ESG and Fiduciary Responsibility Part One: How far does it extend?

The following is the first in a series of posts responding to Ken Blackwell's Townhall column, "Fiduciary Responsibility: How Far Does it Extend?".

A couple of months ago, when my topical feed coughed up the title and first line or two of former Ohio State Treasurer (1994-99) and candidate for governor (2006) Ken Blackwell’s March 2, 2019 column under the title “Fiduciary Responsibility: How Far Does it Extend?” I clicked right through. At that very moment I was in the throes of outlining and drafting a series focused on the convergence of fiduciary functions in the financial and political realms that I’ve been gestating for a couple of years. I needed, as any writer does from time-to-time, something to help me break through to clarity. “Here,” thought I, “may be some insight.” Alas, the promise was not fulfilled.

In fact, when I followed Blackwell’s links and references to their sources, I didn’t find confirmation of his position that applying “exclusionary screens” – read ESG factor criteria – via divestment or other means “can be devastating” for beneficiaries of the public retirement systems (CalSTRS and CalPERS) he charges with hypocrisy and worse. In fact, the first paper to which he refers, a November 2016 item from Jon Hale, Head of Sustainability Research at Morningstar, actually contradicts his thesis in its very title! [1]

Interestingly that paper is the only one to which no link was provided. The other two, whose findings support the notion that ESG screening may incur opportunity costs are not really conclusive. As the abstract and opening paragraphs of one freely acknowledges, analysis in this area is “still at an early stage” with “a range of studies offer[ing] inconclusive results.” [2] The other study, “The Price of Sin: The effects of social norms on markets” by Hong & Kacperczyk [3] which, as Trinks & Scholtens comment, finds “positive abnormal returns for sin stocks” while “others do not find them at all.” [4] Not exactly a solid foundation for a charge of hypocrisy and, by implication, dereliction of fiduciary duty.

So then, you may be thinking, why not just flip the page, so to speak, on Blackwell? Why take valuable time and energy to note, even in passing, his transgressions? Well, let’s take a moment to consider the source, if you will. The short biographical statement at the end of the column tells us that “Ken Blackwell is a board member of the Institute for Pension Fund Integrity and a senior fellow at the Family Research Council” among other credits noted above.

I decided to visit the website for the former. At the “About Us” tab I found the following statement of purpose, which I’ve edited for concision, clarity and emphasis (shown in italics):

"The Institute for Pension Fund Integrity seeks to ensure that local, state and federal leaders are held responsible for their choices in investment, led not by political ideation and opinion but instead by fiduciary responsibility…The Institute for Pension Fund Integrity relies upon reason over whim, truth over opinion and data over emotional investing…"

“Reason over whim.” “Truth over opinion.” “Data over emotional investing.” Individually, and as a group, those are laudable and, in our view, indisputable standards for operating in not only the financial markets but, as we’re arguing elsewhere, in democratically governed societies like ours. The reason we’re taking time to examine Blackwell’s op-ed is that what he does there, under the guise of advocating for strong adherence to fiduciary standards completely undermines the very premises on which the Institute of Pension Fund Integrity (IPFI) is supposedly founded and operating. That’s a circle we can’t square.

In follow-ups to this post, we’re going to take up the topic of applying ESG (environmental, social and governance) criteria in managing fiduciary plans. We think it’s an important and timely topic, especially since, contrary to Blackwell’s claims, there’s a growing body of evidence favoring incorporating ESG criteria in prudently overseen and managed portfolios and employee retirement plans. What is needed is careful, balanced evaluation and discussion along with clear procedural guidelines for plan and other fiduciaries.

Concerning the latter, our technical contributor, Chuck Humphrey, Esq. of Humphrey Benefits Law Group in Buffalo, NY, has prepared a guide for fiduciaries considering and/or implementing ESG screening in the plans they are responsible for managing.

Concerning the former, we’ll also take a look at the four “Core Principles” listed on IFPI’s website in the context of ESG investing.

They are:

1. Adherence to Fiduciary Responsibility

2. Balanced Economic, Social, and Governance (ESG) Factor Investment

3. Long term Pension-Fund Return

4. Data-Driven Investment

As you can see, ESG is a fundamental to IFPI’s focus, which makes Blackwell’s failures all the more egregious and disturbing. We’ll be back next week.

[1] Hale, Jon. “Sustainable Investing Research Suggests No Performance Penalty.” Morningstar Manager Research paper. November 2016.

[2] Trinks, Pieter J. & Bert Scholtens, “The Opportunity Cost of Negative Screening in Socially Responsible Investing.” Journal of Business Ethics (2017) 140:193–208. Published online: 15 May 2015.

[3] Hong, Harrison & Marcin Kacperczyk. “The price of sin: The effects of social norms on markets.” Journal of Financial Economics93 (2009) 15–36. Published online 8 April 2009.

[4] See Trinks reference to Lobe, S., & Walkshausl, C. (2011). “Vice versus virtue investing around the world.” Unpublished working paper, University of Regensburg. Accessed 02 Jan 2014.

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.