ESG: Your Retirement Funds(,) Their Pet Causes

A short piece at City Journal notes two major problems with governments placing public money into ESG funds, whose investors seek out corporate compliance with various causes rather than the greatest return:

Image by Coolcaesar, via Wikimedia Commons, license.

What ESG really offered was an opportunity to bring politics into investing, because deciding which companies meet ESG standards is a value judgment, and that means making a political choice. So the idea of public-pension funds investing in ESG -- an inherently political concept -- was always troubling. In 2018, at least $3 trillion of public pension money, or about a quarter of the market, was invested in ESG funds. This is a problem for two reasons. One is that it means lower returns. As Cliff Asness points out, a constrained portfolio will never return the same amount as an unconstrained one. When the economy was growing, ESG funds appeared to do as well as, or even better than, value-neutral index funds. Now the market is turning, and ESG funds are underperforming. Investors must assess funds based on how they perform in all markets. And when it comes to public pensions, the taxpayer is the one who has to foot the bill for underperforming funds.

ESG investing is also inappropriate for public funds because it is political. Why should taxpayers bear the cost of funds that underperform because they reflect political beliefs that not everyone shares? To some extent, this already happens: investing public-pension money in local, politically favored projects is popular, but it also leads to terrible deals for taxpayers and should not be scaled into public markets. [links omitted, bold added]

This should make lots of people very angry.

The state shouldn't be in the business of running retirement funds, but so long as it is, the officials in charge have a fiduciary duty to maximize returns. This duty is being violated on an enormous scale in what amounts to stealth partial nationalization of the companies whose shares are owned by those funds.

I am glad to see these questions being asked. That said, as inured as everyone is to the government running everything, and with our cultural saturation with leftism, I think the sheer scandalousness of this is escaping most people: The money of countless investors is being misused to support other people's pet causes to their detriment.

-- CAV