In today's WSJ, Senator Chuck Schumer argues that "Republicans Ought to Be All for ESG." There's a lot of misinformation in it. He claims, for example, that:
America’s most successful asset managers and financial institutions have used ESG factors to minimize risk and maximize their clients’ returns.
True, sort of. A lot of investment managers do use ESG. But not successfully. In my book The Profit Motive I review the data on ESG investing and point out that:
If socially responsible firms are superior performers, one should see evidence that investment portfolios weighted towards such firms outperform the market on a risk-adjusted basis. Yet, there is little evidence that socially responsible investment funds outperform relevant market indices. ... In general, there is no evidence that SRI investment funds—standing alone—improve portfolio company performance on environmental or social metrics, probably because such funds prefer investing in firms that already score high on those metrics. ... A 2021 literature review of over 1,100 peer-reviewed studies and 27 published meta-analyses determined that the risk-adjusted financial performance of ESG investing was indistinguishable from that of conventional investing.
He then claims:
Investors and asset managers increasingly recognize that maximizing returns requires looking at the full range of risks to any investment—including the financial risks presented by increasingly volatile natural disasters, aging populations and other threats that the public doesn’t normally associate with financial modeling.
It's interesting timing for that claim, because on Monday in the WSJ we learned that Vanguard CEO Tim Buckley was backing his massive fund family away from ESG:
“Our research indicates that ESG investing does not have any advantage over broad-based investing,” Mr. Buckley said in a recent interview with the Financial Times. Matching word to deed, his comments came after he had withdrawn his firm from the $59 trillion Net Zero Asset Managers initiative, an organization that is part of the $150 trillion United Nations-affiliated Glasgow Financial Alliance for Net Zero. Both alliances are committed to restricting their investments over time to companies that are compliant with the Paris Agreement’s objective of net-zero greenhouse gas emissions by 2050. Mr. Buckley claims the financial world, swept up in climate-change fervor, can’t make such commitments without reneging on its fiduciary duties.
Next Schumer turns to the recent Department of Labor ERISA rule allowing investment managers to freely invest their client's money in ESG:
Nothing in the Labor Department rule imposes a mandate. It simply states that if fiduciaries wish to consider ESG factors—and if their methods are shown to be prudent—they are free to do so. Nothing more, nothing less.
The present rule gives investment managers an option.
But what if the investment manager's client don't want their money going down the ESG sinkhole? Presumably Schumer would say "change investments," but not all of us have that choice. As I discussed in an earlier post, the University of California unilaterally shifted my retirement money into portfolios that track ESG indices. Nobody asked my permission and I don't have any choice in the matter.