Stewardship, not social activism

Congress just passed a measure that restores the long-standing policy that pension fund managers must place the financial interests of retirees ahead of other interests, particularly social goals as represented by ESG factors.

ESG stands for “environmental, social, governance” and is phraseology first coined by a study commissioned by the United Nations. It holds that the traditional view that pension managers have a fiduciary duty to be faithful toward present and future retirees must now be balanced against environmental and social issues. The law and policies that define fiduciary responsibility have deep roots, going back to British Common Law and even to Scripture itself. Paul told the Corinthians “Moreover, it is required of stewards that they be found faithful.”

The word “fiduciary” is rooted in the Latin fide, faithful. Several of Christ’s parables argue from the assumption that stewards are obligated to their owners. The analogy is that, just as stewards owe their allegiance to the owners of the assets they manage, God’s people owe allegiance to God to use what God has entrusted to them for His purposes.

As Wall Street managerial elites began shifting away from that exclusive focus on the shareholder’s financial interest, resistance began to form. The resistance came especially in the case of those responsible for pension assets, a category in which the fiduciary approach had been most firmly asserted in law. The Trump administration’s labor secretary firmly reasserted the historical understanding that qualified pension plans must have one goal, the benefit of the retiree, and that commitment is not to be diluted with social and political preferences of asset managers. Moreover, the Trump administration put the burden of proof on pension asset managers to demonstrate that any criterion they used to select investments would redound to the good of the retirees.

The Biden administration reversed much of that, giving investment managers a pass when it comes to mixing ESG in with financial return factors. Under the Biden rules, ESG factors are presumed consistent with fiduciary duties, even if their financial effectiveness cannot be demonstrated. However, ultimately, Congress creates law, and this Congress just issued a stinging rebuke, passing a measure that reverses the Biden administration’s regulatory innovation and moves the rules back towards the fiduciary standard. Biden has pledged to veto the legislation, which would be his first veto.

What shall we make of all this?

First, current and future retirees should care deeply about whether their “stewards” will be found faithful. A dignified retirement and decent standard of living for their surviving spouse (typically the widow) and some hope for an inheritance for their children hang in the balance.

Second, citizens should care a great deal because ESG is used to make an end-run around the outcomes of electoral processes. For all its victories, the left has yet to convince the American people to give up oil, gas, and coal. It has lost major battles on abortion in the courts and state legislatures. Despite its best efforts, it has not been able to erase the protections we find in the Religious Freedom Restoration Act nor stop states from passing election integrity measures such as voter ID. But the ESG movement/industry has been using the dollars of American investors, a conservative-leaning class, to try to reverse those political outcomes by inducing companies to pressure states into capitulation.

Third, we should think it’s important because they think it’s important. If President Biden is willing to use his first veto to put a thumb on the scale of the ESG industry, that shows us that the political class for whom power is the chief goal and most developed skill set thinks this is big. They attribute so much importance to this that they are willing to risk the ire of super-voter pensioners, the chief victims of the Biden policy.

Finally, shareholders and their representatives, such as financial advisors and money managers, must assert their prerogatives and press the argument against politicized capital. This congressional measure helps them do so. I’ve read thousands of ESG proposals on annual meeting proxy statements, and up until recently, the strongest argument the ESG industry has had is that ESG is reputational risk management. That argument is no longer tenable. When red state treasurers and attorneys general decry ESG and divest from it, and when Congress acts to protect retirees from it, it is undeniable that ESG is both political and divisive. Managers do not protect their companies from reputation risk by embracing it. They multiply it.