President Joe Biden delivers remarks at a Black History Month reception, Monday, February 27, 2023, in the East Room of the White House. (Official White House Photo by Adam Schultz)
No need to maximize returns.
In an attempt to put more private capital under the influence of progressive politics, President Joe Biden overruled a bipartisan congressional resolution protecting retirement savings from politized investment decisions. It was the President’s first veto.
Like many investment strategies, ESG’s record is mixed, with parameters that are both vague and ill-defined. At its core, however, ESG has become a partisan lightning rod. With ESG, investors consider a company’s environmental and social effects, along with its corporate governance.
An Investment Muddle
The imprecise definition of ESG has produced confusion about what companies are ESG-approved, even among the framework’s chief cheerleaders. In a 2021 Wall Street Journal report on three ESG raters, for example, opposite report cards were given to about a third of the firms they all analyzed.
Riding the Tech Boom
To avoid fossil fuels, ESG-focused funds tend to be comparatively tech-heavy and energy-light. In our post-pandemic higher interest rate environment, the tech sector has fumbled, as have ESG funds. Typically ESG fund managers charge higher fees than more traditional asset managers, often resulting in lackluster ESG investment returns.
The congressional resolution, explains the WSJ, employed the Congressional Review Act to “overturn a Labor Department rule protecting pension funds that invest based on environmental, social and governance, or ESG, criteria.”
The rule essentially protects retirement-fund managers from lawsuits if their investment choices cause lower returns or losses because the funds indulge in climate-change or social-justice causes. Under traditional fiduciary standards, funds are obliged to maximize returns.
The Biden administration is writing rules to steer investment to climate and other Democratic priorities, which often leads to the misallocation of capital. In the wake of the ESG rule, watchdogs will have to pay particular attention to retirement-fund managers to see if their political investments come a cropper and hurt retirees.
ESG, like most investment strategies, has a mixed record—and its parameters are often vague and ill-defined. It’s also become a partisan lightning rod, as evidenced by the heated rhetoric lobbed back and forth this week.
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