Congress is right to oppose the administration’s effort to draft retirees into this extortion racket at the expense of their financial security.
Congress is right to oppose the administration’s effort to draft retirees into this extortion racket at the expense of their financial security.
M any of the roughly 116 million Americans who have an Apple iPhone in their pockets may be unaware that the device recently baked inefficiency into its operating system.
In its recent updates, the mobile device introduced a “clean-energy charging” feature. When engaged, it slows your phone’s capacity to recharge its battery during your region’s peak hours of electricity use, prioritizing renewable sources over on-demand fossil-fuel-generated power. The practical effect of this feature is to slow the rate at which your phone recharges, which explains the spike in online inquiries from users who want nothing more than to turn the thing off (and the occasional lecture about why your desire for proficiency in your personal electronics is a moral failing).
This feature presents users who want to subordinate efficiency to broader ideological goals with that option, but it’s the off button that renders this a viable proposition. There are plenty of phones on the market, and consumers may be tempted to shop around if their usage habits have to comport with Cupertino’s ideological preferences. Investors have of late been confronted with a similar conundrum. Ideologically motivated inefficiency is all the rage in the world of finance, but small investors are increasingly being deprived of access to an off button.
So-called “ESG” — environmental, social, governance — investing is the financial equivalent of the iPhone’s green charging feature. It sacrifices the pursuit of returns on investment to one degree or another, incorporating “non-financial factors” into the development of a portfolio. The goal of this practice is to reward firms that prostrate themselves before faddish progressive causes, from DEI initiatives to climate activism.
Among investors who privilege their sense of personal gratification over their bottom lines, ESG investing is just another financial product. But transforming private finance into a vehicle for the pursuit of left-wing policy goals by non-political means isn’t for everyone, particularly investors of limited means. Retirement-fund managers, for example, are confronted with a conflict. They must now balance the social and political pressure to reward the firms progressives like and punish those they don’t against their fiduciary responsibility to seek maximum returns for their investors.
You can safely guess which side of this conflict the Biden administration has joined. Last November, the president’s Labor Department cleared a rule reversing a Trump-era regulation limiting retirement-plan fiduciaries from considering “climate change and other environmental, social, and governance factors when they select retirement investments.” ESG factors, Labor Department assistant secretary Lisa Gomez explained, “can be useful for plan investors as they make decisions about how to best grow and protect the retirement savings of America’s workers.” Congress doesn’t seem to agree.
By a vote of 50 to 46, with Democrats Joe Manchin and Jon Tester joining every Republican member, the Senate passed on Wednesday a resolution blocking the Labor Department’s effort to limit the returns enjoyed by retirees. The principle affirmed by the Senate vote is simple: Fund managers have a fiduciary duty to their investors that is undermined by ESG. By contrast, their opponent’s arguments, summarized by the New York Times’ reporting on the subject, are all over the map.
The attack on ESG is part of a “broader Republican strategy” to portray Biden’s policies as “extreme liberalism run amok,” the Times reports. Moreover, there’s no evidence for the GOP claim that ESG investing “would lead to the disinvestment from the fossil fuel industry,” but this argument somehow persuaded two Democratic senators to back the measure because they “face reelection races in states that rely heavily on fossil fuels. ESG principles are “widely accepted” and have been “around the globe” for “nearly two decades.” That fails to explain why the Trump administration’s prohibitions on the practice failed to rise to the level of national scandal, but the Biden White House’s reversal of this rule has.
Some states already restrict their treasurers from engaging with investment firms that take unsound risks with the 401(k)s, retirement portfolios, and pension plans in their care. Throwing good money after bad isn’t prohibited at the federal level — at least, not so long as ESG initiatives aren’t designed to compel private firms to break the law by, for example, forcing insurers to consider the race of their applicants when issuing policies. But investors need to know they’re leaving money on the table when they prioritize social engineering over profits.
“Pick a company in the Fortune 500 and sample the top five ESG ratings providers — a correlation of less than 50% is normal,” read a 2022 Barron’s analysis. “By comparison, the top five ratings providers for a typical corporate bond from the same Fortune 500 company would likely have a correlation greater than 80%. This kind of result undermines confidence in ESG writ large.” Assets in “sustainable investments” are down by nearly half from their 2020 peak — from $17 billion to roughly $8.4 billion today. As of December 2022, the firms that utilize ESG criteria oversee just 13 percent assets under management in the U.S. In 2020, nearly one-third of assets were “sustainably invested.”
Maybe ESG isn’t so “sustainable” after all. That would explain the urgency its advocates evince in their effort to conscript the financial industry into the work of progressive activism. Indeed, strong-arming private investors and enterprises is a key feature of the ESG business model. A firm with a sound product and a solid projected growth rate can find that a “low ESG rating” is all that matters to certain financial institutions. Take, for example, Elon Musk’s Tesla. Musk’s company had a five-year projected growth rate of 31.4 percent and was expected to deliver “strong growth across all of its key financial metrics” when S&P Dow Jones’s head of ESG indices, Margaret Dorn, determined that the firm had “fallen behind its peers when examined through a wider ESG lens.” The distorting filter of that “lens” led the S&P 500 to remove the electric-car maker from its stock index tracking socially conscious companies, taking access to a big pile of capital along with it.
The notion that the American Right’s hostility to ESG investing represents a “moral panic” over a “conspiracy theory” is a generally uncontested proposition in the center-left press, but the practice’s critics can recognize a pressure campaign when they see one. Congress is right to oppose the administration’s effort to draft retirees into this extortion racket at the expense of their financial security. And yet, President Joe Biden has promised that, if this bill reaches his desk, it will be the first veto of his presidency. The press is on his side, predictably contending that this financial initiative is uncontroversial to all but the most fiscally conservative voters. And maybe they’re right. After all, you know what they say about a fool and his money.