President Biden used his very first veto to squash a bipartisan resolution that would effectively ban using environmental, social and governance (ESG) guidelines when investing retirement funds.
He knew overriding both houses of Congress on the issue was unpopular, so he lied about it. He (or someone on his staff) tweeted: “This bill would risk your retirement savings by making it illegal to consider risk factors MAGA House Republicans don’t like. Your plan manager should be able to protect your hard-earned savings — whether Rep. Marjorie Taylor Greene likes it or not.”
Note the dog whistle references to “MAGA” Republicans and Rep. Marjorie Taylor Greene (R-Ga.), Democrats’ favorite bogeyman. Biden doesn’t explain how Sens. Joe Manchin (D-W.Va.) and Jon Tester (D-Mont.), both of whom voted with the GOP, have become MAGA supporters.
Manchin said of Biden’s veto: “President Biden is choosing to put his Administration’s progressive agenda above the well-being of the American people.” He is correct.
ESG investing has been shown to produce below-average returns and to be riddled with fraud. Why has it attracted trillions of dollars? Because it’s a gold mine for fund managers who charge significantly higher fees and because there are a lot of gullible people in the world.
Many Americans haven’t a clue about ESG, and probably wonder what all the fuss is about.
The argument boils down to this: Biden wants the people running pension and retirement accounts to be able to pick stocks and bonds that meet ESG guidelines, which favor climate-friendly or otherwise socially conscious companies. They claim (without evidence) such firms will outperform over time. Opponents of using ESG as a guide want investment managers to simply make the most money possible for retirees.
Sometimes those things overlap. But sometimes they don’t.
Look at last year. The 10 best-performing stocks in 2022 were oil and oilfield stocks like Occidental Petroleum (up 119 percent) and Exxon Mobil (+87 percent); all 10 rose more than 70 percent.
More broadly, the Energy Select SPDR Fund, the largest oil stock ETF, rose 64 percent in 2022 on top of a 53 percent jump in 2021. By contrast, the S&P 500 fell 19 percent last year, after a 27 percent gain in 2021.
No ESG investor worth his Sierra Club membership would be caught dead investing in oil shares. True, there are numerous oil and gas companies ranked by Dow Jones in the top 100 ESG firms, but that’s because they claim corporate citizenship and other virtues; few true believers will buy them. As a result, for the last two years, ESG funds have underperformed.
Consequently, enthusiasm for the practice plummeted. Investors began to reassess their commitment to doing good as opposed to doing their best, and inflows to ESG funds tanked 76 percent globally, to the lowest amount since 2018.
In the U.S., overall assets invested in ESG funds dropped 20 percent. ESG investors were hurt by not owning energy companies and also by avoiding defense firms (definitely a no-no for the woke crowd), which got a boost from the war in Ukraine. Instead, many were heavy into virtuous tech companies that bombed when the Federal Reserve jacked up interest rates.
Picking companies that satisfy sustainability or ethics guidelines is more complicated than you might think. For instance, you would imagine Tesla to be a perfect ESG investment, but you’d be wrong. Elon Musk may have put electric vehicles on the map, and so actually reduced U.S. carbon emissions, but his workforce is not unionized and his company does not score well on ESG.
Also, one might question whether Apple, a company that manufactures a large share of its gizmos in China, should make the ESG cut. After all, China’s record on human rights and the environment is deplorable. Nonetheless, Apple is an EGS darling, ranked in the top 10 by Investor’s Business Daily.
Naturally, given the winners and losers last year, some (flexible) investment managers have upended their definition of ESG, with some caving and buying oil stocks in desperation. As the Financial Times wrote last year, there is no “universal, objective, rigorous framework for ESG investing.”
Does investing in highly-ranked ESG firms pay off? Is it really better for the beneficiaries of the funds under management? The answer to both questions is no.
A devastating study by a professor at Columbia Business School and an assistant professor at the London School of Economics looking at results from 2010 to 2018 showed that “ESG funds appear to underperform financially relative to other funds within the same asset manager and year, and to charge higher fees.” Worse, the analysis found that “portfolio firms [have] worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds managed by the same financial institutions in the same years.”
The study also showed that, “ESG funds hold stocks that are more likely to voluntarily disclose carbon emissions performance but also stocks with higher carbon emissions per unit of revenue.” And, “We show that ESG scores are correlated with the quantity of voluntary ESG-related disclosures but not with firms’ compliance records or actual levels of carbon emissions.” Ouch.
Why, given this damning assessment, are managers still offering ESG funds? Because they make more money. A recent Harvard analysis showed that “the average ESG U.S. stock ETF charges 0.17% in annual fees, according to Morningstar, 0.05 percentage points more than non-ESG funds.”
And, because there’s a sucker born every minute.
In 2021 the Securities and Exchange Commission undertook to root out fraud in ESG-world, acknowledging that managers were making a lot of bogus claims about how such funds might help save the planet. Last year, the German police raided a Deutsche Bank-owned asset manager accused of “greenwashing,” or making false statements about their ESG funds.
Investors picking money managers should not be distracted by questionable claims of doing good though ESG investing. Better for everyone if they choose investment professionals ready to buckle down and maximize profits for their customers the old-fashioned way.
Liz Peek is a former partner of major bracket Wall Street firm Wertheim & Company. Follow her on Twitter @lizpeek.