The Newest Web

ESG Investing is a Fraud

My last blog was about webs and how fraudsters and government use them. They wind up trapping themselves. In the case of government, they can keep the web going even though nothing works because they can issue debt.

In private industry, the fraud breaks down. See FTX.

I remember being in an MBA class at Chicago Booth talking about Enron. One student said, “They sure made a lot of money”. The professor said, “But they went to jail.” The student said, “But they made money.” The professor forcefully said, “They went to jail.”

Or, if you are Jon Corzine you managed to stay out of prison. Others weren’t so lucky.

Sometimes, the government will change policy to enable fraudsters. Democratic Congressman Barnie Frank rewriting loan policy for homes allowed the whole house of cards to be built that tanked housing values and the economy in 2008. It also caused the government to go deeper into debt and changed banking regulations so that they were more slanted against smaller individuals and a positive for big corporates. Changing the definition of the word vaccine has enabled the fraudsters to distribute a Covid vaccine that doesn’t actually work. But they made millions so what?

Wake me up when the elite credentialed suits go to jail.

Let me put it in plain English. ESG investing is a fraud. It doesn’t take into account regular financial metrics. Paraphrasing hedge fund manager and PhD economist Cliff Asness; he put it gently in his paper on ESG when he said, “investors will accept less return in return for doing good.”

It’s not polite to tell people that have credentials and nice suits they are frauds. You might even be accused of being a racist for saying it. But, they are.

I have blogged about ESG before here, here, here, here, here, here, and here.

The Biden Administration has now rewritten regulations governing investment to protect ESG fund managers from allegations of fraud. I will quote directly from the WSJ article I linked to and then translate it into plain English. Yes, gentle reader, it does make a difference now who is in power so cast your Senate vote accordingly in Georgia.

On Tuesday the Labor Department finalized a rule that empowers retirement plan sponsors to invest based on environmental, social and governance (ESG) factors and put your 401(k) to progressive political work.

The Labor Department casts its rule as a mere clarification of the 1974 Employee Retirement Income Security Act (Erisa), which requires that retirement plan sponsors act “solely in the interest” of participants and beneficiaries. A Trump Labor rule barred retirement managers from considering factors that weren’t material to financial performance and risk.

Asset managers and union pension plans claimed the Trump rule limited their discretion to consider such ESG factors as climate, workforce diversity and labor relations. The Biden DOL says it created a “chilling effect” on ESG investing. Its replacement rule gives plan sponsors nearly unlimited discretion and legal protection to invest based on these often political considerations.

“A fiduciary may reasonably conclude that climate-related factors” including “government regulations and policies to mitigate climate change, can be relevant to a risk/return analysis of an investment,” the rule says. Ditto workforce diversity, inclusion and labor relations since they may affect employee hiring, retention and productivity.

What this means is that you are employed and put your money into a big pension organization. Could be a union. It might be a private employer. Maybe the pension is managed by a large financial institution like Blackrock or Fidelity.

There is an incentive to get a pool of capital to be really really big because then all kinds of entities will pay attention to you. You might have heard about an “IPO road show”. That is where the C-level execs of a firm and their investment bankers go to managers of huge pools of capital and tell them why their firm is a great investment.

If you are a mom-and-pop, you don’t get that sort of attention.

But, if you are a mom-and-pop, you might put your money in a Fidelity-type fund. Due to the change in language, the manager of that fund can now invest into companies that will yield zero or negative return and suffer no consequences from doing it. Not only that, the government has shielded them from legal consequences as well.

The line about how the Trump administration verbiage “chilled” investment into these sorts of entities is telling. The language was put in to prevent fraud. That bad orange man Trump “limited their financial discretion”. Oh, the humanity. They might actually have to compete and earn the best return on investment for their customers.

The people in the game can’t play the game if they have to suffer legal consequences for playing it. They have to compete. They don’t want to compete because they might lose.

All this stuff that is being rammed down your throat invites fraud. It’s an engraved invitation with no RSVP on it. Come when you want as long as you toe the line. When you don’t have standards, you can’t have competency. If you can’t be held accountable, then you can do anything you want in the name of whatever cause du jour is the current thing.

Medical schools now are teaching critical race theory and using race as a factor in the practice of medicine. When I go to the doctor, I don’t really care what the doctor is or what their sex is, I just want them to be good.

Law schools are abandoning US News and World Report rankings because the rankings don’t take into account “equity”. Never mind that the law schools would accept a bunch of subpar students based on race/gender and give them scholarships, knowing full well they’d drop out after year one opening up spots for qualified transfer students that paid full freight. Meanwhile, when the schools reported their class data they would only show the first-year data and not the makeup of the class that actually graduated. The law schools were running their own scam under the table and didn’t want you to know about it.

Business schools do the same stuff. So do undergraduate colleges and universities.

In addition, there is so much “group work” at colleges and universities now that people can just slide along while the rest of the group does the heavy lifting. For goodness sake today you take a test and if you aren’t happy with the result you go to the professor and ask for a “regrade”. At Harvard, if you get by with the “gentleman’s C” you still get a sheepskin that says Harvard MBA or Harvard Law with your name on it.

At least with Law or Medicine, you have to pass some sort of standardized test to practice but no doubt, those will be changing soon.

My recommendation is to find a wealth manager that is accountable to you. Could be in a big firm like Morgan Stanley, but might be an individual that has an RIA (resident investment advisor) business. You can have more control over what you invest in then and hopefully, they are sharp enough to avoid any funds or indexes that are investing using ESG metrics. Or, if you want to embrace the suck, put your money into ESG.

The sad thing is all these ESG funds are gonna need a government bailout someday. If they are big enough with the right people involved and the right people in power, they will get it.