According to a recent Wall Street Journal article by Marlo Oaks and Todd Russ (the state treasurers of Utah and Oklahoma respectively), “Firms whose job is to deliver investment returns” are using their investments in companies “in pursuit of nakedly ideological goals.” They’re talking about asset management firms, in which public pension funds often have investments, supporting shareholder proposals meant to achieve social justice or climate objectives yet of dubious financial value.
State financial officers are legal stewards of other people’s retirement assets, Oaks and Russ argue, and must ensure their investors’ proxy votes aren’t used to support “value-destroying political measures.” The duty of a public pension plan and of an asset management firm is to the people whose assets they are investing and managing. The trend of asset management firms pursuing ideological goals at the expense of financial returns, Oaks and Russ conclude, “is perhaps the most severe breach of the fiduciary standard in American history.”
In Canada, the pursuit of ideological goals by public pension plans (among others) charged with stewarding other people’s money is unfortunately widespread. For example, despite its clear mandate to earn the best financial return on the assets it manages, the Canada Pension Plan Investment Board (CPPIB) is firmly committed to leveraging those assets to pursue collateral objectives instead. CPPIB’s investment strategy involves pushing society towards “net-zero” carbon emissions by encouraging government regulation and imposing environmental obligations onto corporations of which it invests. Both are financially deleterious.
The Caisse de dépôt et placement, which manages the Quebec Pension Plan’s assets, is similarly committed to pursuing non-financial goals with its environmental and sustainable investing strategies. “The unelected managers of public pension plans,” as William Watson writes in the Financial Post, “should not use other people’s money to try to change the world. If they want to do that, they should get into politics.” (Most people who get into politics to use other people’s money to try to change the world end up wasting people’s money, too. But at least they were elected to do so.)
It would be different if by pursuing environmental or sustainability goals, pension plans increase their risk-adjusted returns. It does not seem logical, however, that reducing the focus on financial returns and instead pursuing collateral objectives is profitable. Nor is it supported by the empirical evidence. A broad literature review by Steven Globerman, a senior fellow at the Fraser Institute, last year found there was no conclusive evidence that investing in companies with higher ESG (environmental, social, and governance) scores increased investor returns.
Other reviews have come to similar conclusions. “It is a myth,” corporate governance experts David F. Larcker, Brian Tayan, and Edward M. Watts write in an essay for the Stanford Graduate School of Business, “that ESG improves outcomes for shareholders and stakeholders (so-called ‘doing well by doing good’). Despite widespread claims to this effect, the evidence is extremely mixed and very dependent on the setting.” And if investing to achieve environmental goals is really value-increasing, they note, there would be no need for people to specifically say they are investing to improve the environment. They could simply carry on trying to maximize returns.
While the empirical evidence on ESG investing on financial returns is mixed, one thing is for sure—when asset managers add non-financial objectives, management fees are higher. That is, even if incorporating non-financial criteria into investment decisions does not result in worse investments, Canadian workers paying into the Canada Pension Plan and Quebec Pension Plan must pay for additional CPPIB and Caisse staff and overhead to look into non-financial concerns. When it comes to their pension savings, this is clearly a value-reducing activity—as Oaks and Russ said, a breach of fiduciary duty.