ESG: Illegal, Unprofitable (AND Often Wrong)

Writing at the Washington Examiner, Robert Bork provides both an analysis of the legal status of Environmental, Social, Governance (ESG) investing (as it is known at the moment) and an update on how it is faring as an investment strategy.

(As one might expect with anything the left promotes, one would wonder how mankind had managed to survive for so long before it was devised. It's good to hear another perspective for a change.)

Regarding the former, the practice of placing concerns other than maximal returns first -- fraudulent when done without consent to begin with -- was explcitly made illegal decades ago:

Image by FaceMePLS, via Wikimedia Commons, license.

When Congress passed the Employee Retirement Income Security Act in 1974 to govern private pension plans, it imposed strict fiduciary duties of prudence and loyalty. In other words, your fiduciaries, or asset managers, were legally required to obtain the best financial returns for you while striving to reduce expenses and risks to your portfolio. ERISA remains the law under which 152 million workers hold $12 trillion in assets.

This is hardly to endorse the above law, which looks to me like a way to expand the reach of the regulatory state. Nevertheless, it is on the books, and it is being circumnavigated by the Biden Administration.

But again, since fraud is already illegal -- and if someone wants to invest this way, he should be free to do so -- I find the latter more interesting, and more likely to arouse a well-deserved backlash:

A good idea of how individual retirement accounts will fare under the ESG regime is how large, institutional ESG funds have performed. ESG funds, heavily weighted toward tech and away from oil and gas, performed well for years until those sectors reversed. So-called green funds saw losses that exceeded the overall market. Now ESG is in the tank. In the last five years, according to Terrence Keeley, former BlackRock senior executive, global ESG funds have underperformed the broader market with an average return of 6.3% compared with an 8.9% return for non-ESG funds. An investor who put $10,000 into an average global ESG fund in 2017 would have about $13,500 today, compared to $15,250 for someone who invested in the broader market.

This is not to say that ESG would be a-okay if only it performed better.

The fact is that, as I put it recently:

[A]ccording to DeSantis, Disney had been pressured by activist ESG (Environmental, Social, Governance) investors to oppose the law, raising the possibility that the company was being coerced.

How? Many states with large public pension funds, like California, engage in ESG at the behest of government officials, instead of maximizing returns. That is, they wrongly use retirement funds without the knowledge or consent of retirees to promote ideas those retirees may not agree with. In the process, they're turning corporations into political sock-puppets. [bold added]

Bork is factually correct to note the illegality of (at least some) ESG investing and its recent poor performance vis-a-vis other strategies.

But, while Bork will probably anger many retirees, it will not be as intense or as righteous an anger as it ought to be.

Why? For, insofar as the state is behind it, ESG investing is not merely as wrong as any other form of fraud, it is worse in the sense that it is being compounded by the government -- whose job includes protecting property rights -- performing it!

So long as conservatives fail to stress that forcing investors to accept lower returns violates their rights, they will fail to land the sucker punch that this dishonest tactic is practically asking for.

-- CAV