‘Responsible’ Investing Means Saving the World With Other People’s Money

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Psychologists advise those hoping to get in shape to not tell friends they’re going the gym. Bragging about working out ex ante validates people’s virtue before they accomplish the virtuous act and makes it less likely they will actually follow through. People should withhold the information (and postpone any reward) until after the workout.

This is a fairly harmless manifestation of virtue signaling, the phenomenon where people show off that they behave according to the approved social norms of their community. These days a good deal of virtue signaling can be accomplished via social media by reposting the right article or approving the right politician or activist.

However, when virtuous behavior becomes inconvenient or costly, people may stray from the norms of their group’s social ethos, as evidenced by environmental protesters who don’t clean up after themselves or vegans who eat meat on the sly.

The Wall Street Journal found another such example when it reported that the portfolio managers of socially responsible investment funds often fail to vote their proxies in support of policies that their funds were ostensibly created to embrace.

Socially responsible investment funds typically eschew investing in companies that don’t meet certain environmental guidelines, or fail to hew to various social agenda, or that conform to various guidelines for corporate governance, such as committing to hire a fixed proportion of women or minorities in senior executive positions.

According to a recent Morningstar report, one fund that promises to invest in companies that pursue gender diversity was found to have voted for just two out of ten shareholder proposals that would force the companies to increase their diversity. It also found “similar voting inconsistencies” in various environmental investment funds offered by Fidelity, Vanguard, BlackRock, and others that voted against shareholder proposals to address climate change.

These revelations highlight another manifestation of the rise in corporate virtue-signaling: The growing influence of proxy advisory firms and their predilection for nudging their clients — namely, investment fund managers — to vote their proxies in favor of such environment, social, or corporate governance matters regardless of the impact on long-term returns.

The Securities and Exchange Commission has studied proxy advisory firm behavior since 2010, and support for new regulation appears to be growing. A study recently released by the Spectrem Group found that 64 percent of retail investors want the SEC to reign in proxy advisors and limit their predilection to pursue political goals in their advice. Of those respondents who said they were familiar with the proxy advisory industry, fully 96 percent said that they wanted increased SEC oversight.

Last year BlackRock issued standards on climate risk, executive compensation, and diversity practices to companies seeking access to the $3 trillion they manage, ominously warning that “while we are patient with companies, our patience is not infinite.” However, many firms continue to resist such pressure because they know that such an agenda does not comport with their mission to maximize the returns of their investors.

A study commissioned by the National Association of Manufacturers found that while shareholder resolutions that encourage socially responsible behavior have yet to significantly impact company returns, they are far from harmless. It noted that activism diverts resources towards goals that can be orthogonal to shareholder returns, ultimately serving to impact corporate governance and divert the attention of management away from growing a company and towards managing these exigencies instead. A company’s primary intent should be to provide value to shareholders and customers and not to foment social change — especially if that comes at a cost to shareholders.

The money in most investment funds represents the retirement savings of millions of American households, most of whom will need every dollar possible to finance a retirement lifestyle that resembles what they had when they were working. The phenomenon of compound interest means that even a small reduction in annual returns — such as what might be caused by an obeisance to social or environmental investing guidelines — may result in a significant change in a funds’ accumulated returns.

For proxy advisory firms to foist lower retirement savings on American workers in the pursuit of political exigencies is deeply problematic. The often-empty virtue-signaling of many of America’s biggest investment funds shows that they fully understand what is at stake in this matter. Maybe they should just hit the gym instead.

Jared Whitley is a long-time politico who has worked in the U.S. Congress, White House, and defense industry. He is an award-winning writer, having won best blogger in the state from the Utah Society of Professional Journalists (2018) and best columnist from Best of the West (2016). He earned his MBA from Hult International Business School in Dubai. To read more of his reports — Click Here Now.


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