Many people are drawn to the idea of tying decisions about investing their wealth for their future security with their personal values in an effort to support social change. But basing decisions that could have lifelong impacts on someone’s financial security on a wide range of issues that are not typically part of financial analysis is risky and should be left up to the investor.
Right now, that’s not the case and many passive investors are unaware how their savings are being used. Activists and their investment are working to leverage roughly $12 trillion in pension and other retirement fund plans to force policy changes at the federal level. However popular this trend may be, the Trump administration is wisely taking steps to make sure pension investments are tied first and foremost to the financial well-being of the participants in those plans.
What has come to be termed “ESG” investing – for environmental, social, and governance issues – enables individuals to grow their retirement savings and express views about climate change, weapons proliferation, public health and other social issues. While laudable, many analysts find that “portfolios with a purpose” often represent a lower-value proposition from traditional investment strategies.
According to a study by Dr. Wayne Winegarden with the Pacific Research Institute, ESG investing produced 43.9 percent less in returns than investments in standard S&P 500 index funds. Even when you consider a wide range of results when comparing returns on investment between various types of funds, 43.9 percent is a sobering number for individual workers and fund managers alike.
A favorite target of ESG investment funds is the oil and gas sector. The thinking is that fossil fuels are on their way out and their demise can be hastened by investment decisions. But the end of the fossil fuel era is overhyped and overlooks some very basic market fundamentals. Investors who eschew all fossil fuel investments are missing out on a critical and profitable industry.
As CEO of Canary LLC, one of the largest independent oilfield services companies in the country, I am familiar with the short-term rollercoaster ride of energy prices. This has been an especially difficult year in the energy arena as over-production pushed oil prices into negative territory and a global pandemic brought the free flow of goods and people to a halt with predictable impacts on demand for oil.
Still, as long as people need to drive, fly, heat their homes, and power manufacturing facilities and other businesses, there will be a need for abundant and affordable oil and natural gas. Experienced investors with an eye on a fund’s financial performance should recognize the value proposition that oil and gas companies offer. Investors who base their decisions on the idea that a breakthrough in carbon-free energy production and consumption is imminent may find themselves holding an empty bag.
ESG investing focuses not merely on making bets on the future based on the best data available, but also in driving change in corporate decision-making and public policy. It rests more on hopeful assumptions that game-changing technology breakthroughs will emerge more quickly by denying fossil fuel companies capital. No matter how earnestly held, such assumptions should not drive investment strategies for public or private pension funds or other retirement plans.
This underlies ERISA, the Employee Retirement Income Security Act of 1974, which sets minimum standards for pension plans in private industry. In the wake of a concerted push by investor-activists to use retirement plans to advance progressive policy priorities, the U.S. Department of Labor has proposed new rules that will fortify the fiduciary responsibility to the best interest of plan participants.
Likewise, the Securities and Exchange Commission is taking steps to improve transparency and accountability by firms that administer shareholder votes on resolutions. The public has a right to know if these firms routinely tip the scales in favor of ESG investing, again, with possible adverse outcomes for retirement savers who may or may not embrace the ESG agenda.
Stricter adherence to ERISA poses no restrictions on individual choices. BlackRock Capital
The performance of Blackrock’s Clean Energy fund trailed its S&P Fund Growth fund, including fossil fuel companies, by about 10 percentage points over the last five years. BlackRock’s founder and principal Larry Fink might believe confidently that his firm can underwrite a sea change for ESG investing with hikes in its fees and investors in “sustainability” funds are free to pursue this strategy, but that is prognostication with a bias. It should not permeate decision making by managers of retirement plans on which millions of workers depend.
The unexpected shocks and changes the country has endured since the start of the year make clear that even the best analysts and market watchers cannot reliably predict the future. Portfolios and investment strategies could look very different a decade from now. ESG investing could become the market standard, or it could walk a step behind traditional investments proudly. Whatever course individual investors take and whatever the market forces to come, regulations should stipulate adherence to ERISA by the managers of funds. This remains the best and fairest way to protect the retirement income security of working Americans.