The Problem with Mandatory «Socially Responsible Investing»

The term environmental social governance (ESG) investing is relatively new. As described in Forbes,

[An] approach that is slowly on the rise is ESG activism, where an activist fund will take a position in the security of a company with the aim of campaigning to make its business better in terms of governance, less environmentally unfriendly and more socially responsible.

But the concept of morally selective investing is not totally new, as it gained a good deal of traction in the 1950s, particularly among labor unions. Trade unions recognized that their shared capital could be focused on investments that would ideally provide returns beneficial (or so they perceived) in areas such as affordable housing or education.

Unions and the concept of ESG remain connected today. An ESG-centric investment selection, if made compulsory, could become, to provide a loose comparison, the fund lineup equivalent of a labor union.

Here’s why:

Currently, companies have the ability—and in fact the obligation—to fire poorly performing fund managers within their retirement plans. In fact, federal legislation requires fund managers to manage funds with an eye toward maximizing return. When it comes to managing pensions, fund managers are not permitted to pursue political goals, but must maximize returns for employees’ pensions in terms of dollars.

If ESG-centric investing becomes mandatory, then fund managers will mirror labor unions in the way that labor unions reduce worker productivity and company efficiency in the pursuit of political goals—that is, if a fund manager working in a mandated-ESG environment will sacrifice a fund’s monetary earnings in order to pursue goals set by politicians.

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