The Labor Department’s decision reverses a regulation implemented during the Trump era. Now your 401(k) retirement plan can benefit from ESG investments. At Globe Live Media we explain all the details
The U.S. Department of Labor announced a ruling Wednesday that allows trustees of 401(K) retirement savings plans to consider ESG (Environmental, Social and Governance) investments, also known as sustainable investments. This order, issued by the federal institution, reverses a regulation implemented during the administration of former US President Donald Trump, which made it difficult for 401(k) retirement plans to include ESG investments.
According to Investopedia, ESG investments are ideal for investors who prefer to bet on companies that have sustainable and environmentally responsible production standards, as well as good corporate governance practices and are led ethically by their managers.
What characterizes ESG investments in the United States?
ESG investments generally take into account the following criteria:
1) Environmental: this means that companies that have environmentally responsible production criteria comply with the following points:
– Regularly publishes reports on the sustainability of its production.
– Limits the use of polluting chemicals.
– Seeks to reduce the emission of greenhouse gases and their carbon footprints.
– Use renewable energies.
– Reduces waste production.
2) Social: as its name indicates, this means that companies have socially ethical production criteria:
– They have a supply chain that complies with ethical principles.
– Avoid employing personnel outside the United States that may lead to questionable labor practices such as child labor.
– Supports the rights of the LGBTQ+ community and supports all forms of diversity.
– Has regulations and policies that prevent inappropriate sexual behavior.
– Grants fair wages to its workers.
3) Governance: this means that companies comply with the rules of good corporate governance:
– Supports diversity on boards of directors.
– Supports business transparency.
– Allows the elections of business boards.
How can including ESG investments in your 401(k) retirement savings plan benefit you?
Believe it or not, opening up ESG investments in your 401(k) savings plan can benefit you, as ESG investment criteria generally can help investors de-risk their bets and therefore therefore, of their investment portfolios.
The reason? You can avoid investing in companies that operate in risky or unethical ways, which can cause those companies to underperform in US and world financial markets.
An example of this, according to Investopedia, could be the BP oil spill in the Gulf of Mexico, or the Volkswagen carbon emissions scandals. Both events caused the shares of said companies to drop in price dramatically, which, of course, caused millions of losses to their investors.
Also, part of the value that ESG investments can have lies in encouraging companies to make real changes for the greater good.