Regulatory approaches to ESG investing by retirement funds are increasingly diverging between the U.S. and the European Union and U.K. and could affect fund returns at some point, Fitch Ratings said in a brief Friday.
"While these differing approaches are not expected to immediately affect ratings assigned to investment managers, pension funds and/or the institutions sponsoring such plans, we anticipate they will translate into differing investment considerations, risks and potential returns over the longer term," Fitch said.
The brief also predicted that the diverging regulatory paths "are unlikely to converge in the near term given the U.S. Department of Labor's historical conservative stance amid the evolution of ESG investing in the EU/U.K."
In June, the Labor Department proposed a rule for retirement plans governed by the Employee Retirement Income Security Act to prohibit using those assets for furthering ESG objectives. A second proposal in August would require plans to cast shareholder votes only on issues with a direct economic effect on a retirement plan.
"In contrast to the DOL's approach, regulation in the EU and U.K. promotes the integration of sustainability and ESG concepts into financial decision-making, which has become a more common and/or formalized consideration for pension fund managers. The European Commission's proposed amendment to Markets in Financial Instruments Directive II rules would mandate that investment firms consider the ESG preferences of their retail clients when providing investment advice," Fitch said.
The ESG investing trend is expected to persist, said Fitch, noting that the first half of 2020 saw global inflows of $59 billion, with total ESG assets under management reaching $2.2 trillion globally, according to Lipper.
"The shift in social and political attitudes that has fueled demand for sustainable investing is accelerating as investors, public institutions and corporations increasingly prioritize ESG measures as part of their investment criteria," while market participants increasingly believe that ESG factors can have material impact on long-term investment returns, Fitch said.