Let’s end the week on a lighter note, by delving into the world of ESG.
For those not familiar–and that would include nearly all Americans–ESG stands for “Environmental, Social, Governance”. It’s becoming a new rating system for determining the “success” of companies and governments in this country. Corporations, municipalities, and states are now reporting their environmental impact or carbon footprint, customer ratings and diversity of workforce, the makeup of their boards of directors and what political causes they lobby for or support financially. It can be published as part of a company’s annual financial report–or as a stand-along document.
That has led to a new trend on Wall Street: ESG Investing–where those looking to buy stocks care less about how much money a company is going to make and more about what social causes it is advancing. And while that is fine for individuals looking to throw their personal money away, it is now almost required by the Department of Labor for those that oversee public pension funds. The “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” rule proposed by the Biden administration would “allow employers and investment managers to invest employee retirement savings in such a way that benefits social causes and corporate goals even it if adversely affects the return to the employee.”
In a nutshell, public sector pension funds can intentionally work to reduce the potential return on investment of what are taxpayer funds. If you are not a public sector worker, you may not care that those retirees are not going to get all of the financial security they have been promised. But you are likely a taxpayer–and you would be on the hook for an estimated $5.8-TRILLION in unfunded public pension liabilities in the US. Fortunately, Wisconsin’s pension fund is fully-funded (right now)–but that is not the case for many local municipalities in the state.
ESG threatens to bite taxpayers in the wallet another way, through municipal bond ratings. Twenty-three states are currently threatening to sue over ratings set by S&P and Moody’s under “strong recommendation” from the Biden administration. Those states point out that if they don’t have as many “renewable energy sources” or a “diverse enough” government structure, they could have lower credit ratings and have to pay more in interest when they borrow for public works projects–even if they are in a better financial position to repay bonds than states with high ESG scores. That interest is, of course, passed on to taxpayers.
And don’t think that ESG isn’t going to make its way into personal finance as well. Commercial lenders could easily deny all loans for the purchase of gas-powered vehicles–and only lend money to those buying electric cars. Owners of four-bedroom, single family homes with large suburban lots with rock-solid credit histories could still be made to pay more in interest than someone borrowing to purchase a much-smaller, two-bedroom “twindominium” unit with a lower credit score. What’s to stop your credit card company from denying purchases at the gas pump or not even offering to accept payments for retailers that don’t show enough effort to hire minorities?
I should point out that the “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” rule is not subject to approval by Congress, nor are the “strong recommendations” to lower the credit ratings of non-ESG-focused states and municipalities. Usually, proposals like that are met with overwhelming public and political opposition. Better to exert government control on the free market out of site–and let everyone deal with the intended consequences later.
I look forward to the sob stories told by my 85-year old garbageman about how he can’t retire because the city’s pension fund manager invested heavily in Abound Solar, Solyndra, A123 Systems, and Nordic Windpower–all so he could feel “good” about himself as a younger man.
