08 May PUBLIC PENSION CORNER, #42: Retirement Security and Financial Literacy
NEWS:
I. Canadian Banks Abandon Climate Goals
Two Canadian banks, RBC and Scotiabank, are dropping their financed emissions goals, citing the changing energy environment, especially the inevitable delay in the energy transition:
Canadian banks Scotiabank and RBC revealed that they have retired their 2030 targets to reduce financed emissions for key carbon-intensive sectors, with each bank citing external factors ranging from changes in public policy, energy demand, and slower than requires technology development.
Scotiabank also announced that it is dropping its goal to achieve net zero for financed emissions by 2050, while RBC has maintained its 2050 target.
The announcements, made in each of the banks’ sustainability reports, form the latest in a series of moves by Canadian banks to pull back from climate commitments over the past year, as the political environment, particularly in the U.S., has evolved to make progress towards net zero more challenging, and has seen banks come under pressure from politicians over sustainability goals and participation in climate-focused groups.
II. Proxy Advisory Services Sue Two More States
Institutional Shareholder Services (ISS) and Glass Lewis, the two biggest proxy advisory services, filed suit last month against two more states (Kansas and Indiana), alleging that the states’ efforts to regulate them violate their First Amendment rights. This follows a similar suit filed against Texas last summer:
Institutional Shareholder Services and Glass, Lewis & Co. in April sued two more states, Indiana and Kansas, over laws compelling the firms to tell shareholders and update websites if their voting advice contradicts management’s wishes.
The laws, both of which are scheduled to take effect July 1, violate the First Amendment by forcing speech only in certain situations, the recent lawsuits allege. They also illegally regulate out-of-state commerce and impose unconstitutionally vague provisions, the lawsuits said.
“It is hard to imagine a more plainly viewpoint-discriminatory law,” ISS said in a lawsuit against Kansas filed April 29 in the US District Court for the District of Kansas. “The law’s goal is to force ISS to walk the line that corporate executives want—even if ISS and its clients believe that course of action is wrong.”
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“Retirement Security and Financial Literacy”
It is clear that one of the issues that concerns American leaders in both the public and private sectors is “retirement security.” Social Security alone will not provide a comfortable retirement for most people. Indeed, on its present trajectory, Social Security will not provide much for anyone. While many Americans are able and do save for their retirement through employer-sponsored plans – 401(k) plans and more traditional pensions – not everyone has access to those plans. And even among those who do have access, many do not save enough.
To his credit, BlackRock CEO Larry Fink has addressed this issue repeatedly, arguing that Americans as a whole are unprepared to retire, and that this will almost certainly cause a significant crisis unless things change. Of course, Fink has ulterior motives here, but he’s hardly alone in identifying the problem. President Trump’s efforts to enhance Americans’ retirement savings were unveiled via executive order last week, confirming that this is an issue he and his administration take seriously. Likewise, state leaders (often in the form of state financial officers) are concerned and are working diligently to address what they see as a glaring weak spot in the American promise of life, liberty, and the pursuit of happiness.
One issue that makes the effort to enhance retirement security particularly frustrating is the lack of financial literacy among those who comprise the target audience. People who should be saving more for their retirement usually face two barriers to doing so: First, they do not have the resources; and second, they often do not understand the immense benefit. Programs like the Trump IRA (and, planned state-level programs) attempt to address the first of these. Unfortunately, the second is even harder to fix – and not just among potential savers.
Most of us understand the power of compound interest. We understand the importance of investment, not just in terms of what it provides the broader economy, but also what it can provide the individual investor. People don’t invest in equities out of the goodness of their hearts, after all. They invest because they want to make money; they want to see a return on their investment. That’s the whole point of the system: it’s mutually beneficial – or at least it’s supposed to be.
Many people don’t get this, however. Some understand the power of compound interest, but some do not. More to the point, even those who understand the concept abstractly don’t always grasp its finer points or its relevance to our economic system. It is possible that basic financial literacy education can help explain the general concepts to people and reinforce the importance of saving. The finer points, by contrast, will require considerably greater – even continual – effort on the part of those of us who wish to see the system preserved and even improved.
Just over a year ago, for example, Morgan Stanley’s “Institute for Sustainable Investing” released a report showing that younger investors – those whose retirements will be most affected by their investment/savings decisions – are overwhelmingly supportive of ESG and sustainable investment products:
88% of investors globally are interested in sustainable investing, with more than half saying they are “very interested.” Interest is highest among Gen Z (99%) and Millennials (97%). The main motivations for investor interest vary—around 45% of North American and APAC investors seek real-world outcomes, while in Europe over 40% of investors believe sustainable investments could offer stronger financial returns than traditional investments.
There are, on its face, three major problems evident here.
First, like all such reports, this one attempts to confuse readers by focusing on “investors globally.” Yes, it’s true that “investors globally” are interested in ESG, but that’s largely because many investors in Europe and the UK are simply beyond help. Financial literacy education would do them no good. As Morgan Stanley points out here, despite the reams and reams of data showing otherwise, these investors still believe that “sustainable investments could offer stronger financial returns than traditional investments.” Conflating ill-informed zealots with actual investors is the point, though. It enables MS to make it appear that a higher percentage of investors favor ESG/sustainability than does. American investors are far more numerous in reality than they are in the crosstabs of these surveys, and they are less likely to be driven by ideologically tainted investment ideas.
The second problem here is that young American investors are far more supportive of ESG/sustainability than are older investors, even as their support hinges on non-pecuniary goals: “North American… investors seek real-world outcomes….” What this tells us is that these investors grasp compound interest in theory, but not in reality. Again, the evidence shows pretty comprehensively that “real-world” ESG/sustainability outcomes almost always mean lower returns on investment, which is to say less interest compounding over time. And that, in turn, means less retirement security. Younger investors clearly don’t realize it, but all of this stuff is connected. There is no free lunch, as the adage says, and there are costs associated with “real-world sustainability outcomes.”
The third and most glaring problem here is that there is such a thing as the Morgan Stanley “Institute for Sustainable Investing.” This is an aggressively political organization, helmed by aggressive political activists. Its board of directors is a Who’s Who of ESG and sustainability non-profits, including Ceres and Just Climate. It sponsors conferences, events, and contests for “policymakers, economists, scientists, entrepreneurs, and investors.” Fiduciaries not invited. The Institute for Sustainable Investing is one of the few remaining hardline outward signs of political ideology among American asset managers. It represents everything that BlackRock, Vanguard, and the rest embraced in 2021 but have largely abandoned since (at least publicly).
Morgan Stanley Wealth Management manages over $1 trillion in IRA funds and is, through its E*Trade platform, expected to be a featured provider when the TrumpIRA.gov marketplace launches in 2027.
Retirement security is an outstanding policy focus. And so, for that matter, is financial literacy.
We have a long row to hoe on both.
.
