Targeting fossil fuels as an investment is a current political issue. With more than $700 billion in assets, The Thrift Savings Plan is the target in the midst of the political fight.
President Biden has issued a new Executive Order entitled “Climate-Related Financial Risk”. Investors in the federal government’s Thrift Savings Plan (TSP) will want to pay attention as the EO will impact investments for your future retirement income.
The EO assumes climate change is an inherent risk to various financial investments, including assets in the TSP. The Executive Order concerns “the global shift away from carbon-intensive energy sources and industrial processes present(ing) transition risk” while also providing “generational opportunities to enhance U.S. competitiveness and economic growth, while also creating well-paying job opportunities for workers.”
The EO directs the Secretary of Labor to:
(a) identify agency actions that can be taken under… the Federal Employees’ Retirement System Act of 1986 (Public Law 99-335), and any other relevant laws to protect the life savings and pensions of Unites States workers and families from the threats of climate-related financial risk:…
(c) assess — consistent with the Secretary of Labor’s oversight responsibilities under the Federal Employees’ Retirement System Act of 1986 and in consultation with the Director of the National Economic Council and the National Climate Advisor — how the Federal Retirement Thrift Investment Board has taken environmental, social, and governance factors, including climate-related financial risk, into account…
Within 180 days, a report is to be submitted on the actions taken by the Thrift Savings Plan to take climate-related financial risk into account.
Seeking to Divest Fossil Fuels from the TSP
Earlier this year, FedSmith published an article on proposals that threaten “to gut some TSP funds.” The article cited proposals to require the TSP to divest the TSP of investments in fossil fuels. The article called the TSP “an important prize” as “the largest retirement plan in the United States.”
The article questioned whether the “Biden Administration has the nerve to make a move like this” by “Using his executive authority to divest the T.S.P. (to) help him go down as the first real climate President.”
The New Yorker contends federal employees are “fed up with dirty fuels lurking in their nest eggs.” The apparent source of the conclusion is a contention by an AFGE official in the Environmental Protection Agency quoted as saying, “Right now, my employer, the federal government, forces me to invest in the very companies that imperil my children’s future by pumping greenhouse gases into the air.” The attorney organized a petition asking for support by more than six million TSP investors for an executive order to create a fossil-free TSP. At the time of this writing, 561 people have signed the petition.
Opposing and Supporting Proposed Changes
Curious if the purported opinion of federal employees cited in the article was valid, FedSmith asked this question of readers in a survey: “Are you in favor of an executive order from the president requiring the TSP to divest all fossil fuels from its investments?” 2,383 readers submitted their reactions. On this question, 7.3% were in favor and 92.7% were opposed to such an executive order.
The largest federal employee union, the American Federation of Government Employees (AFGE) has also jumped on the fossil fuel divestiture bandwagon. In a recent statement, the union wrote it supported the new EO and also supported a bill requiring the TSP to eliminate fossil fuels from the TSP. AFGE wrote: “Curbing investments in harmful fossil fuels is not only good for the environment and our planet – it’s good for workers, too.
The Federal Retirement Thrift Investment Board (FRTIB) is the organization that administers the TSP. In response to the RESPOND Act, the FRTIB wrote in a talking points document: “The RESPOND Act would gut four of the TSP’s five Funds.” The organization also concluded, in part:
Removing individual companies or specific segments of the market from the Funds or their benchmark indices is highly likely to result in lower risk-adjusted returns to participants over the long term.
The RESPOND Act violates one founding principle of the FRTIB’s mission to provide federal workers and retirees passively managed investing based on broad market indices.
To the extent real change is desired, directing the DOL (Department of Labor) to create a national standard for all retirement investments will accomplish…the purported goal and result in a more consistent approach.
March 2021 Talking Points from FRTIB regarding S. 606 and H.R. 1618 (the RESPOND Act)
Conclusion
The Executive Order does not have any immediate impact on the Thrift Savings Plan. With the prominent emphasis by the current administration on climate concerns, and the involvement of the national climate advisor in this review process set up by the EO, the Thrift Savings Plan will probably see changes.
Whether the changes will occur with a future EO or with legislative changes remains to be seen. The Executive Order appears to indicate this is a first step in making changes the White House wants to make, how to make them, and the extent of the changes to be made.
The Executive Order is a step in creating a national standard of some kind for financial investments. This is what the FRTIB wrote was necessary but was not what the RESPOND Act or an EO singling out the TSP would do.
