Providers of ETFs that invest based on principles of environmental, social, and governance (ESG) are facing headwinds from multiple sides. First, they are about to be hit with a batch of new rules from the SEC. Secondly, they have been put directly in the middle of a political battle between those for ESG and those who think it is just woke capitalism. On the SEC front, the agency recently published the results of two consultations. The first was on proposals to change the so-called Names Rule. The SEC wants to strictly define how a fund’s constituent investments should be reflected in its name. The second was on proposals for requirements on ESG disclosures for investment advisers and investment companies. On the political front, Florida passed a resolution in August that bans its pension fund managers from considering ESG with regard to their investing strategies. During the same month, Texas criticized BlackRock and nine European financial groups for boycotting the fossil fuel industry.

Finsum:ESG ETF providers are facing criticism on both the regulatory and political fronts.

At the 2022 PLANADVISER National Conference, which was recently held in Scottsdale, Arizona, three staffers from the SEC provided an in-depth discussion on multiple topics, which included best practices that firms should consider putting in place to avoid any Reg BI issues. According to the SEC staffers, under Reg BI, when making a recommendation to a retail customer, a brokerage professional must act in the best interest of the retail customer at the time the recommendation is made, without placing their own financial or other interests ahead of the retail customer’s interests. Their recommendations included: avoiding compensation thresholds that disproportionately increase compensation through incremental increases in sales, minimizing compensation incentives for employees to favor one type of account over another, eliminating compensation incentives within comparable product lines, and implementing supervisory procedures to monitor recommendations.

Finsum:At a recent conference, three members of the SEC provided a list of recommendations for advisors to implement to avoid running afoul of Reg BI.

While many market strategists have noted the recent failures of the 60/40 model portfolio, one investment manager still sees value in the portfolio model. Quilter Cheviot's investment manager David Henry told the Financial Times that there was still value in 60/40 portfolios despite rising inflation and geopolitical uncertainty. He commented, "But if we look at the historical numbers, maybe the grim reaper should hold onto his horses." Henry looked at quarterly returns for stocks and bonds since 1986 and found that there were nine quarters when the prices of both bonds and stocks fell in tandem and it has only happened once since 1986 in consecutive quarters, the first and second quarters of this year. He stated, "Breakdowns in diversification like we have seen this year, are rare. We then looked at 12-month forward returns for a 60/40 asset allocation following quarters where stocks and bonds fell together and returns were pretty healthy following those quarters.”

Finsum: An investment manager still believes in the 60/40 portfolio model as it is pretty rare for stocks and bonds to fall in tandem.