ESG... Criminal Behavior?
So. ESG is apparently going to be a crime.
File this under the heading “Things That Are So Absurd Nobody Would Believe Them If They Weren’t True”:
New Hampshire Republican lawmakers have fired the most recent salvo against ESG investing. While we all know that ESG is just one of a handful of boogeymen in every right-wing politician’s playbook, and while we’ve all seen some pretty silly stuff as a result, this one takes the cake.
According to the industry publication Pensions and Investments, New Hampshire’s GOP representatives recently introduced a bill that would prohibit any of the state’s investment arms from committing capital to investments that consider environmental, social and governance factors. The state’s treasury, pension funds, reserve accounts and any branch with a cash balance that needs to be invested would presumably fall under the purview of this law.
Here is a choice excerpt from the bill:
"Executive branch agencies that are permitted to invest funds shall review their investments and pursue any necessary steps to ensure that no funds or state-controlled investments are invested with firms that invest New Hampshire funds in accounts with any regard whatsoever based on environmental, social, and governance criteria,"
And another one:
“[The New Hampshire Retirement System] shall adhere to their fiduciary obligation and not invest with any firm that will invest state retirement system funds in investment funds that consider environmental, social, and governance criteria, as the investment goal should be to obtain the highest return on investment for New Hampshire's taxpayers and retirees."
The punishment? “Knowingly” violating the law would be a felony punishable by not less than one year and no more than 20 years imprisonment, according to the proposal.
Which, if you think about it for more than a few seconds, makes no sense whatsoever. As I read it, the law would make it a felony for anyone associated with making investment decisions on behalf of the State of New Hampshire to consider governance as part of their diligence process. Governance. As in: “Is the fund engaged in fraud? Might it be a giant Ponzi scheme? Is the CEO in thrall to a cult that worships Baal?” Basically, any investor who seeks to understand where sub-standard governance might pose a material investment risk will be… chucked in jail?
And if you take this logic one more step, you end up in some very strange places. No longer would it make sense to vote proxies, for that could be construed as trying to influence corporate governance. No longer would it make sense to track insider transactions, because, well… who cares? And of course, the Securities and Exchange Acts of 1933 and 1934 become somewhat less relevant, as the whole concept of governance would be turned into a “trust us” exercise.
And if by some chance you accidentally learned that a board was directing no-bid contracts to family members, and felt inclined to sell your shares in the company because of bad governance, doing so would be a felony.
Look, we all understand that sometimes ESG investors take it all a little bit too far. Saying, for example, that developing a deep expertise in ESG will automatically earn an above-market financial return is patently absurd (and has been proven to be a false premise more times than we can count.)
But developing that expertise is, unambiguously, a risk mitigation skill. Considering, for example, whether or not rising oceans will put at risk an insurance portfolio composed of low-lying commercial real estate, is a sensible approach to evaluating long-tail liabilities. Or trying to understand if the C-suite has been using the corporation’s fleet of private jets for family vacation travel reveals a desire to understand the P&L. ESG is, and has always been, nothing more than an additional set of lenses through which to evaluate investment opportunities. Making it a crime to do so is bizarre. Worse, making it a crime to act on information that might reflect an elevated risk profile will, by definition, make that elevated risk more likely.
Align has always been a steadfast advocate for elevating ESG factors in the investment process. Fundamentally, we believe that doing so makes us - and the whole market - better investors. More transparency. More communication. More actionable information. Yes, we happen to put a clearly-articulated values layer on our ESG focus, but even without that extra step, ESG factors are simply part of how an enterprise operates. Understanding that information, and then acting on one’s analysis, is called “investing”.
Of course, if State Legislators in New Hampshire get their way, it will also be called “criminal behavior”.