The subhead (or dek if we want to sound pretentious) says it all, “A fiduciary can’t escape the obligation to invest for the client’s best returns.”
The context is an op-ed in The Wall Street Journal Monday decrying calls for mandated ESG investing, proponents of which argue it’s right for the world and—more recently—risk-adjusted returns.
The catalyst is the U.N.-sponsored Principles of Responsible Investing, which, like it or not, runs afoul of both finance and ERISA law, as the authors note.
Anyone considered a fiduciary must “act for the exclusive benefit of the beneficiaries, considering solely their interests, without regard for collateral benefits.”
Collateral benefits, in this case, are the environmental, social and corporate governance good—airily defined—on which everyone would somehow simply agree (it’s 2018 and Twitter’s a thing. No one can agree on anything, ever).
ESG advocates argue that returns from evils like fossil fuels are routinely overestimated because litigation costs (among others) fail to be factored. It’s especially rich given that ESG proponents, or their allies, are typically doing the suing—a circular argument akin to depressing a stock price to prep for a short.
We understand evidence has recently arrived that gives credence to the ESG risk-return argument, but as the authors note, it’s “oversold” by those who seem to fundamentally misunderstand capital markets. Like any single stock, industry or sector, a rush to invest would lead to overvaluation and lower risk-adjusted returns, so their logic is self-defeating.
They can’t even agree on what necessarily constitutes the common good—for years Anheuser-Busch was left off many screens due to social considerations, even though it was the largest single recycler of aluminum in the world.
“Everyone wants to have his cake and eat it, too. But for a trustee, facts and motives matter. For a pension fiduciary, the Supreme Court says this means focusing exclusively on ‘financial benefits’,” the authors conclude. “The fiduciary may not use other people’s money to pursue collateral benefits to third parties, no matter how well-intentioned.”
We sat next to a high-profile ERISA attorney at a recent conference as panelists discussed ESG benefits. We discreetly asked her about fiduciary considerations, since (unsurprisingly) they were never raised.
“They’re a nightmare,” she whispered, “but I don’t want to say anything and ruin the goodwill.”
It might just be the best summation of ESG investing we’ve yet heard.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
