Pres. Joe Biden’s first veto speaks awful volumes about the current state of the Democratic Party.
The topic at hand may seem like an arcane issue. It’s called ESG. That stands for Environment, Social and Governance. As applied to investments, it means that money managers can take these things into account when making decisions. That could be a problem because, in most cases especially for big pooled retirement funds, managers are required to invest for maximum return while taking into account risk.
So, a Biden administration rule would protect money managers from lawsuits from investors who might claim that their returns were hurt because the managers placed ESG goals ahead of their fiduciary responsibilities. Congress voted to kill the Biden rule with a few conservative Democrats joining all the Republicans. Biden vetoed that bill, which had the effect of leaving the pro-ESG rule in place.
This highlights yet again the primacy of hard-left identity politics in the Democratic Party. What if you’re a blue collar union retiree with moderate or conservative social views? Or what if you share those progressive views, but you just can’t afford to sacrifice earnings? Sorry.
Here’s the main problem. ESG is impossible to get right because, except for pure ideologues, people’s political views are complex. For example, I’m pro-E, but anti-S and ambivalent about G.
Let me explain. I’d be fine with targeting my investments toward environmental goals like fighting climate change, the G part. But I’m highly skeptical of Diversity, Equity and Inclusion programs, one prominent example of what might go into the S part, because the evidence suggests that they actually do positive harm to diversity, equity and inclusion. And, while I suppose having people of different backgrounds on corporate boards, the G part, would be a plus, it’s not that much of a plus. Suppose that the most pro-fossil fuels member of the Exxon board is a Black woman who opposes DEI programs because of their ineffectiveness. Does she get a pass just for being a Black woman or does her pro-G fail to compensate for being anti-E and anti-S?
It gets even more complicated. Can I just invest in an E fund, but without the S and the G? And even there, just how much am I willing to lose so that my investments line up with my environmental values? A half percent? One percent? Ten percent?
And, in fact, I probably will lose money. It turns out you can’t actually do all that well by doing good. In a March 10th article in the Wall Street Journal, Mike Edleson and and Andy Puzder put the “do well by doing good” theory to the test. “The results are compelling,” they wrote. “The market was down overall (from the last half of 2021 to early 2023), by 1.8% for the S&P 500 and 3.2% for the Russell 1000. ESG (environment, social and governance) funds performed worse, with most losing 2.5% to 6.3%. A simple index composed of only neutral companies gained 2.9%, significantly outperforming both broad-market and ESG indexes in up and down markets. Notably, the benchmarks include the outperforming neutral companies—indicating that the politically active companies further underperformed.”
My point is that not everybody is a hard-left progressive and even those of us with a politics that shades left of center don’t neatly check all the progressive boxes. Investors are people with complicated interests and diverse values. It’s pretty much impossible to capture those without an individualized portfolio and even then how much can we really know about each of the companies we invest in? Corporations have become pretty good at ESG window-dressing.
If you are hard-left, check every conceivable politically correct box, and you want to invest this way, well, that’s great. Go ahead. But the rest of us with more nuanced and mixed views shouldn’t be required to go down that road (and perhaps that hole) with you.
Have a nice weekend.
4 thoughts on “ESG: Not For Me”
Hi Dave, interesting points. I’ve been ambivalent about ESG investing and have also seen the analysis of their results. The combination of ESG is somewhat problematic. I went and read the rule, and I’m not sure I really understand the complexity of what it does. But it does strike me that if the Trump administration removed consideration of ESG factors for money managers, doesn’t this simply add them back? The most salient point I read in the rule was: “However, the final rule maintains the longstanding principle that the fiduciary may not accept reduced returns or greater risks to secure collateral benefits.(11)”
I guess I believe that people should have ESG funds as options, but I concur that neither you, nor I should be forced to accept those as part of our portfolio.
Dave: I have four ESG funds. All of them made money in the past year. Yet you give financial advice – which, really, is a slippery slope anyway – specifically telling blue collar workers and others NOT to invest in ESG because they lose money. The rule is a dumb rule. A good investor will have a good advisor. But telling workers to avoid ESG funds because of it? Yeah, sorry. My father would never allow us to use shotgun squirrel hunting. It’s where I learned about overkill. George
I don’t think I was giving anyone financial advice. If I did I don’t see how it could be any worse than my political advice. Anyone foolish enough to take it would deserve the outcome. Kind of Darwinian in that way. I did quote from the study that was in the Wall Street Journal where they found that ESG funds didn’t perform well versus market indicators.
Exactly on point Dave. Great summation of the anti-fiduciary nature of the bill in question.
The bill is unconstitutional, which doesn’t seem to be an issue for Democrats. Maybe it’s a plus for them. Amendment 5 – the Taking Clause – specifies that the government cannot seize private property without compensation. The last line:
“Nor shall private property be taken for public use, without just compensation.”
If the gov’t forces people to invest in a public ‘good’ – ESG here – they have to compensate for any loss. Protecting money managers from their fiduciary responsibilities neuters the amendment.
As history is unequivocally clear, legislating morality – “doing good” – should be an obvious red flag.
Mr. Hesselberg, you should start an advisement business. You outperformed every financial advisor and ESG fund that I am aware of.
Source for the above:
Armstrong is one of the most famous, and effective, financial advisors in the world. Highly recommended for economic perspective.