When ‘Social Justice’ Comes to Investing

Reposted from The PIPELINE

Clarice Feldman • 20 Jun, 2020 • 6 Min Read ESG, anybody?

Trillions of dollars sit in private trusts, pension and retirement accounts, and charitable endowments, and they are targets of those who wish to reshape domestic investments, corporate governance and means of energy production. I recall years earlier when people and outfits who wished to accomplish such things bought stock and made pests of themselves at shareholders meetings, or ran well-funded public relations campaigns against investment in South African companies or nuclear energy, to take two historical examples of “active shareholding.” In recent years they’ve devised another means: pressuring trustees of these funds and fiduciary investment managers to consider Environmental, Social and corporate Governance (ESG) analyses in their investment buys. A quick Google search shows a number of providers vying to assist (for fees ) trustees in making such investments.

The most detailed explanation of the history and pitfalls of this strategy—economic and legal—is in this Stanford Law Review article:  The authors, Max M. Schanzenbach and Robert H. Sitkoff, are writing for a very specific audience and you are encouraged to read it all if you want a more complete analysis, but here’s a short take on it as it involved institutional investors, index funds , endowments and trust companies. Such investing may well place trustees at risk of violating their fiduciary duty of loyalty under which they must consider only the interests of the beneficiary.

Fiduciaries motivated, even in part, by any other thing—sense of ethics, benefit to third parties, for example — violate their duty of loyalty. While trustees of a charitable endowment whose settlor or beneficiaries okay such considerations, might do this without violating the rule of loyalty, trustees of institutional investors, trust companies and even index funds run a risk if they do.
In the first place, the very concept ESG investing lacks precise definition.

All told, the fluidity of the ESG rubric means that assessment and application of ESG factors will be highly subjective. Like any form of active investing, risk-return ESG investing necessarily involves subjective judgments in the identification of relevant factors, assessing whether they are good or bad from an investor’s perspective, and how much weight to give each factor. However, this subjectivity makes both application and empirical evaluation of ESG investing challenging and highly contextual. As some astute commentators recently noted, “the breadth and vagueness of the factors as a whole, and the likelihood that different factors bear on different investments, present barriers to their widespread use as investment guides.

What are the social and environmental impacts of a firm’s products or practices? Is a gas pipeline better for the wildlife in the area it runs through than a solar or wind farm? (No one’s surveying the views of the caribou in Alaska who seem to love the pipeline, or the avian communities fried or turned to pate by solar and wind farms.)What are the environmental costs to producing the glass and aluminum to create solar panels or the cost of disposing of no longer useful wind turbines ?

The favorable empirical results regarding environmental and social factors, however, are not uniform. A significant concern is that managers may invoke ESG factors to enact their own policy preferences at the expense of shareholders—an agency problem for which there is also some empirical evidence. Another concern is that the extent of a firm’s regulatory and political risks may not be reflected in its ESG scoring. For example, companies pursuing alternative energy sources may score high on ESG factors but still face significant political and regulatory risk owing to heavy reliance on current government policy. Indeed, one of the Commissioners on the Securities and Exchange Commission (SEC) has suggested that the SEC has not yet taken a position on ESG disclosure in part because defining ESG factors is value laden and would involve confronting contentious political issues.

And then there’s corporate governance. Some corporate governance issues are obvious—lack of a sound auditing and accounting operation or frequent litigation losses for bad labor practices or unhealthy products. The social factors are even more subjective and not well validated by empirical evidence. The effect of sex and race diversity on the corporate board doesn’t seem measurable or even relevant to how prudent an investment might be in a company. The number of factors one might consider under this category seems inexhaustible.

The fluidity of the ESG parameters and the obvious subjectivity involved in weighing them should concern trustees. Aside from subjecting them to litigation for losses due to erroneous assessments on ESG investments, trustees can be removed, enjoined, forced to repay the trust for losses and so forth for breaching their duty of loyalty to the trust. To defend against such claims, the trustee who picks and chooses among investments on the basis of ESG strategies, must have documented analyses showing he’s made a realistic risk-loss return estimate and must also reevaluate these analyses regularly, a costly undertaking. So, to take an example near at hand, if President Obama made the cost of fracking higher through regulatory constraints on it and the trustee eschewed investing in such companies under his analysis of risk-reward, President Trump’s support for fracking certainly changes the equation. So does the I hope temporary dislocation of that market due to the Wuhan virus shutdowns. The trustee has to reconsider original action and readjust the portfolio. The risk-reward equation has shifted.

If independent analysis shows the ESG models the trustee relied upon resulted in statistically significant under-performance, the fiduciaries who relied upon those models may well have breached their duty of loyalty and be subject to litigation by the beneficiaries of the trust. And any claims that ESG investment strategies provide superior returns are far from certain. Even more troublesome in the authors’ view is this: if corporations draw a lot of ESG investment on the grounds that they are undervalued from a risk-reward standard by their lights, they may soon become overvalued. Contrarian strategies seem then to be attractive.

