ESG and Fiduciary Responsibility: Part Two
The following is the second installment in a series of posts responding to Ken Blackwell's Townhall column, "Fiduciary Responsibility: How Far Does it Extend?".
You can find Part One here
In our last post we offered a preliminary, high-level response to a column by Ken Blackwell, board member of the Institute for Pension Fund Integrity and a senior fellow at the Family Research Council as well as former Ohio State Treasurer and 2006 candidate for governor, under the title “Fiduciary Responsibility: How Far Does it Extend?”
The column’s thesis was that directors of two major public pension funds, CalSTRS and CalPERS, are acting in a manner that is hypocritical and may also violate their responsibilities as fiduciaries because they have chosen to continue to employ ESG (environmental, social and governance) criteria in investment selection. As noted last time, we find Blackwell’s position confusing. First of all, he ignores what is now a fairly large body of research that contradicts his position. Second, of the research he does cite, one contradicts his position. Finally, when Blackwell’s argument is considered in the context of the Institute for Pension Fund Integrity (IPFI)’s four “Core Principles” our sense is that the direction in which he is pointing may actually undermine sound fiduciary practice.
Consider, with our emphasis added, the following:
1. Adherence to Fiduciary Responsibility:
"…officials residing (sic) over pension funds should be held to a high degree of fiduciary responsibility, consistently making decisions on investment that will benefit the long-term growth and security of the fund. Consistent dividend yield, resistance to market flux and strong corporate credit ratings are just a few variables that must be taken into account by these individuals. Often times outside interests have pressured pension funds and other entities to divest from certain investments under political pressures, which would subject pension funds to lower financial returns. This divestment would violate a pension fund’s fiduciary responsibility."
As you would expect, we don’t take exception to the first italicized section above. Where we do, however, is in the sentence that follows in which IPFI advocates, regardless of the disclaimer that immediately follows, a specific portfolio strategy for all public pension funds, apparently regardless of each particular situation.
Reading further, in the third italicized section there is an explicit assertion that divestment “subject[s] pension funds to lower financial returns’ yet, in the “Principle” immediately following that assertion is specifically contradicted:
2. Balanced Economic, Social, and Governance (ESG) Factor Investment: "Accounting for ESG factors in investments can prove to be advantageous with greater transparency and consistently high returns. With more than 80% of all corporations releasing ESG factor reports, options are plentiful for the investment of pension funds into holdings with positive ESG outlook. ESG factors should not dictate a political agenda for guiding public investment decisions."
What are we to make of this “Principle” when it not only contradicts the preceding one but, when read carefully, actually contradicts itself? (We’ll come back to this problem with IPFI’s messaging in future posts).
3. Long term Pension-Fund Return:
"When investing with pension funds and other long-term payout entities it is imperative that long-term stock stability be sought after in the investment process. Part of the responsibility of the managers of pension funds is to identify long-term, low market volatility investments that will allow for prolonged growth and a sustaining of pension budget health for years on end."
As we’ve already noted in our first comment on Principle #1, what seems to be advocated here is a particular investment strategy for all public pension plans regardless of the particular situation in which a board or committee finds itself. Nothing could be further from sound fiduciary practice.
4. Data-Driven Investment:
"The scourge of pension fund investments over the last decade has been a reliance on the emotion and politics of the investment manager and a distrust of basic market data and investment principles. IPFI believes that smart investing stems from the reliance on market data, on the research of economic patterns and on the reliance of strong dataover loud voices. Investments driven by social and political factors are irresponsible and lead to the cessation of funding for pensioners for the beliefs of some activists."
As we noted at the beginning, there is now a large and ever-growing body of research that overwhelmingly supports the proposition that using ESG criteria not only doesn’t negatively impact investment returns but that, properly implemented, ESG factors actually contribute to superior investment performance. How then do Blackwell & IPFI so boldly assert contrary claims under the banner of “data-driven investment” process?
As critical thinkers sensitive to disinformation and propaganda techniques, we have some ideas that, further on, we plan to explore. For now, we’ll take leave with the promise to return in our next post to a more credible source that, disturbingly, seems to come to a similar position on the ESG in public pensions question…
Ed Lynch is founder and CEO of FPG. He has worked with ERISA-qualified plan sponsors and designated fiduciaries in most aspects of plan development and maintenance since the early 1980s. Ed founded FPG with the mission to be a leader in the field of employee benefits and the most trusted source of information and evaluation in the retirement plan industry.