How ESG will hurt your retirement

A few years back, a Nevada man made millions of dollars selling lots on the moon, complete with “lunar deeds” to be framed and displayed. It turned out to be a strong business plan. At $24 an acre, lunar lots were snapped up by many eager buyers, including A-list movie stars and former U.S. presidents.

Dollars invested in future ranches by the airless, bone-dry Sea of Tranquility is the very soul of discretionary spending. Not so discretionary will be the large sums in your personal retirement funds that will evaporate in the service of so-called environmental, social, and governance
investments. You won’t even get a deed with five green stars you can frame and display in your home office.

When Congress passed the Employee Retirement Income Security Act in 1974 to govern private pension plans, it imposed strict fiduciary duties of prudence and loyalty. In other words, your fiduciaries, or asset managers, were legally required to obtain the best financial returns for you while striving to reduce expenses and risks to your portfolio. ERISA remains the law under which 152 million workers hold $12 trillion in assets.

In recent years, large fund managers such as BlackRock, State Street, and Vanguard have leaned in hard on the ESG movement. At their back are powerful NGOs such as Ceres, which push out coordinated talking points and foment proxy challenges to harass large corporations into adopting their preferred policies. The Department of Labor during the Trump administration sought to at least protect personal savings from this fashion by issuing a rule that reinforced the plain language of ERISA: that asset managers must not “sacrifice investment returns” to promote ESG factors.

Like a teenager intent on putting tortoises on fence posts, the Biden administration has set out to reverse sensible rules from the previous administration. Under Labor Department rules issued last year, your money managers will be able to consider “the economic effects of climate change and other environmental, social, or governance factors.” Congress recently passed a law forbidding this, with the support of two Senate Democrats, prompting President Joe Biden’s first veto. So the rule stands.

Now your fiduciaries can play politics with your money. They will not be required to fully document the ESG decisions they make on your behalf. You will never know, precisely, which left-wing agenda item your money will be used to encourage.

One conceit from proponents of this change is that ESG will guide managers to perform better economically by forcing them to book future costs of carbon reduction. Somehow, the lawyers who populate NGOs and the Biden administration believe they are better at estimating future risks and returns than the money managers who do this for a living.

But we don’t have to guess about ESG performance. The returns are in, and they are ugly.

A good idea of how individual retirement accounts will fare under the ESG regime is how large, institutional ESG funds have performed. ESG funds, heavily weighted toward tech and away from oil and gas, performed well for years until those sectors reversed. So-called green funds saw losses that exceeded the overall market. Now ESG is in the tank. In the last five years, according to Terrence Keeley, former BlackRock senior executive, global ESG funds have underperformed the broader market with an average return of 6.3% compared with an 8.9% return for non-ESG funds. An investor who put $10,000 into an average global ESG fund in 2017 would have about $13,500 today, compared to $15,250 for someone who invested in the broader market.

It is possible that a future judicial ruling will strike down Biden’s new ERISA rule. The law clearly requires managers to invest the assets of a retirement plan for the “exclusive purposes of providing benefits” to participants and their beneficiaries. But the language of the Department of Labor rule now allows fiduciaries to select a fund or action “based on collateral benefits other than investment returns.” This administrative rule directly contradicts the statute.

Perhaps one day the U.S. Supreme Court will rule on this contradiction and overturn this rule. But don’t expect that any time soon, if at all. For now, your money manager may put your dollars to work to fulfill some left-wing concept of gender equity, racial compensation, or environmental benefit instead of earning you the best return.

Expect the result to be sheer waste. ESG is failing to reduce U.S. greenhouse gas emissions, while the substitution of coal for power generation by natural gas is yielding impressive reductions. Moreover, a hard thumbs-down on economic returns is sure to make retirees insecure as Social Security faces insolvency in about 12 years, with projected deficits that will extend into the 22nd century.

But cheer up. By then, you probably will be able to really invest in the moon.

Continue Reading at The Washington Examiner.