Going belly-up for climate change.

A few months ago, concerns were highlighted in a dispute involving the trustees of the California State Pension Fund (Calpers) and other major pension funds.

In the last two years, its directors have opposed proposals to sell stocks in private prisons, gun retailers and companies tied to Turkey because of the potential for lost revenue and skepticism about whether divestment forces social change. One of these directors is now urging the system, also known as Calpers, to end its ban on stocks tied to tobacco, a policy in place since 2000. “I do see a change,” said that director, California police sergeant Jason Perez, in an interview. “I think our default is to not divest.”

Calpers isn’t the only system wrestling with these new doubts. Rising funding deficits are prompting public officials and unions across the U.S. to reconsider the financial implications of investment decisions that reflect certain social concerns.

The total shortfall for public-pension funds across the U.S. is $4.2 trillion, according to the Federal Reserve. New York state’s Democratic comptroller and unions representing civil service workers oppose a bill in the Legislature to ban fossil fuel investments by the state pension fund. In New Jersey, Gov. Phil Murphy, a Democrat, vetoed legislation last year that would have forced divestment of state pension dollars from companies that avoid cleaning up Superfund sites by declaring bankruptcy…

The board now plans a comprehensive review, scheduled for 2021, of all of Calpers’ existing divestment policies, which include bans on investments in companies that mine thermal coal, manufacturers that make guns illegal in California and businesses operating in Sudan and Iran. 

And then there are outfits like Black Rock which seemingly to court millennial investors are weighing such factors. Is it, in danger of violating its duty of loyalty? Bernard Scharfman thinks they may be.  He hints that this virtue-signaling may be an effort to draw in Millennial investors, and discusses the practical limitations of Black Rock’s stated plant to weigh companies’ stakeholder relationships in weighing investments. He says this sort of shareholder activism may breach the duty it owes to its own investors:

So while Black Rock’s shareholder activism may be a good marketing strategy, helping it to differentiate itself from its competitors, as well as a means to stave off the disruptive effects of shareholder activism at its own annual meetings, it seriously puts into doubt Black Rock’s sincerity and ability to look out only for its beneficial investors and therefore may violate the duty of loyalty that it owes to its current, and still very much alive, baby-boomer and Gen-X investors. In sum, if I were running the Department of Labor or the Securities and Exchange Commission, I would seriously consider reviewing Black Rock’s strategy for potential breaches of its fiduciary duties.

If people really want to put their money into virtue-signaling instead of reasonable returns, why doesn’t someone just create a Virtue Fund? Investors would agree not to hold the managers of it accountable for losses as long as the investments tickle their fancy. That would leave those of us such as the Calpers beneficiaries who rely on secure returns to use more traditional measures of risk and reward (like debt-equity, dividends and price-earnings ratio) which have an historical measure of efficacy.

Clarice Feldman is a retired attorney living in Washington, D.C. During her legal career she represented the late labor leader Joseph (“Jock”) Yablonski and the reform mine workers against Tony Boyle. She served as an attorney with the Department of Justice Office of Special Investigations, in which role she prosecuted those who aided the Nazis in World War II. She has written for The Weekly Standard and is a regular contributor to American Thinker.

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27 thoughts on “When ‘Social Justice’ Comes to Investing

  1. The people in the picture “ESG anybody?” don’t look like investors, they look more like the morons inside CHAZ/CHOP who are extorting money from fearful business owners. I have been with the same investment advisor for 35 years and I am totally confidant he would never talk to me about ESG. I have often wondered it it is a brave new world we are heading into or just another hiccup in humanity. Stay sane and safe and invest wisely.

      • They have daddy’s money and will have more of daddy’s money when he kicks the bucket.

        Did you notice not a single representative from an ethnic minority in the picture? Everybody is white and middle class and wouldn’t know how to pick their own noses without instructions.

  2. I don’t agree that taxes are necessarily theft but sometimes they are.

    I’m astounded that the mainstream media isn’t covering the debacle in Seattle. link

    These idiots are showing their true colors. Some of them seem to think it would be a good idea to have a revolution and take stuff away from privileged white folks (all white folks are privileged don’tyaknow). Those privileged white folks, being about 3/4 of the population, may have something to say about that.

    • I had a dialogue with a social justice warrior on a Facebook page. He was very offended when I suggested he reduce his financial position downward toward the worldwide average by donating his “excess” to charities.

    • If taxes enable you to buy what you would have wanted anyway had government not made it difficult to buy privately, then taxes might not be theft.
      If taxes are used to force you to purchase a product that you don’t want, and may even violate your sense of morality, then taxes are theft.

      • If taxes are used to force you to purchase a product that you don’t want, and may even violate your sense of morality, then taxes are theft.

