The Department of Labor recently proposed to clarify certain portions of the Employee Retirement Income Security Act of 1974 (ERISA), an Act which aims to protect the retirement investments of individuals. The proposals drew quite a bit of criticism from many interested in the Environmental, Social, and Governance (ESG) fund sector, which includes renewable energy from wind and solar. So what exactly is the Department wanting to accomplish?

The additional clarifications focus primarily on the fiduciary’s responsibility under ERISA to concentrate on financial risk & return above any other underlying position. The Department flatly stated that ESG funds are not inherently compatible with ERISA standards and pension managers must pay special attention when choosing to invest retirement savings into them. And they are right.

The Department is simply taking steps to ensure that your financial manager doesn’t choose to transform your retirement savings into a lump-sum donation.

A brief definition of an ESG fund may be: a fund whose stated focus is on issues other than a reasonable rate of return. It is not that the fund will not provide a return to investors, but simply that part of its stated focus isn’t on returning your investment, but on issues such as protecting the environment. Now, while noble causes might be worthy of your charitable contribution, the Department is simply taking steps to ensure that your financial manager doesn’t choose to transform your retirement savings into a lump-sum donation.

Take the renewable energy sector as an example. The Government has long ago stepped in to be an “investor” in renewables, such as with electrical generation from wind and solar. Yet after decades of federal and state subsidies and artificial market pressure, wind and solar only comprise 9% of the United State’s electric generation; the lack of gains might be the cause of their increased concern for your retirement funds.

• For both wind and solar plants, CAPEX, Operation & Maintenance, and the associated transmission and storage costs exceed associated costs for natural gas combined cycle plants (NGCC), with these costs not likely to fall to current NGCC levels until 2050.
• A primary source of capital for wind and solar is based on direct expenditures from the Federal Government as well as mandated demand for its product via Renewable Portfolio Standards (RPSs) at the state level (29 states have passed RPSs).  
• NGCC can generate about 3 times as much electricity (based on capacity factors) as  wind and solar combined, for only a fraction of the cost.

The $126 billion spent by the electric customers could be spent ten times over and we would still not have begun to effectively reduce the world’s CO₂ emissions.

The Department may certainly understand that the economics of renewables such as wind and solar are not competitive in an free market, but how do these renewables measure up when looking at the non-financial ESG factors? Are they delivering economic value by reducing enough CO₂ emissions to save the planet?

• U.S. carbon emissions have increased 4% overall from 1990 levels, when coal then contributed 52.5% of electricity generation. Placed in a global perspective, China has increased their CO₂ emissions over 89% since 2004, and over 400% since 1990.
• Natural gas is replacing coal in electric generation and is the key driver to our reduced emissions, not wind and solar.
• RPSs in the 29 states have been shown to substantially increase the cost of electricity while only achieving a mere 8% of the Paris Climate goals for the U.S. Yet the cost of this meager achievement was over $126 billion to the customers of those states alone.
• Compounding these factors, China has taken the lead in telling the world that it doesn’t plan to even begin reducing its CO₂ emission until 2030, which means that the $126 billion spent by the electric customers could be spent ten times over and we would still not have begun to effectively reduce the world’s CO₂ emissions.

With such a small change in CO₂ emissions at these exorbitant costs, the Department of Labor has good reason to caution retirement fund managers to pay careful attention to their investments in ESG funds. To be clear, however, the Department is not prohibiting investments in ESG funds, they are simply reiterating ERISA rules that require the fiduciary to consider monetary risk and return under generally acceptable financial theories before they consider potential benefits from the environmental, social, or corporate governance aspects of the fund. 

Perspective: The caution issued by the Department of Labor regarding ESGs supports retirement investments, but it does nothing to address the greater risk posed by our fiduciaries in Congress. The Department should therefore recommend that Congress and State Legislatures append the following disclaimer to each spending bill:  “The citizen is hereby notified that we are about to use your tax dollars to invest in a high-risk venture that in all probability will not produce a return. Please do not follow our example and invest your retirement savings in such schemes, as we cannot afford for you to lose more of your own money than we already have.”

James M. Spillers