Congress Is Holding Hearings to Ban Responsible Investing Funds

There's a debate brewing in Congress right now over environmental, social, and governance -- or ESG -- investing. Currently, investment funds can, if they want, focus their attention on ESG investments. For example, a fund may choose to invest in companies that are focused on environmentally responsible manufacturing or a company that ensures it sources its materials in a socially ethical way.

The disagreement between lawmakers comes as some elected officials (mainly Republicans) believe that too much focus on ESG doesn't allow funds to focus on purely financial factors of investing, which could then lead to poor mutual fund performance.

Other lawmakers (mostly Democrats) say focusing on ESG investments is a good financial decision because, for example, companies that are environmentally conscious may be more stable than those exposed to climate-related risks.

Without picking a side in this fight, let's look at what a ban on ESG investing would mean for the average investor.

What a ban on ESG investing would do

First, it's worth mentioning that a bill that would have kept pension fund managers from making investment decisions based on ESG-related factors was already vetoed by President Biden earlier this year.

But that doesn't mean restrictions on these types of investments couldn't happen in the future. Congress recently debated current mandates that require companies to make certain disclosures about the types of environmental, social, and governance investments they make.

Republicans are worried that publicly traded companies that don't have a significant focus on ESG investments may be ignored by investors, even if they have significant financial strength. They fear that it could discourage some companies from going public and hurt current companies that already sell their stock on public markets. Based on this viewpoint, a ban on ESG investing would open up more investment opportunities and help investors focus on a company's financial strength.

The flip side, according to most Democratic lawmakers, is that a ban on ESG investing would keep investors in the dark about what the companies they're invested in are doing for climate change or social advancements. They believe that a ban on ESG has the potential to harm investors' portfolios because they may not be able to tell which companies have exposure to threats, such as a company having outsized risks from climate-related events.

Investors still have the power

There will likely be a debate about this topic for a while. But here's the good news for investors, no matter which side of the coin you fall on: Investors can still decide where to put their money. Neither side is forcing investors to open their brokerage account and buy specific stocks or funds, nor are they making investors sell anything they own. In short, investors can still buy and sell what they want.

Even if a ban were to occur, that wouldn't change which companies or funds an investor can purchase. That doesn't mean rules or regulations can't influence the market, but neither side is calling for investors to choose specific types of investments in their online brokerage.

According to McKinsey, more than 90% of companies in the S&P 500 publish ESG reports in some form. Contrary to what both sides may argue, there is conflicting evidence as to whether ESG-focused companies and investments outperform or underperform other investments.

This leads us back to the ultimate conclusion: Invest in whatever you want. If ESG is important to you, find the funds and companies focusing on those ideas. If it's not a compelling idea to you, you have the option to ignore it.