ESG is still undermining fiduciary duty
Donald Trump may have forced many banks and asset managers to drop the term ESG, but trendy diversity and net zero requirements are still very much alive, and they’re undermining your property rights, says James Graham
For some years, the term ‘ESG’ (Environment, Social, and Governance) dominated the world of finance, a shorthand for trendy investment in net zero and diversity targets. Yet in the USA, under shareholder pressure, the term was dropped in favour of less contentious ones such as ‘sustainability’, and ‘responsible investing’. Banks and asset managers were dropping out of net zero alliances and US states were blacklisting and suing ESG asset managers.
Thus, when I told people that I was researching a paper on the topic, they told me that ESG was no longer a problem. It has been dealt with; Trump has killed it.
Whilst comforting to believe that ESG no longer needs slaying, the truth is that in Britain net zero, diversity requirements and sustainability objectives still rule the day.
Almost every pension in Britain is captured by ESG. Most have rebranded, instead masquerading under the guise of responsible investing or a similar innocent sounding pseudonyms. Yet the reality remains the same.
Reminders of ESG’s continued dominance are all too common.
To take a recent example, last week the Church of England announced their intention in the upcoming AGM season to vote against banks that are “backtracking on their climate commitments”. In other words, during an energy crisis, they are penalising banks who are willing to reprioritise underlying shareholders by servicing our energy needs.
This follows a report published in March, co-authored by the Church of England, calling for investment allocations to be altered to “direct long-term capital towards the clean energy transition”.
The Church also bans investment in the defence industry, despite having no formal position on pacifism and being the established church of a nation in which His Majesty’s Government is committed to increased defence spending. Furthermore, the Church remains a signatory of the Asset Owners Diversity Charter and last year voted against 279 companies on gender diversity grounds.
The Church bans investment in the defence industry, despite having no formal position on pacifism and being the established church of a nation in which His Majesty’s Government is committed to increased defence spending
Given that 42 per cent of clergy report “”, one would imagine that CofE pensions would be focused on maximising returns and ensuring their retirement income is as generous as possible. Alas.
As my new Prosperity Institute paper The Death of the Fiduciary Duty lays out, the CofE is in no way unique. Every major workplace pension in Britain remains committed to net zero by 2050 or sooner. There is little consumer choice, with default pension options almost always ESG-aligned. To name one, saving into Scottish Widows default lifetime investment trust means your money will be withheld from companies that “aren’t making progress to lower their carbon emissions”.
This means that every company that wants access to capital must align themselves with net zero and ESG goals. Thus, we now have a situation in which almost every FTSE 100 company has a net zero target, with some committing to spend £1bn or more to decarbonise.
Wrong
All of this is wrong. Companies are not vehicles for social policy and pension managers are not philanthropists. Companies are owned by their underlying shareholders and owe them a fiduciary duty to maximise returns. The pension manager should allocate based on what will generate the highest long-term return. Not doing so is a violation of trust on a systemic scale.
A hypothetical pension saver, putting away just £150 a month throughout his working life will be £178,000 worse off in retirement if his pension generates an eight per cent rather than a nine per cent return. This is life-changing money which would be better spent by a 65-year-old retiree than on the whims of the ESG flavour of the week.
ESG misallocation does not only hurt individual pension pots but the whole nation. For the economy to grow, investment capital needs to be allocated based on value. The product or company with the best value proposition gets money and grows, to our collective benefit. This mechanism has been distorted by ESG, which excludes profitable industries whose success directly benefits the nation, such as oil and gas and defence.
Ultimately this is a problem without a singular solution. A fiduciary duty must be implemented in law, obliging managers of money to maximise returns as default, only pursuing side quests with the explicit consent of underlying investors. Public pension funds should not be able to invest in subsidy-reliant green schemes. There must be a mass repeal of regulations that incentivise ESG, from the requirement to disclose board gender and ethnic diversity to the obligation to report global carbon emissions. It all must go.
This will face resistance, not just from the political left and even centre right but also from large corporates who have used ESG to build moats, cottage industries and barriers to entry.
There is a risk that, left to their own devices, corporates will double down in a defiant defence of vested interests. Therefore, shareholders must assemble into an offensive formation and defend their property rights. Every tool in their armoury should be mobilised to win: turning up at AGMs and challenging directors, filing shareholder motions to force change, demanding workplaces shift to profit-focused schemes.
The fiduciary duty is dead in Britain. But its resurrection represents some of the lowest hanging fruit in British politics, to revitalise the economy, return to growth and make pension savers richer.
James Graham is senior researcher, financial freedoms at the Prosperity Institute