President Biden on Monday came down squarely on the side of those who believe that all investing should include the left’s preferences on environmental, social and governance considerations. Mr. Biden vetoed a congressional resolution rejecting a Department of Labor rule that allowed fiduciaries — those charged with stewardship over your money — wide latitude in how they decided to invest your cash.
That rule is a notable departure from the traditional norm, which requires fiduciaries to invest on the basis of what will produce the greatest return for their investors. It represents the high-water mark — so far — of ESG pathology.
Fortunately, two weeks earlier, Consumers Research published a 30-page report on how the ESG movement operates and how it poses a direct threat to American economic freedom.
It is worth the read.
Consumers Research starts strong. Executive Director Will Hild’s letter to Congress opens on the right note: “Intentionally designed to be opaque yet seem benign, ESG represents a grave menace to America. ESG is the weaponization of America’s investments against its own citizenry. Against their freedoms. Against their jobs. Against their retirements. Against their pocketbooks. Against their national security. It undercuts democratic rule.
“It aids communist dictators and petty tyrants alike. It concentrates power into the hands of a tiny group of Wall Street managers who were not elected, lacks any accountability to the people, and routinely make it clear they resent any restriction on their power to set policy.”
“BlackRock and other … firms have contributed to higher costs for consumers, slower economic growth, and reduced returns … all while helping China build up the very same industries that ESG punishes here in America. … ESG grifters are perverting our markets using our own investment dollars.”
The report continues in the same vein, noting that ESG advocates’ central organizing principle is that by controlling those who manage capital, the wealth of the nation’s investors can be used to exert political control over businesses.
As the report correctly emphasizes: “Many Americans reasonably delegate the management of their savings to others, like banks, financial planners and employer 401(k) managers. And with many small or private funds, the system works as it should: Managers invest Americans’ savings for their benefit in productive enterprises.
“But with the ESG … that kind of money management is increasingly the exception, not the rule. … [T]he system has turned on itself. Instead of investing Americans’ savings for productive enterprise, large money managers and their advisers increasingly use Americans’ savings perversely to advance left-wing political and social engineering.”
Consumers Research correctly argues, as have others, that ESG approaches lead to suboptimal investment outcomes. That makes sense. Money managers are already investing in what they consider optimal investments; coercion is needed only to make them invest in losers.
The report hits the nail squarely on the head. “But even if ESG policies were not costly … their benefits would only be incidental to alignment with a political program that was evidently assembled without regard for the best interests of American savers. There is no escaping the ESG movement’s deep conflict with fiduciary principles.
“They win, not by forcing transparent decisions by accountable individuals in the open, but by stacking the decks of corporate governance so that their causes become the path of least resistance. They win by changing what is considered ‘normal’ in the market.”
What is to be done?
First, because ESG has become a quasi-regulatory mechanism orchestrated by the federal government, it requires a federal response. The left has used and plans to keep on using the considerable power of the regulatory state (the Securities and Exchange Commission, the Consumer Financial Protection Board, etc.) to drive companies and individuals away from their own interests and toward the preferred interests of the collective.
The second problem is that three large investment firms — BlackRock, Vanguard and State Street — have $20 trillion under management and are the goon squad for the ESG crowd. Such a concentration of power makes it difficult for companies to resist instructions from these funds.
At a minimum, these funds should be subject to a lot more scrutiny and transparency so investors can act on better, more complete information. Investors should have the ability to approve or condition the actions of their fiduciaries.
There should be size limits on funds. No one person or any one group of people should control that much money. It invites abuse, and it probably poses a significant threat to the economy. The possibility of fraud (these are theoretically passive funds) and collusion requires complete legal and political ventilation.
Consumers Research has done a mitzvah. The report it has written deserves attention and action.
• Michael McKenna, a columnist for The Washington Times, co-hosts “The Unregulated Podcast.” He was most recently a deputy assistant to the president and deputy director of the Office of Legislative Affairs at the White House.
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