Until recently, there were two iron laws in investing. One, popularised by Milton Friedman, a Nobel-prizewinning economist, posited that a company’s responsibility above all else was to provide returns to its shareholders. The second, promoted by Jack Bogle, founder of Vanguard, an investment firm, held that asset-management fees must be driven to the lowest level possible.
The growing importance of environmental, social and governance (esg) criteria has weakened Friedman’s doctrine of shareholder primacy, perhaps fatally. Global esg funds manage $7.7trn in assets, having doubled in size in the past seven years. Even the Business Roundtable, a talking shop for American bosses, declared in 2019 that companies must place the interests of a variety of clients, customers and communities on equal footing with shareholders.
But like all revolutions, this one has generated a reaction. The anti-esg backlash is flourishing. Vivek Ramaswamy, author of “Woke, Inc.” and co-founder of Strive Asset Management, announced his candidacy for the Republican presidential nomination on February 21st. The firm he left to pursue his political ambitions promotes exchange-traded funds (etfs) and proxy-voting services that push back against what it sees as the politicisation of corporate governance.
Anti-esg legislation is also rippling through American state legislatures. In February Ron DeSantis, Florida’s governor, who is also expected to compete in the Republican primaries, proposed legislation to prohibit the use of esg criteria in all of the state’s investment decisions. Given the supervisory role many statehouses hold over public pension funds, many of which have hundreds of billions of dollars in assets, this sort of legislation could have big implications for the asset-management industry.
There are plenty of problems with the esg movement. Working out if assets are esg-compliant is complex, and prone to bias, mismeasurement and public-relations peacocking. Proponents of feel-good investing want to have their cake and eat it, insisting that the focus on stakeholders is actually better for shareholders, too.
But in defending Friedman’s law, the anti-esg crowd is struggling with the other part of the investing canon—the importance of low fees. At the moment, taking a position against esg is much more expensive than going with the crowd. This is particularly true when it comes to anti-esg laws, which are more preoccupied with bashing esg-promoting firms than with prioritising shareholder returns and cutting costs for taxpayers.
A study by Daniel Garrett of the University of Pennsylvania and Ivan Ivanov of the Federal Reserve Bank of Chicago considers one anti-esg stance. It finds that Texas’s anti-esg laws, which had the unfortunate side-effect of thinning out the number of bond underwriters, raised issuers’ interest costs by $300m-500m in their first eight months. Meanwhile, Indiana’s anti-esg bill was watered down after the state’s fiscal watchdog suggested that it would cut annual returns to the state’s public pension funds by 1.2 percentage points, because it would prevent the use of many active managers and limit investment in the private-equity industry and thus private markets.
Similarly, the cost of anti-esg etfs is considerable, and their benefits questionable. Strive’s most popular etf, drll, focuses on the American energy industry. But the fund charges fees of 0.4% a year on assets, compared with 0.1% for xle, the largest regular energy etf, created by State Street Global Advisors, another investment firm. This amounts to a big drain on a buyer’s compounded returns. Moreover, the top ten holdings in both funds are the same.
Any success that Strive achieves in changing corporate governance and raising returns will be enjoyed by holders of other energy funds as well. Therefore an anti-woke investor may be best advised to stick with lower-fee funds and wait to see whether the efforts of anti-esg activists amount to anything. It could be a long wait: it is difficult to see exactly how anti-esg offerings will expand their audience beyond the most committed fellow travellers.
For a hard-headed investor who still believes in Friedman’s doctrine, the anti-esg movement would hold an obvious appeal were it to become less costly. But at the moment there is only one rational choice. Investors, and taxpayers, are far better placed when they follow the crowd. That means coming to terms with Woke, Inc., rather than paying hefty sums to push back against it.■
Read more from Buttonwood, our columnist on financial markets:
Despite the bullish talk, Wall Street has China reservations (Feb 23rd)
Investors expect the economy to avoid recession (Feb 15th)
Surging stocks undermine a hallowed investing rule (Feb 7th)
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