When Investment Is Informed by Partisan Politics, It's Not Investment
For most people, the purpose of investment is to provide for retirement, provide for a rainy day, or--if one is fortunate--take care of one’s descendants.
However, for an increasing number of investment professionals it has become another means for pursuing a political agenda that may or may not comport with that of their investors.
The nation’s top pension fund managers are coming to Washington, DC this week for the Council of Institutional Investors (CII) Spring 2018 conference, and--fitting for the location--political engagement is on the agenda. Specifically, environmental, social and governance (ESG) investing initiatives feature prominently on CII’s schedule.
Why is this so concerning? ESG investing is the latest fad in the investment world, as billions of dollars invested on behalf of current and future retirees have been directed to ESG-focused funds, or committed to environmental and social activist causes that are unlikely to find success. These activist endeavors incur hefty fees for the Main Street retail investors, 401(k) owners and pensioners, and research has shown that such virtuous investment comes at a cost: ESG funds tend to underperform the market.
And while a few basis points might seem like a small sacrifice to pay to help the political aspirations of investment managers, those points add up over a lifetime of investing: A report by President Obama’s Council of Economic Advisers noted that a reduction in the return to an investment can diminish how much a retiree is left with by as much as a quarter.
Although ESG investing is generally bad news for middle class workers saving for retirement, the conference agenda has an all-star roster of individuals who will try to validate ESG strategies. First up on March 12 is a session titled “Master Class: Activist Investing, Shareholder Proxy Contest Decision-Making and Board Dynamics.” The session is being led by Jeff Barbieri, the head of ESG Research at Wellington Management Company.
Also on the panel is Matt DiGuiseppe, the head of Americas Asset Stewardship at State Street Global Advisors (SSGA). With $2.8 trillion in assets under management at SSGA (and another $2.47 trillion under the control of parent company State Street Corporation), the State Street enterprise has tremendous shareholder voting power in companies across the economy. DiGuiseppe “manages SSGA’s proxy voting activities and issuer engagement on environmental, social and governance issues,” according to his biography on CII’s conference agenda. In effect, he wields trillions of dollars in political heft, and he’s coming to share his methods.
Another speaker is Rob Main, the Head of Portfolio Company Engagement, Analysis and Voting at Vanguard, another behemoth asset manager with $4.5 trillion in assets. Main is responsible for ESG matters at Vanguard and controls how the firm votes its shares on various proxy proposals.
The following day has an event that features Jean Rogers, who invented and leads the Sustainability Accounting Standards Board to promote environmental sustainability through new accounting standards--with the support of CalSTRS, SSGA, BlackRock and others. Another event titled “How ESG Can Drive Voting Considerations” also embraces using the power of the purse to pursue political agendas.
The second day ends with a session titled “Engaging Carbon Intensive Companies on Climate Change,” which gives investment professionals--no doubt convinced by prior sessions that ESG strategies are good for their funds--a playbook for forcing publicly traded companies to jump through all kinds of hoops in attempts to beat back accusations that they are abetting polluters.
Prioritizing investments in socially responsible, environmentally friendly companies may be the latest fad, but it bears repeating that it comes at the cost of lower returns to investors, which will hasten the insolvency of state pension funds as well as reduce the benefits of private sector workers. The Council for Institutional Investors and its members would be well served to omit the word politics from their vernacular when dealing with the money of American workers.