House bill would nix ESG funds in Thrift Savings Plan

A Republican-sponsored bill that would bar the Federal Thrift Savings Plan from offering some ESG-themed funds to its participants resurfaced last week in Congress.

That legislation, which was first introduced last year by Rep. Chip Roy, R-Texas, addresses the relatively new mutual fund window that is available to the roughly 6.5 million government workers. The TSP, which is the biggest defined-contribution plan in the country at more than $800 billion, added the mutual fund window last year.

That list of funds contains thousands of investment options from numerous asset managers, including a variety from providers that use sustainable and responsible criteria. There are 50 funds with ESG in their names available within the window, according to a list on tspfolio.com.

Among those funds are at least three sustainability-themed target-date series: the Natixis Sustainable Future, BlackRock LifePath ESG and Putnam Sustainable Retirement lines.

But the Thrift Savings Plan's fund window also contains numerous mutual funds that specifically invest with a decidedly social angle: Christian-themed funds from such providers as the Knights of Columbus, Ave Maria and Timothy Plan.

The latter firm notes that it “pioneered the first pro-life, pro-family filtering standard. Our commitment, first to our Lord, is that we will not invest a single penny into any company that violates our filters.

“Selecting a mutual fund should be about more than its rate of return — it should also be morally responsible,” Timothy Plan states on its site.

EXCLUSIONS

The House bill introduced a week ago would require the TSP board to rid the mutual fund window of any funds that use ESG criteria in their investment processes “to the extent that those criteria are unrelated to maximizing monetary returns for investors.”

It would also require the plan to nix investment options “that [are] marketed as making investment decisions based on ESG criteria.”

The second aspect would almost certainly have a greater impact on the mutual fund window. Many funds include ESG considerations as part of their investment processes, even if they aren't marketed as being sustainable or responsible funds. And of the U.S. mutual funds that include ESG in their names and marketing, few put social or environmental goals ahead of financial performance — those products tend to use ESG criteria as a means of seeking higher risk-adjusted returns over time.

Both categories of restrictions — around investment process and marketing — could run into the same problem, which is that funds using ESG criteria usually, if not always, do so in pursuit of higher returns, said Joshua Lichtenstein, partner at Ropes & Gray.

“In either case, you’re going to argue that it is not a violation of the rule, because you’re just considering [ESG factors] as part of the investment process,” Lichtenstein said.

The legislation identifies environmental criteria as “emissions, climate change, sustainability, environmental justice, pollution or conservation” as well as “whether a company is engaged in the exploration, production, utilization, transportation, sale, or manufacturing of fossil fuel-based energy.”

It calls out social factors as diversity, union status, firearms and political affiliation.

The definitions are broad, which means that funds the bill’s author would not intend to have excluded from the TSP could easily be affected, Lichtenstein said.

“That’s always the challenge with these things. It’s very hard to define the criteria,” he said. “The authors of the bills think they’re that they’re only limiting a very specific type of investment, but in reality, because of the breadth of the language, they end up chilling a broader universe of investment participants.”

That could also affect funds and strategies that are marketed as SFDR-compliant in Europe, even if they are not badged as ESG products in the U.S., he noted.

But the bill has virtually no chance of passing in the current Congress, and President Biden would be extremely unlikely to sign it.

“I don’t think the goal is to pass it, though … I think that it’s to create the sense of the benefits or detriments of ESG being a two-sided argument, as opposed to an inevitable march to more adoption of ESG principles,” Lichtenstein said.

“It’s kind of like a bad-faith debate,” he said. “It’s not really clear to me that anybody is actually doing the things that in particular the right is trying to protect against.”

In an announcement of the bill’s introduction, Roy had strong words about ESG.

“ESG is an investing scheme woke corporations are using to appease the left by destroying reliable American energy and advancing radical gender and racial ideologies,” Roy said in an announcement of the bill’s reintroduction. “The U.S. government has no business propping up woke scams like ESG. Congress should eradicate every federal policy and office that promotes it, starting here.”

The version of the House bill last year died in committee. A companion bill sponsored by Sen. Mike Lee (R-Utah) did not advance.

TSP LIMITS

The legislation differs from other recent anti-ESG measures in that it targets a defined-contribution plan, in which participants make elections and invest their own money. Most of the state-level legislation and regulations seeking to cut off ESG have focused on public pensions, where participants don't make investment choices.

Although the opening of the mutual fund window within the massive TSP was seen as a win for participant choice, and potentially for sustainable investing, it has limits on how much people can invest. Currently, the initial contribution to the mutual fund window is a minimum of $10,000, and participants must have at least $40,000 in their accounts to make that transfer. The TSP does not allow more than 25% of account balances to be invested through the window.

In addition to the fees charged by mutual funds available through it, the program charges administrative and maintenance fees of $55 and $95 annually, as well as a $28.75 per-trade fee.

In 2021, the Government Accountability Office issued a report recommending that the TSP evaluate its investment options for financial risks associated with climate change, finding that stakeholders could be significantly affected by those risks in retirement.

Editor’s note: This piece has been updated to remove Thrivent Financial’s name from the list of fund companies that invest with a social angle, since Thrivent’s funds don’t use social or faith-based screens.