometimes works with “mission driven” clients who make exclusion and divestment requests, this is not what ESG is strictly speaking, since ESG strategy would normally invest in highly profitable fossil fuels businesses, for example.

Mindlin explains that he tries “to avoid divestment as a strategy”. Viewing ESG as additional information however can lead to greater insight on how to capitalize on climate transition and the growing renewables sector. ESG is a method of reducing risk, but not at the expense of reduced returns, which an investor favoring an exclusionary strategy may be more tolerant of.

ESG and Politics

The panelists did acknowledge that political values often inform how ESG strategy is executed.

Mindlin said of ASU that “Sustainability is key to our identity,” but the challenge is how to “align with that ethos from an investment strategy perspective.” He noted that ASU prides itself on its sustainability ethic and its carbon neutrality.

Calkins said that some rust belt clients are skeptical of ESG. If you frame ESG as a political agenda it can seem like an attack on someone’s political identity. When asked if liberally minded investors are more open to ESG than conservative ones, Calkins responded that it is “certainly an easier conversation” and there isn’t the “same potential pushback.”

He lamented that “politics is trying to get ESG to pick a side” but making ESG a political issue will only make it harder to acquire the data investors need to make decisions. He said that one does not “want to trade off performance for social good, but it’s terrific if you can have both.”

Kreps noted however that political and moral views can cloud the judgement of any fiduciary, regardless of the weighting they give to ESG factors, or their personal political views. He quipped that “if you really hate shoes you won’t want to invest in shoe shops no matter how profitable they are.”

He urged fiduciaries to focus on their client’s interests and consider the fact that retirement benefits are a social good in and of themselves.

FTX Bankruptcy Has Chilling Effect on Crypto Use in Retirement Plans

The collapse of the cryptocurrency exchange and related plummet in the crypto market has increased concern about including the asset in DC plans.



The rapid collapse of cryptocurrency exchange FTX has some in the retirement industry second-guessing a recent push toward including cryptocurrency in 401(k)s and other defined contribution retirement plans.

The fast fall of FTX, which caused a related drop in mainstay cryptocurrencies such as bitcoin, came to a head Friday with Bahamas-based FTX filing for Chapter 11 bankruptcy. No matter the outcome of the proceedings, industry experts say financial and retirement advisers may be chilled on recommending the asset, which is currently in use by some plan sponsors via offerings from industry-leader Fidelity Investments and small business plan provider ForUsAll.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

“About a year ago we had questions from clients about crypto within 401(k) plans and we suggested a ‘wait and see’ approach,” says Michael Gheen, vice president and senior client executive for retirement plan services at Oswald Financial. “The FTX bankruptcy really reinforced our approach. There is not enough regulation and too much risk today to add crypto as an investment option within the plan.”

The events over the past week have added to concerns voiced by some in the retirement industry, including regulators, that cryptocurrency inclusion needs serious consideration to meet the fiduciary standards enforced by the U.S. Department of Labor through the Employee Retirement Income Security Act.

“If you are sitting in the DOL’s shoes, this points to the fact that this isn’t a regulated currency, there are some issues to be worked out and that fiduciaries should be cautious,” says Wendy Von Wald, fiduciary product manager at Travelers Insurance. “Overall, I think what this does is just reinforce the need for fiduciaries to be real diligent in what they’re offering.”

A survey by fintech company Capitalize found that 60% of investors would like cryptocurrency in retirement plans, and the offering is particularly interesting to younger workers, according to a separate survey by Charles Schwab. Gheen of Oswald says they were asked by plan sponsor clients about cryptocurrency before the drop in values began earlier this year, but at the time they cautioned against it.

“We reminded committees members of their fiduciary responsibility to their participants,” Gheen says. “Our big concern is many plan participants are not sophisticated investors, however, they hear news about ‘crypto billionaires’ and may get caught up in the hype. With the concern of participants chasing returns, in hindsight we are relieved none of our clients added a crypto option to their plan.”

Debbie Matustik, a managing director with retirement advisory Pensionmark Financial Group in Austin, said the FTX collapse reinforced her views on cryptocurrency not being a good option for plan participants.

“To me, the potential risk inherent in cryptocurrencies makes them inappropriate for most participant-directed retirement plans,” Matustik said in emailed response. “Most plan participants do not have sufficient investment sophistication to truly understand the potential risks of an investment in crypto. The FTX crash and bankruptcy bears this out.”

Participant Access

The news comes as the country’s largest retirement plan recordkeeper, Fidelity, and small business plan provider ForUsAll have plan sponsor clients providing participants access to cryptocurrency assets within their 401(k) accounts.

A spokesperson for Fidelity said in an email that the Boston-based firm has had plan sponsors signed up since the fall offering access to Fidelity’s Digital Assets Account as a part of their core 401(k) line up. The firm did not immediately respond to comment on the FTX collapse.

ForUsAll announced last week that 50 plan sponsors were live with its cryptocurrency offering for 401(k) participants through the self-directed brokerage window. It also noted a number of safety precautions ForUsAll has in place before retirement investors can direct deferrals into cryptocurrency, including a waiver, a quiz on blockchain technology, and the fact of needing to go through the self-directed window itself. The San Francisco-based company did not immediately respond to comment on the FTX collapse.

ForUsAll is also embroiled in a lawsuit against the DOL about a warning the regulator gave to fiduciaries about including cryptocurrency in retirement plans, whether through the menu or a self-directed brokerage window. CEO David Ramirez recently told PLANADVISER that the firm offered to drop the lawsuit so long as the agency confirmed its warning on cryptocurrency in retirement plans does “not have the force of law.”

Not Plain Vanilla

The story of FTX’s fall reinforces the need for fiduciaries to be prudent with the investments they make available, and to monitor them consistently, Von Wald says. She notes that retirement fiduciaries are now commonly sued for investment decisions that are far less volatile and new than cryptocurrencies.

“If you’re going to be challenged for the most vanilla of investments like a stable value fund, or a money market fund, then selecting something like a virtual currency or bitcoin should definitely require additional time and review,” she says.

Matustik of Pensionmark Austin says they don’t have any clients that offer crypto in their plans. But rather than avoid the discussion, they introduce the topic proactively in client plan review meetings, noting the pros of including it—mostly to satisfy the “small percentage” of employees asking for it—versus the cons, including the risk of large losses by individual participants.  

Matustik noted that she may be proven wrong, but that as a retirement plan adviser she doesn’t see widespread adoption of cryptocurrency in 401(k) plans any time soon.

“The collapse of FTX simply illustrates the point,” she says. “It may actually provide a great (though unfortunate) future illustration of what risk really means when investing in the most speculative and volatile instruments.”

«