E-S-Gee Whiz

Contextualizing the finance news you need to know.

If your 401(k) holdings are looking a little, ahem, ugly, we’ve got great news. Earlier this month, the Biden administration issued a rule making it easier for employers to consider environmental, social, and governance (ESG) factors when selecting 401(k) investment funds.

ESG factors allow potential investors to screen companies for risky or (sometimes deeply) unethical behavior—but they’re also a hotly debated classification among investment nerds. Let’s do a little ESG mythbusting:

• Myth #1: Everybody’s doin’ it. Earlier this year, Bloomberg reported that global ESG assets may surpass $50 trillion by 2025, up from $30.6 trillion in 2018. Still, ESG investing is relatively rare when it comes to 401(k)s. That could change with Biden’s new rule, which reverses a Trump-era decision that made it harder for 401(k) plans to feature ESG investments.
• Myth #2: ESG investing will tank your portfolio. Yes, prioritizing ESGs means you’re gonna have some limitations. If you’re investing with ESG criteria in mind, you probably can’t sink your 401(k) funds into, say, (the very fake) Taking Candy From Toddlers International, Ltd. Still, plenty of profitable companies have high ESG ratings—which brings us to our final myth.
• Myth #3: ESG investments are only for eco-warriors. When you think of ESG-forward companies, you might picture eco-friendly brands led by long-haired, sandal-wearing geniuses. Sorry, readers—that’s not usually the case. Many ESG rating organizations prioritize factors besides environmentalism when evaluating companies—like corporate governance, for example. That could explain how mega crude oil producer ConocoPhillips wound up at the top of one ESG list.

And remember: Under the new rule, fiduciaries may consider ESG governance factors when making decisions for their clients. They don’t *have* to, though. So, hey, if you still wanna invest in Taking Candy From Toddlers International, Ltd., more power to you.—Lillian