(This op-ed has been been updated since publication.)
There’s a concept in psychology called “moral licensing,” whereby people who do something they feel is good grant themselves an excuse to do something bad. This explains why some dieters actually gain weight or some Obama voters appeared to become more racist.
In finance, moral licensing has taken the form of activist investing – putting money from large funds into companies and causes that support Environmental, Social, and Governance (ESG) guidelines, guided by the gauzy rationale that companies that do well must also do good. If activist investment managers can check boxes on buzzwords like climate change or corporate diversity, they don’t need to feel guilty about making lots of money.
However, just as the road to hell is paved with good intentions, this particular road happens to be paved with the blood of Main Street investors being thrown under the bus. Individual investors who choose for themselves to make ESG investing decisions are perfectly within their rights to do so, and sacrifice some fraction of their retirement income to assuage their conscience or contribute to a world they would like to see. However, when pension or 401k managers do it with other people’s money without first securing their approval, it is anything but wonderful.
Given how the proxy-voting system works for these large funds, Main Street investors have very little power to push back – or even the know-how to realize that their rights and resources are being curtailed.
They’re getting some help, but they need more.
Recently, the Trump administration’s Department of Labor issued a mandate that fiduciary managers can no longer sacrifice returns or assume greater risks to promote ESG goals in their investment decisions. Often the axiom is advanced that such decisions will invariably lead to better returns, but the Department of Labor observes that there is no real evidence to support that.
Activist-investment resolutions forced on retail investors can cost millions of dollars and divert resources away from shareholder returns. Retail investors in passive pension, mutual, index and other funds deserve an adequate say in how their shares are voted. Likewise, it demands that fund managers focus on financial performance, not subjective political goals.
But a lack of credibility has investors growling at the whole idea. More than 80 percent of investors are dissatisfied with ESG criteria to begin with, according to a PwC study. And who can blame them? Wouldn’t picking stocks be that much more difficult if there were 75 different P/E ratios to look at? And isn’t this all just a bit much for someone just trying so save up to buy a home?
Wall Street is not where these kinds of changes should be effected at all. Shareholder resolutions are an ineffectual substitute for political institutions. Plus there’s also good, old-fashioned charity: if investment managers want to motivate change, they can vote or make a political donation.
Of course, that’s not as sexy.
One of the worst actors in this realm is the investment firm BlackRock, Inc, which recently released an ultimatum to companies they invest in instructing them of the need to meet ESG standards for diversity, environmentalism, and executive compensation, and that it would no longer invest in companies that fail to comply.
It is perfectly understandable why the issues at the heart of ESG investing are of great import to some people, influencing how they invest their savings. But these issues should not affect what they do when they are investing other people’s money.
Even if fund managers don’t “invest their conscience,” individual investors can themselves if they want to! The Internet provides an abundance of information to those who want to find companies whose operations align with their values. SEC filings alone already account for about 75 percent of the information in sustainability reports.
When activist investment managers make financial decisions that hurt mom and pop, it’s not charitable–it amounts to an exercise in moral licensing and comes close to theft.
Jared Whitley is political veteran with 15 years of experience in media and Washington politics. He has served as press liaison for Sen. Orrin Hatch (R-Utah) and associate director in the White House under George W. Bush. He is also an award-winning writer.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.