Environmental, Social, and Governance Funds – A False Promise

Environmental, Social, and Governance Funds – A False Promise

Since the moment that man left the state of nature and consented to be governed, the government has been in the business of helping to choose who the winners and losers are in business.  During the rule of despots and tyrants, this was done in a not-too-subtle way.  The emergence over centuries of various forms of democracy and free-market economies in the West has forced government leaders to get more refined in how they favor sectors or companies.

In today’s America, government choosing winners and losers is most often choreographed through the use of the Internal Revenue Code or through the issuance of, and exemptions from, regulations.  This is exactly what is now taking place with environmental, social, and governance (ESG) investment funds and while the companies in those funds will be coming out winners, individual American investors will be the losers if they are not paying attention.

ESG funds are the politically correct bundling of publicly traded companies that conform to today’s socialist agenda.  These are companies that “aren’t” certain things (weapon manufacturers, tobacco companies, fossil fuel producers, etc.), companies that help support, fund, and promote socialist causes (Amazon, Comcast, Meta, Twitter, Google, etc.), and finally, companies that are actively engaged in advancing socialist causes through the sale and distribution of their own goods and services, such as any type of “green energy” company.

Under the Trump administration, rules were issued that governed financial advisors and the requirements for how they recommend funds to investors.  The rule emphasized the need to focus on “pecuniary factors” which in simple language means the dollars and cents of the fund’s cost and potential return.  Now, under new rules being proposed by the Biden administration, not only will financial advisors be freed from that constraint where ESG funds are concerned, but investors may actually be unwittingly placed into those funds without their express approval.

Under the proposed rules that are being promulgated by the Department of Labor (the Department that regulates 401(k) investment activity), financial managers of company 401k plans will be able to set an ESG fund as the “default investment” should an employee not deliberately select a particular fund into which their retirement dollars are to be placed.  Traditionally, those default investments have been made into funds designed to produce maximum asset growth over the employees’ estimated remaining working years to retirement.  Now, your financial future and security can be made subordinate to serving the “greater good.” Think – Atlas Shrugged.

Financial planners will now be able to push these ESG funds to investors without the need to focus on comparative costs and returns.  This means that an individual can be effectively steered into a fund under the naïve belief they are somehow stopping climate change when in reality they are limiting the financial return they receive on that investment.

I am not at all against the establishment of ESG’s or allowing individuals to be able to invest in those kinds of funds.  What should be of great concern to every American is the Biden administration wants to get involved in essentially tricking Americans into investing in these funds either unwittingly or without the full information needed to make a sound choice.

I believe that the right way for someone to help to contribute to any cause in which they believe, social justice or otherwise, is to invest their time, talent, and treasure into activities that provide the greatest financial return.  They can then use these returns as the means by which to promote their favorite initiative.  They can solar panel their home, buy a windmill for the local church, fund a study to combat cow flatulence, or whatever it is they want to do to help save the planet or save anything for that matter.

What they should not do is be tricked by the government into investing in a fund that will cost more, return less, and have a negative impact on their own financial security.

Some financial advisors will point to the inclusion of companies in ESG funds like Amazon, Comcast, and Twitter as a way to suggest that strong performers are in these socialist-engineered investment vehicles.  That claim is technically true and functionally irrelevant.  Those referenced companies are in many other funds that include companies that are chosen for their financial contribution to the fund’s performance, not for their contribution to causes supported by the likes of AOC and Bernie Sanders.

We all remember Solyndra, the bankrupt green energy company supported by the Obama administration to the tune of over $500 million lost taxpayer dollars.  Whether you believe in solar power or not, these companies need to succeed or fail on their own without the intervention of the government.  Sad but true, the government is much better at picking losers in the market than it is in picking winners.

The recently exposed scandal at Deutsche Bank highlights the problems that take place when investment firms start to mix political considerations with those of simple return on investment criteria.  The German-based bank had been aggressively promoting its ESG investment commitments to its woke client base only to discover that some mid-level fund managers were not toeing the line in terms of directing client money into ESG funds.  Those managers were concerned about the actual financial returns in those funds when compared to other traditional alternatives.  Deutsche Bank now finds itself under investigation by both government and media for its puffed-up claims about ESG commitment.

They might have been better off just focusing on making sound investment decisions.

As individual citizens, there is little you can do to stop the proposed new regulations on this ESG… What you can do is make sure that you pay attention to your 401k investment selection and that you work with a personal financial advisor that will remain committed to you and your family’s financial well-being.