ESG Investing Under Attack by Trump Administration
In recent years, the addition of environmental, social and governance (ESG) performance factors to investment criteria has been growing rapidly. More and more mainstream investment managers have incorporated ESG factors into their risk calculations.
The wisdom of this step is clear when you consider the current hurricane and Western wildfire seasons. Companies with more low-lying properties along the Gulf and East coast may face significant costs due to sea level rise and storm damage. Insurance companies and others broadly exposed to wildfires caused by climate change should be rated as riskier investments. And efforts by a company to encourage government policies that address climate change should be seen as prudent.
Surprisingly, the Trump Administration is attempting to prohibit consideration of environmental, social and governance factors, political activism, and proxy voting based on ESG considerations by retirement funds. Institutional investors and others are pushing back, arguing that these concerns will indeed have a material impact on companies’ financial performance.
Eugene Scalia, Trump’s Secretary of Labor and son of Anthony Scalia, the Supreme Court Justice who anchored conservative thinking on the court until he passed away in 2016, is at the center of the attempt to scuttle ESG investing. The Labor department, which regulates private pension plans to insure that individual investors are protected, has proposed a new rules which would prohibit private pension funds from voting on any measure which it cannot prove “has an economic impact on the plan” and from investing in financial instruments which use ESG criteria – unless they can prove they are not sacrificing financial returns.
The new rules would put significant procedural hurdles in place to suppress the growth of ESG investing and activism. To some extent, the rules reflect the traditional debate in corporate responsibility over long term versus short term profitability. Just as Milton Friedman in his 1970 New York Times magazine article argued that a business should consider only shorter-term returns, Scalia and his new rules argues against considering longer term risks such as climate change, heightened labor rights, and good corporate governance on corporate performance.
Pushback against the Trump-Scalia rules has been increasing. Institutional Shareholder Services(ISS), the largest proxy advisor in the world, argues that the new rules were bad for shareholder democracy as well as progress in areas of long term risk. The new rules, according to Lorraine Kelly, governance business head at ISS, “will ultimately weaken portfolio company oversight and harm the ‘millions of American workers’ the DOL purports to protect.” A representative of Majority Action, a nonprofit shareholder advocacy organization, argues the proposals would “harm and silence long-term investors.”
My view is that it is hard enough to motivate companies to pay attention to social and ethical considerations without government attempts to shut down even the consideration of enlightened and long-term self interest arguments.
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