There’s been a lot of attention on the proposed SEC regulations for climate disclosures, which are intended to help investors pick climate change winners from losers. But there’s a corresponding complementary development: a change in rules, so that 401ks and other retirement funds can invest in ESG-themed stocks too.

During the Trump administration, the regulations that govern retirement funds, including 401ks, were narrowed, allowing only financial considerations to be applied in “prudent” stock selections. Now the Biden administration is proposing that climate disclosures and similar concerns are also a reasonable step in evaluating risk. This would set up the long-term framework for a broader definition of responsible fiduciary management of retirement funds.

Not only does this change in regulations increase the amount of funds seeking ESG-themed investments, it opens up a new category of green investments aimed at retirees. In other words, more profits for financial innovators. So expect lots of shareholder and institutional support for this rule change.

There are two key implications. First, the pressure is increasing on every company to report their emissions data and emissions reduction plan. Retirement funds hold 37% of the equities outstanding, so if the change in regulations is approved, expect a wave of money into ESG-themed stocks and bonds.

Second, as Texas and other states restrict their employee pension funds from investing in ESG stocks, there will be a quantitative benchmark to compare investment strategies against. Texas retirees may earn significantly lower returns as investment dollars flow to ESG-themed stocks and away from others. 

In sum, changing regulations further deepen the use of climate disclosures by investors. It’s all about better returns, and transparent and reliable climate disclosures help to achieve that goal. 

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