At the World Economic Forum in Davos, Switzerland, Greta Thunberg demanded an end to all investments in fossil fuels. While Ms. Thunberg may have good intentions, her demands are indicative of the economic ignorance found in today’s activists. Unfortunately, BlackRock CEO Larry Fink has fallen victim to the same flawed reasoning. Just ahead of the Davos summit, Fink announced that his company would divest entirely from fossil fuels. The head of the world’s largest money manager should know that selling stock is an ineffective vehicle for change. Instead, it provides an opportunity for major oil and gas companies to buy back their stock. In the end, it’s the pension plan members who have committed a portion of every paycheck to funds that invest in these industries that wind up suffering.
Public servants who hope to one day collect a livable retirement expect that their dollars will be invested based on proven, traditional strategies that yield maximum returns. But many of the industries that can deliver on this expectation now face widespread attacks. The fact is divestment doesn’t work. The large-scale selling of a company’s stock only brings the price down briefly. This makes it more attractive to investors less concerned with the political implications of a particular company. Divestment has little impact on the actual operations of a business. Even AIG CEO Brian Duperreault, who supports impact investing, stated during a Davos conference that AIG is not prepared to cancel business with “low ESG score” companies.
The dangerous trend of ESG activism compromises returns on the pensions of over 14 million Americans. Divestment movements have become a favored tactic of activists who are unable to effect change in the legislature. In turn, they attempt to circumnavigate democracy by wielding the funds at their disposal in a manner they believe will help their cause, all while attacking investors who employ investment strategies geared toward maximizing returns, their fundamental obligation as a fiduciary. ESG investing, on the other hand, is incompatible with maximum returns. A recent study by Pacific Research Institute found that ESG funds underperform standard S&P 500 index funds by 43.9 percent over 10 years. To advocate in favor of an investment strategy that so profoundly limits returns is irresponsible and a violation of an asset manager’s fiduciary duty, and America’s pension funds would be the victims.
Pension funds and other financial assets are amoral entities. They are best served by considering all investment options, not just the ones that fit into a third party’s political agenda.