There’s a concept in psychology called “moral licensing,” whereby people who do something they feel is good grant themselves an excuse to do something bad. This explains why some dieters actually gain weight or some Obama voters appeared to become more racist.
In finance, moral licensing has taken the form of activist investing – putting money from large funds into companies and causes that support Environmental, Social, and Governance (ESG) guidelines, guided by the gauzy rationale that companies that do well must also do good. If activist investment managers can check boxes on buzzwords like climate change or corporate diversity, they don’t need to feel guilty about making lots of money.
However, just as the road to hell is paved with good intentions, this particular road happens to be paved with the blood of Main Street investors being thrown under the bus. Individual investors who choose for themselves to make ESG investing decisions are perfectly within their rights to do so, and sacrifice some fraction of their retirement income to assuage their conscience or contribute to a world they would like to see. However, when pension or 401k managers do it with other people’s money without first securing their approval, it is anything but wonderful.
Given how the proxy-voting system works for these large funds, Main Street investors have very little power to push back – or even the know-how to realize that their rights and resources are being curtailed.
Luckily, a group with that know-how is fighting back for them.
This week, a new advocacy organization launched to reform the proxy-voting system, particularly how it is often subverted to place headline-grabbing corporate vanity projects over sound financial management. The intent of the Main Street Investors Coalition is to raise investors’ awareness of how campaigns initiated by activist-shareholders can abuse the rights (and reduce the wealth) of 100+ million retail investors, most of whom need every investment dollar they can earn to adequately finance their retirement.
The Coalition wants to ensure that retail investors in passive pension, mutual, index and other funds have an adequate say in how their shares are voted. Likewise, it demands that fund managers focus on financial performance, not subjective political goals.
The coalition isn’t alone in this fight. Recently, the Trump administration’s Department of Labor issued a mandate that fiduciary managers can no longer sacrifice returns or assume greater risks to promote ESG goals in their investment decisions. Often the axiom is advanced that such decisions will invariably lead to better returns, but the Department of Labor observes that there is no real evidence to support that.
On the contrary, the evidence suggests that the opposite is true. In a new Compass Lexecon study, researchers have asked if political, social, and environmental shareholder resolutions create value for investors. The answer is a harsh “no.” While it does not appear to have an impact on share prices, it does substantially increase the cost to investment managers forced to comply with the entire process.
Activist-investment resolutions forced on retail investors can cost millions of dollars and divert resources away from shareholder returns. “The academic literature also finds that the long-run impact of social-issue shareholder proposal activism is negative,” the study states in its executive summary.
Moreover, the study’s authors assert that Wall Street is not where these kinds of changes should be effected at all. “Shareholder resolutions targeted at prominent corporations is an ineffectual substitute for sound policymaking via the political institutions of democracy.” If investment managers want to motivate change, they can vote or make a political donation.
Of course, that’s not as sexy.
One of the worst actors in this realm is the investment firm BlackRock, Inc, which recently released an ultimatum to companies they invest in instructing them of the need to meet ESG standards for diversity, environmentalism, and executive compensation, and that it would no longer invest in companies that fail to comply.
It is perfectly understandable why the issues at the heart of ESG investing are of great import to some people, influencing how they invest their savings. But these issues should not affect what they do when they are investing other people’s money. When activist investment managers make financial decisions that hurt mom and pop, it’s not charitable–it amounts to an exercise in moral licensing and comes close to theft.
Jared Whitley is political veteran with 15 years of experience in media and Washington politics. He has served as press liaison for Sen. Orrin Hatch (R-Utah) and associate director in the White House under George W. Bush. He is also an award-winning writer.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.
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