There’s good reason for Louisiana Republican Treasurer John Schroder and the State Bond Commission he heads to have ended a dozen-year relationship with a firm that advises the SBC: because they found one more knowledgeable therefore likely to make better decisions.
Current adviser Lamont Financial Services found itself ousted last week when the SBC voted to award the contract to Public Resources Advisory Group (PRAG), which has similar deals with 18 other states. The adviser makes recommendations for financing deals looking for the lowest interest rates on state debt.
Although Lamont’s longtime liaison with the state plans to retire, what probably contributed more the switch was remarks made by its founder Bob Lamb about the role of “environmental/social/governance” criteria in making decisions. ESG is a somewhat nebulous concept but typically means making investing decisions on the basis of these nonpecuniary objectives. Increasingly a number of investment funds have included these criteria that brings up controversy because political viewpoints define these. This could mean, for example, a fund won’t invest in a certain industry because of its area of business, or a certain business because of labor practices, or a certain country because of its system of government over ideological displeasure with these.
Schroder has declared that he will not do business with entities that practice viewpoint discrimination, specifically mentioning banks that won’t lend to businesses related to firearms and funds that use ESG criteria, which connotes viewpoint discrimination, and has hinted that the state may end sharing of information with credit rating agencies that use ESG as part of their process. Another SBC member, GOP Atty. Gen Jeff Landry, has issued an opinion how ESG criteria likely runs afoul of state law in a number of areas.
But when queried about ESG exclusion, Lamb sounded skeptical, arguing that by automatically excluding those kinds of vendors the state may miss out on better deals. For its part, the senior managing director of PRAG, Wendell Gaertner, during the vetting expressed that ESG should receive no special emphasis.
As it is, the data support the idea to disregard ESG when it comes to investing. A Harvard Business Review article earlier this year summarizes the most recent research into whether investment by ESG principles has any impact on returns, with an answer that if it does likely it would be negative
Specifically, funds with articulated ESG objectives generally fare more poorly in financial terms than the universe of funds. And while investors might wish to sacrifice returns to achieve the political results, in fact funds specifically chasing ESG often don’t even attain those goals compared to funds without specific criteria, with one study revealing on labor and environmental rules that they have worse compliance than funds that don’t have such criteria. Even more interestingly, when explicitly ESG funds added companies in which to invest, those additions didn’t improve compliance by those firms.
Indeed, public relations appears as a major motivator to specific ESG pledges. ESG scores of company signatories to the United Nations’ Principles of Responsible Investment didn’t improve once a firm signed on and their financial returns were lower and risk higher than non-signers. Some evidence shows that companies publicly embrace ESG as a tactic to explain away poor financial performance, using it as an excuse.
In sum, the authors speculate that prudent managers take a variety of factors into their decision-making, ESG included, and that following an ESG strategy distorts that by overemphasizing it to the detriment of return. Thus, “[t]he conclusion to be drawn from this evidence seems pretty clear: funds investing in companies that publicly embrace ESG sacrifice financial returns without gaining much, if anything, in terms of actually furthering ESG interests.”
Schroder and the SBC got it right. They owe citizens the best fiduciary stewardship of their money, and advice that treats ESG objectives on par with returns disserves the public on that account, the evidence shows.