New Orleans Weirdly, along with critical race theory, gender determination, and abortion, some of Republican states also have found red meat in attacking banks and some financial institution’s offerings of alternative investment funds. ESG or Environmental, Social & Governance, standards purport to add various screens for investors who are concerned about these additional factors, rather than simply the rate of return or dividend yield. What’s ticked off some governors in Texas, Florida, and elsewhere is banks as well that have indicated that they will no longer lend to oil and gas drilling operations, but generally the whole idea of something less than brute force, survival-of-the-fittest, dog-eat-dog, robber baron capitalism seems to offend some of these folks.
It’s their citizens’ personal money, so why do they care? No one is forcing the states to add these ESG screens, although some state treasurers and public pension funds have indicated that they will. There’s also no question that the ESG money movement has gotten much, much larger over the last 20 years or so. It’s not small. One estimate by the Harvard Business Review says, “As of December 2021, assets under management at global exchange-traded “sustainable” funds that publicly set environmental, social, and governance (ESG) investment objectives amounted to more than $2.7 trillion; 81% were in European based funds, and 13% in U.S. based funds.” That’s not small potatoes, so what’s the problem?
Well, there are some in fact. Like the issue in certifying fair trade coffee, where there are a plethora of groups making claims, ESG sustainability funds also have widely different standards that are complicated by the competition between the funds and the lack of transparency about how the ratings are calculated. Some are more environmental. Some don’t really factor in labor and workplace issues. It’s a hodgepodge of good intentions without agreement on common rules of engagement. When that comes to getting people to part with their money, that’s an issue, regardless of the ideology of some of our elected officials.
Part of the caveats around ESG investments, and this is where critics hit home, is that in avoiding sin stocks, climate-killers, and other bad to sketchy businesses, the investor is saying that they are willing to absorb the fact that these sustainable plays may not pay off as well as Warren Buffet-type investments only focused on the bottom line. In a special report recently, the Wall Street Journal surveyed a number of these focused investment categories and broke down the response by age cohorts. The older you were, the least willing you were to take the chance that you would make less with ESG investments. As they report,
Investors 58 year old and over were the least likely to support ESG objectives in general, and those between 18 and 41 were the most likely….For instance, more than one-third of the young investors said they would be willing to lose 11% to 15% of their retirement savings to encourage companies to have gender and racial diversity mirroring the general populations, but only 3% of the older investors said they would forfeit that amount for that goal.
No real big surprises there. The young ones have plenty of time to get their money right, but that’s less so for the oldies, unless they are sitting on a pile.
The other problem, which isn’t personal, but institutional, is requirements that pension and other funds maximize their returns. Some restraint is warranted to hold trustees and board members accountable, but many critics – me among them – believe that on the margins, these funds, especially the big ones, have a public responsibility to more than pure profit, and should have more flexibility. Some funds make the case as well, that ESG investing is competitive with regular investing.
We’re way out of our lane here, but some things are clear. States should not be allowed to politicize this area. More standardization and transparency are needed to make the big guys and little ones more comfortable in this area. Finally, pension funds, especially those overseen by unions, should have more flexibility to support their members’ work in addition to their retirements.
There’s a long road to go, but the path is pretty straightforward.