        Actually, in that example, it sounds more like taxes are extortion.

  3. What is it about progressives and their need to tell everyone else how to live their lives?

    • Progressives (the left) have a long history of authoritarianism/fascism. Today’s “progressives” are no different.

  4. Brilliant and much needed post. Thank you very much. Activism to change the investment strategy and objectives of funds managing other people’s money that was invested based on existing strategy and objectives is as immoral as robbery and should be illegal.

    The punch line at the end says more than the rest of the paper.

    Those wishing to play activism games with investments must do so with their own money and not with my money. The only rational and legal mechanism is to create a fund that follows those guidelines. Not to interfere with funds managing other people’s investments with other legal objectives.

    • The only legal and moral alternative for activists of any color is form their own fund and see how much money they can raise.

      Would like to add that there is an example of activism corruption of an organization’s funded objectives in the United Nations where the UNDP, funded to help least developed countries to develop, is now helping them to fight climate change.

      https://tambonthongchai.com/2019/03/06/sdg/

  5. Maybe 10-15 years ago, advocates began to argue that the supposed socially and environmentally-conscious funds would outperform the rest. They still do.

    There is actually a SPDR SSGA Gender Diversity Index (SHE) which apparently started in 2016. S&P500 has kicked its butt.

    • Diversity (i.e. color judgments) including sexism… Gender (i.e. sex-correlated attributes, notably sexual orientation)… I’m not surprised. Most men and women are not racist, sexist, etc., and are capable of discerning differences in context. Male, female sex. Masculine, feminine, gender respectively. And the transgender spectrum from homosexual to neosexual. It’s ironic that the Transgender Rainbow excludes black, brown, and features the shredded remains of white. Diversity, indeed.

    • It can actually work. Al Gore started selling investments in companies that didn’t generate CO2. That put him into service companies like Microsoft, etc. As a result, he’s now hundreds of millions of dollars richer even though Buffett partner Charlie Munger says Gore is an idiot. link

      • Because Microsoft, Google, etc only source their energy from unreliables. Imagine that, acres of data warehouses only run on unicorn farts.

  6. I am fairly certain CALSTRS followed Nobel Prize winning economist, Paul Krugman’s advice and SOLD all their stock market holdings after Trump was elected … and missed the 75% increase in stock market value the Trump Presidency has created. Thanks CALSTRS! For jeopardizing my wife’s retirement

  7. There is good info for a socoeconomic study in this topic and likely other related stuff based on whether one is on the (new) left or on the right.

    Looking at wealth, are Republicans more shrewd, analytical, better off with investments? Are the wealthy Dems more likely to have got there with taxpayers’ money? Do Dems tend to have much more expensive Apple electronics and Republicans P.Cs and Androids. Steve Jobs was a nice cold-blooded free enterpriser and he knew he could mark up Apple products about 40% – 50% because of loyal Dems and generous Dem governments needs and electronics for a soshulist education system from K to PhD. What about Tesla owners. Dem-type govs have wasted uncounted trillions of taxpayers money and individual players have skimmed off hundreds of billions for themselves and crony cap friends.

    Is there a tendency for ‘show me’ sceptics to be on the right (both sides have low info cheerleaders). What about health, vegans, adopting fads in general, new frankenstein meat (loaded with tofu estrogen), chemical nutrients …

    What p’s me off is that these thoughtless left activists/protesters would happily ruin the pensions of hard working people who have little else. Is this all just going to gradually disappear without a calling to account?

  8. I like Sir Winston Churchill’s comparison of socialism vs capitalism:

    “The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of Socialism is the equal sharing of miseries.”

    Thank you, Winston!

    • A wonderful aphorism, but in actual practice Socialism has proved to be even more unequal in sharing blessings than Capitalism is. As a partial example, Socialism is much more prone to throwing people into jail until they confess and sometimes using widespread torture, or even killing prisoners outright without a trial.
      I think most people would be glad to avoid murder in prison. Even a humble waitress can hope for big tips from wealthy people, or just someone well-to-do in a Capitalist system.

      Ujfortunately, there aren’t many capitalist countries left!

  9. Fist, excellent article. The suggestion to fund a ” Virtue Fund ” is a creative one.

    For my two cents, there is another risk. What happens if the so called virtuous company commits a criminal or other notorious act.

    As a funder of said company, your company would be sued as an enabler of the miscreant.
    BlackRock has very deep pockets. What a tasty morsel for a Corporate Ambulance Chaser.

  10. Thank you for reporting this. In part this mess has been caused by governments which require boards to look at all stakeholders rather than concentrate on maxmisiing shareholder wealth.

