Kentucky Attorney General Opinion OAG 22-05 notes the "increasing trend among some investment management firms to use money in public and state employee pension plans—that is, other people’s money—to push their own political agendas and force social change." The Attorney General is also concerned "that politically biased investment strategies have real costs and worsen outcomes for pensioners."
The Attorney General therefore addresses the following question:
Whether “stakeholder capitalism” and “environmental, social, and governance” investment practices in connection with the investment of public pensions funds are consistent with Kentucky law governing fiduciary duties.
The opinion reviews both ERISA and Kentucky statutes to conclude that:
While asset owners may pursue a social purpose or “sacrifice some performance on their investments to achieve an ESG goal,” investment managers entrusted to make financial investments for Kentucky’s public pension systems must be single-minded in their motivation and actions and their decisions must be “[s]olely in the interest of the members and beneficiaries [and for] the exclusive purpose of providing benefits to members and beneficiaries” .... In sum, politics has no place in Kentucky’s public pensions. Therefore, it is the opinion of this Office that “stakeholder capitalism” and “environmental, social, and governance” investment practices that introduce mixed motivations to investment decisions are inconsistent with Kentucky law governing fiduciary duties owed by investment management firms to Kentucky’s public pension plans. (Emphasis in original.)
I certainly agree that politics has no place in investment management. I have frequently written about that issue in connection with divestment campaigns, most notably in Those Divesting Presbyterians.
As I will be discussing in my forthcoming book, The Profit Motive: In Defense of Shareholder Value Maximization, I am also deeply skeptical that there is a business case for ESG and stakeholder capitalism.
Having said that, however, note that the Kentucky Attorney general's opinion has a gap; namely, it fails to address the question of whether there is a business case for ESG and stakeholder capitalism.
Proponents of ESG argue investing in employee welfare generates higher employee satisfaction and, as a result, productivity gains.[1] Improved corporate governance will discourage managers from actions that benefit themselves at the expense of shareholders and/or stakeholders. Likewise, investing in environmental enhancements will reduce long-term costs from climate change. And so on.[2]
Proponents will therefore argue that they are using ESG metrics in making investment decisions precisely for the required "purpose of providing benefits to members and beneficiaries."
As I explain in The Profit Motive, I don't buy the proponents' argument. To the contrary, ESG is mostly about politics.
But the Kentucky Attorney General's opinion basically ignores this critical issue. It says there is "some suggestion" that ESG's costs outweigh its benefits. In support of that rather weak claim, the opinion cites one op-ed from Barron's. This omission significantly weakens the opinion. As such, the opinion does the objection to ESG little good.
[1] See, e.g., Sonja Lyubomirsky et al., The Benefits of Frequent Positive Affect: Does Happiness Lead to Success?, 131 Psychol. Bull. 803 (2005) (arguing that employee happiness is positively correlated with a number of attributes that result in higher levels of productivity and, accordingly, business success). But see Stephen M. Bainbridge, Privately Ordered Participatory Management: An Organizational Failures Analysis, 23 Del. J. Corp. L. 979, 997 (1998 (“Participating workers are not necessarily happy workers and happy workers are not necessarily productive workers.”).
[2] See, e.g., Virginia Harper Ho, “Enlightened Shareholder Value”: Corporate Governance Beyond the Shareholder-Stakeholder Divide, 36 J. Corp. L. 59, 82 (2010) (citing a report arguing that “a focus on ESG matters ‘may better align investors with the broader objectives of society,’ but its fundamental rationale is solidly grounded in shareholder primacy—namely, that ‘consideration of [ESG] issues is part of delivering superior risk-adjusted returns’ to investors over the long run”).
