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“Virtue Signaling is Expensive”: ESG Investing’s Threats to Retirement Security

November 08, 2023

Four Key Moments from Ways & Means Hearing on Protecting Seniors and Savers from “Woke” ESG Activism

WASHINGTON – At a Ways and Means hearing exploring the infiltration of ESG (environmental, social, and governance) ideology into America’s financial system, witnesses exposed how the Biden Administration’s climate alarmism is allowing ESG activists to threaten the $33 trillion Americans have saved in pensions, annuities, IRAs and 401(k) plans. Increasingly common and pervasive ESG mandates are forcing seniors and savers to pay more in management fees, while earning less. Over the past year, according to a Ways & Means Committee staff analysis, the 20 largest ESG funds lost money and performed nearly 19 percentage points worse than the benchmark S&P 500 index.

Despite ESG’s poor financial performance, the Biden Administration created a pro-ESG rule in 2022, opening the door for asset managers to invest retirement savings in pursuit of climate goals instead of a secure retirement for their clients. During the hearing, the Committee heard how this move has financially benefited countries such as China and Iran, will hurt family farmers, and shift America’s financial systems from one focused on maximizing returns to instead financing radical climate goals.

“Virtue Signaling is Expensive”: ESG Funds Charge More and Perform Worse

Americans expect and are legally entitled to have their retirement savings invested for maximum financial returns. ESG funds have a track record of delivering lower returns and costing more to manage. As a result, investors withdrew a net $13.2 billion from ESG funds in 2022. Ways and Means Committee Chairman Jason Smith (MO-08) asked whether seniors are well-served by ESG funds.

Chairman Smith“In your estimation, what sort of returns are investors seeing from ESG labeled funds? And does this performance indicate that the ESG agenda is aligned with maximizing retirement security?”

Jason Isaac, energy expert“ESG is certainly not aligned with maximizing retirement security or fiduciary principles. These funds have higher fees; they have lower returns. Virtue signaling is proving very expensive to retirees here in this country to the detriment of our national security, to the detriment of our fiscal responsibility, and really to the detriment of fiduciary responsibility, fiduciary duty.”

The “China/ESG Agenda”: Iran and China are the New Destinations for American Investment 

ESG factors have moved investment in American oil and gas production to adversaries like China and even Iran, the same state sponsor of terrorism that funds Hamas attacks against Israel. In addition to using the wealth of Americans’ retirement savings, special interest tax breaks in the Democrats’ so-called “Inflation Reduction Act” are being used by Chinese industries, which dominate the “green” energy supply chain. Rep. Brad Wenstrup (OH-02) highlighted that ESG hurts Americans’ pocketbooks and makes the United States dependent on adversarial nations like China.

Rep. Wenstrup: “Mr. Isaac, can you discuss the dangers of an ESG fueled investment boycott of fossil fuels, and how steering Americans’ retirement funds toward green energy benefits our geopolitical adversaries like China?”

Jason Isaac, energy expertI call it the China ESG agenda, and it’s working as designed, as planned. You look at the North American oil and gas private capital being invested. In 2015, there were 58 funds that raised nearly $50 billion to produce energy in this country, where we produce it more responsibly than anywhere else in the world…In 2022, we’ve seen a 76 percent reduction in the number of funds raised and a 92 percent reduction in dollars raised in North American capital that’ll produce American energy. And that’s why we’re not producing nearly as much as we could. We’re shifting production, not demand. We’re seeing dollars flow into Iran from China to the tune of $50 to $80 billion dollars because of the ESG agenda, and guess who’s going to be buying the refined products that China is producing because they’ve expanded their refining capacity? The United States will be buying jet fuel, diesel, and home heating oil, made from Iranian oil that is funding this war on terror.

“What are Americans feeling? From 2021 to 2022, there was a 30 percent increase in Americans having their electricity disconnected; a 76 percent increase in Americans having their natural gas disconnected in this country. This is the China ESG agenda, and it is working as designed to the detriment of our country and to the detriment of our economic prosperity.”

Public Employee Pensions are too Important to Gamble on Risky ESG Investments

The Biden Administration’s pro-ESG rules allow investment managers to gamble public servants’ retirement savings on “green” investments that have a poor financial record. Fiscally responsible states like Utah are standing up for public employees and preventing public pension funds from falling prey to woke investment managers. Rep. Carol Miller (WV-01) asked Utah’s state treasurer what steps his state has taken to protect seniors, like requiring that the state’s shareholder proxy votes are exercised in the best interest of shareholders.

Rep. Miller: “Mr. Oaks, you come from a state which has also taken a stand against the administration’s misguided ESG policies? Can you tell us how retirees in your state are better off now that their financial managers are focused solely on financial returns?”

Marlo Oaks, Utah state treasurer: “I think one of the key issues is that asset managers have committed all of their assets under management to drive this agenda. It’s not just ESG funds that are pushing ESG policies; so that’s really the challenge here. Several research studies have shown that ESG-related proxy measures often have a detrimental effect on financial return. The proxy vote is one of the very important roles that an owner of a stock has…Unfortunately, this process is being hijacked.

“There was a study published in the Journal of Financial Economics…and the findings revealed a negative correlation between increased activism by public pension funds and stock returns. Additionally, companies receiving proposals from activist public pension funds advocating for social agendas were valued at 14 percent less compared to similar companies that did not pursue such agendas. 

“The Utah legislature took several actions this past legislative session to protect Utahns. Very importantly, we passed a fiduciary standards law that included voting proxies for the best interest of the beneficiaries.”

One-Size-Fits-All ESG Mandates Don’t Make Sense Outside of Corporate Boardrooms

ESG mandates are imposed from the top-down by large asset managers, corporations, or government bureaucrats. Farmers are particularly affected because these mandates often seek to cut the use of carbon, a vital part of growing crops and raising livestock. In response to Rep. David Kustoff (TN-08), one of the hearing witnesses, an Oklahoma banker and farmer, shared how ESG mandates are often at odds with common industry practices, such as agriculture, and are impractical for farmers to implement.

Rep. Kustoff: “My congressional district, the eighth congressional district of Tennessee, sounds somewhat like your district, where ag plays a big part…You talked about your family-owned farm. Can you talk about the challenges that ESG mandates present to family-owned farms like yours, to ranchers and farmers?”

Mason Bolay, Oklahoma banker and farmer: “Again, anytime you want to mandate a change or drive a practice, there are unintended consequences, especially in agriculture. Say that we had to do all no-till all across America – that’s unsustainable. It doesn’t work in all areas, and especially in our area, there are certain farms, ranches, soil types that can handle no-till and across the country, that wouldn’t work…So again, any mandate would be detrimental to our production agriculture.