    What the real problem is, is hinted at. These companies are not investing their money. They are investing other people’s money as either Trustees or agents – probably wrongly I refer to investment and open ended funds as agents. Have they ever consulted the people whose money they hold on their preferences? If people are specifically investing in an ESG fund, whatever that is, then they have but in many cases they have not. The reason I raise this is even more fundamental as these same institutions are the ones who have allowed Directors’ remuneration to soar away into the stratosphere and done nothing about it, apart from whinge and whine and hand wring in public. Have they ever consulted the people whose money it is – no, of course not. Have they ever voted againsst the Directors’ remuneration – very rarely. Virtue signalling again.

  11. If you want to go down the wokey brokey route like Gillette and their “toxic masculinity”, be warned, pretending you’re better than everybody else is expensive.

    From a Reuters report:
    P&G (Proctor & Gamble) reported a net loss of about $5.24 BILLION, or $2.12 per share, for the quarter ended June 30 2019, due to an $8 BILLION non-cash writedown of Gillette.

    Oupsie…

    I know I’ll never buy another one of their blades again.

  12. “Trillions of dollars sit in private trusts, pension and retirement accounts, and charitable endowments,” Wrong that money is not sitting anywhere, it already invested. Anyone who thinks other people money should be invested in other than well preforming investment can shut the hell up. They can do what they want with their money but keep their big months and pea size brains away from my money.

  13. Here is a link to information about how CPP (Canada Pension Fund) used “shadow bank” BlackRock to purchase Industrial Wind Turbines. Why did they use a shadow bank? Did they perform due diligence on these investments?
    https://blackrocktransparencyproject.org/2018/08/27/how-canadas-infrastructure-bank-was-created-by-and-set-up-to-benefit-blackrock/

    New evidence shows BlackRock’s role in Canada Infrastructure Bank may have also included advising on key personnel
    August 27, 2018

    Canada’s Infrastructure Bank, a key campaign promise in Prime Minister Trudeau’s 2015 election platform, was sold to Canadians as a new “tool” that would use both federal and private sector funding to provide low cost financing to territorial, municipal, and Indigenous governments for infrastructure projects throughout the country.

    But investigations in 2017 by Canadian news outlets revealed that the Trudeau government consulted BlackRock extensively about its plans for the $35 billion investment in the new Bank. According to the reports, BlackRock executives who had previously served in influential positions in the Canadian government worked directly with Trudeau officials for months during his first year in office to prepare a pitch to BlackRock clients and other investors about the benefits of the new Bank.

    BlackRock’s role in the controversial process, critics said, put the priorities of wealthy investors and BlackRock clients ahead of Canadian taxpayers, public pension investors, and consumers. Moreover, Canadian watchdog groups argued that the cozy relationship violated federal conflict of interest rules and gave BlackRock preferential treatment in the selection and implementation of projects financed by the new Bank.

    The ethics and conflict of interest charges provide a stark contrast to BlackRock’s oft-stated public commitment to develop a new “social value” model of corporate governance. In early 2018, BlackRock Chairman Larry Fink sent a letter to CEO’s at the world’s largest companies admonishing them to be better corporate citizens or risk losing BlackRock’s support.

    In recent years the company has promised to put a premium on “investment stewardship” by excluding gun manufacturers and sellers from its funds and pushing energy, transportation, and industrial sector companies to report climate risks in their financial projections.

    Its advisory role in Canada’s Infrastructure Bank however, may have been driven more by the financial interests of its investors. As the company states on its website, BlackRock’s fiduciary responsibility is to its clients, not Canadian taxpayers, pension investors, or consumers: “As an important part of our fiduciary duty to our clients, BlackRock advocates for public policies that we believe are in our investors’ long- term best interests.”

    Now new evidence suggests the world’s largest asset manager had a significant hand not only in the Bank’s creation but in personnel decisions as well. A BTP analysis of the history and timing of key hires at the Infrastructure Bank shows that BlackRock executives, many of whom left government service themselves for lucrative jobs at the world’s largest asset manager, appear to have had influence in determining who filled key positions at the Infrastructure Bank as it was getting off the ground.

    In February 2017 for instance, Prime Minister Trudeau named Jim Leech, a former Canadian pension official and close friend of Mark Wiseman, a BlackRock executive advising the government on the Bank’s creation, as a special advisor to the Infrastructure Bank. Wiseman himself had abruptly left his position as the CEO of the Canada Pension Plan Investment Board for BlackRock only eight months earlier.
    Later that year, the Trudeau government named Janice Fukakusa, a Royal Bank of Canada (RBC) executive as Chair of the new Infrastructure Bank. Fukakusa was the former boss and supervisor of Marcia Moffat, an RBC executive who joined BlackRock in 2015 as the Managing Director, Head of Canada. In an added twist, Moffat is married to Mark Wiseman.
    Pierre Lavallee previously worked directly with Wiseman and another BlackRock executive André Bourbonnais at the CPPIB before being named by Trudeau as the new CEO of the Infrastructure Bank in May 2018.

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