There’s increasing outside pressure from the executive branch on the TSP’s governing body to assess potential risks due to climate change – but is there a real threat or is this just politics?
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One of the main focuses of the current administration is to address the impacts of climate change. This can be seen through numerous executive orders and policies that have impacted several agencies, including the USDA, DOT, and EPA. This past year, federal agencies have been targeting the federal employee retirement plan, the Thrift Savings Plan (TSP), as an area where the impacts of climate change need to be addressed.
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In February, a sub-agency of the Department of Labor (DOL), the EBSA (Employee Benefits Security Administration), criticized the TSP’s passive investment strategy of tracking “commonly recognized” indexes, and insinuated there could be more appropriate indexes to track that take environmental and social governance (ESG) risks more into account. The EBSA also argued the market index used for the S-Fund, the Dow Jones US Completion Stock Market Index, isn’t “commonly recognized” and could be replaced with an ESG-focused index that is either more or just as recognizable.
More recently, the Government Accountability Office (GAO), believing the TSP’s board is not taking climate risks seriously, issued a strong recommendation to the Federal Retirement Thrift Investment Board (FRTIB), urging them to extensively assess the TSP’s investments for risks related to climate change. But in truth, there isn’t much the FRTIB can do to alter the TSP’s investments, and even when modest index changes have been attempted (like with I-Fund in 2020), political turmoil prevented the implementation of new index.
Federal Agency rules and executive orders can’t override legislation from Congress, so any changes to the TSP’s core funds (G, F, C, S, and I) would have to be decreed by law. There have been bills proposed that would have significantly altered the TSP’s investment strategy, but none were passed. One proposal would’ve added a new TSP fund that tracks an index focused on ESG investments while another would’ve eliminated fossil-fuel investments in the TSP altogether. Because the TSP is the largest such retirement plan on the planet in terms of both participants and assets managed, making such a drastic change would cause a major disruption to markets across the globe. This is the main reason why the FRTIB exists outside of regulations (such as ERISA) that similar investment organizations are bound to – to prevent either the TSP’s governing body or the executive branch from using the TSP’s size as a tool to accomplish political goals.
DOL Issues New Rule
On November 22nd, the DOL issued a final ruling regarding an executive order that allows fiduciaries of retirement plans to take ESG factors, including climate change, into account when selecting investment options. It removes restrictions that the previous administration had enacted through its own executive order, which mandated that fiduciaries had to prioritize profitability over all other factors. While this doesn’t directly impact the passive strategy currently used by TSP fund managers, the past year’s pressure on the FRTIB to address climate change-related risks does not show signs of relenting.
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