GOP VS ESG Investing

GOP VS ESG Investing

by Doyle Ranstrom on Mar 12, 2023

Why are Republicans afraid of ESG Investing? February 28th, Forbes published an article entitled "A Divided Republican Party Is United Against ESG Investing".  On December 19th, 2022 USA Today published an article entitled "GOP vs ESG".  

First of all, political parties being afraid is nothing new.  As a lifetime Independent Moderate, I have watched either or both political parties be afraid.  

But the GOP seems to have taken being afraid to a new level.  Some of things that Republicans seem to be afraid of include:

  • WOKE and/or CRT.  Keep mind in many if not most probably do not know what either mean not to mention being able explain what the acronyms represent.
  • Free and fair elections.  Even Fox News was forced to admit under oath that hosts and commentators of some political shows knew that President Biden won the last Presidential Election as soon the Election was over, but they continued to support the "Big Lie" which was Trump won.  They lied to continue the "Big Lie" because they were afraid of losing their base and more important, their income stream. 
  • Minorities voting.  GOP seems to be very afraid minority voting will increase, hence all the recent legislation to make voting more difficult in many states. 
  • Climate Change.  Instead of being afraid of climate change, they should be afraid of its consequences, especially the increasing frequency and costs of natural disasters.  
  • Women's Rights.  The GOP is afraid women will make their own healthcare decisions.  

There more, this is just a few. 

But even I was surprised when I starting reading Republicans are afraid of ESG.  First of all I am guessing many if not most Republicans do not know what ESG means not to mention what it represents as an investment strategy.  

So what is ESG investing.  An excellent description of ESG investing comes from a February 21st, 2023 article in Nerd Wallet.  The following is from the article:

  • "Environmental, social and governance criteria, or ESG, is a framework companies use to evaluate their sustainability. Environmental factors look at the conservation of the natural world, social factors examine how a company treats people both inside and outside the company and governance factors consider how a company is run. Here are some examples of what each ESG category covers:
  • Environmental - Carbon emissions, Air and water pollution, Deforestation, Green energy initiatives, Waste management, Water usage.
  • Social - Employee gender and diversity, Data security, Customer satisfaction, Company sexual harassment policies, Human rights at home and abroad.
  • Governance - Diversity of board members, Political contributions, Executive pay, Large-scale lawsuits, Internal corruption, Lobbying".

ESG ETFs/Funds provide investors an opportunity to invest for long-term return in a manner which is consistent with their personal and social values.  As part of this, ESG investors generally believe that companies which meet ESG criteria will be more profitable long-term and have the potential for higher returns.  This is a good time to mention that past performance does not predict future results.  Remember this as it is important.  

One of the reasons Republicans in some states are trying to eliminate the ESG ETFs/Funds as options in government pension plans is they believe it reduces investment return.  I think this is, let me be polite, BS.  Many ESG managers believe that ESG criteria enhance return on a long-term basis.  There are studies that support this belief.  Some examples are as follows:

  • Many investors believe companies that develop and maintain sustainable energy policies will be more profitable long-term.  Reasons may be they believe sustainable energies are becoming more cost-effective and will reduce long-term company energy costs.  Historically oil has been and continues to be a very volatile source of energy.  By comparison, sustainable renewable energies have the potential to be a consistent and stably priced source of energy.  
    • Note: Oil was 19.46 a barrel in 1946, 24.10 in May, 1973, there had been volatility before, but this was the beginning of the big swings.  In May, 1980 it reached 144.45/barrel, then declined to 26.30 in October, 1998, going back up to $157.72 in April, 2008 followed by a decline to $2199 in April, 2020.  Since then went up to 104.39 in March, 2022 and since has declined to 77.05.  
  • Companies that avoid data breaches, sexual harassment lawsuits, and make customer satisfaction a corporate priority have the potential to be more profitable long-term.     
  • Companies which have fair and equitable and pay scales along with high quality employee benefits may have employees who are vested in the success of the company. 

The above along with other examples all have the potential to make companies more profitable which maybe reflected in their stock prices.  

Another reason some Republicans are opposed to ESG is they believe it promotes a "WOKE" agenda.  Again, what was the term I used before, this is BS.  I would suggest that companies which treat their employees fairly and do not discriminate, provide quality products or services for the customers at a competitive costs, provide great customer service, are contributing members of their communities and stabilize the cost of their energy may be more profitable long-term.  

Investors, be it individuals or pension plan trustees, should determine if they want to make ESG criteria a part of their investment strategy.  State and federal governments should stay out of it.  

So why are parts of the GOP really afraid of ESG investing.  I suspect there are multiple  reasons.  Following are a few I would mention. 

  • One, they receive substantial contributions from the oil lobby.  And those contributions [bribes] result in significants subsidies for the oil industry.  Does subsidizing fossil fuels at this point make long-term economic sense?  That's a whole different discussion, but it seems to me that one of the reasons the GOP is afraid of ESG investing, is it reduces the dependence on fossil fuels which may affect the wealth of some of their largest donors.  As many understand, wealthy donors do not like to become less wealthy, so again, they donate [bribe] politicians to pass legislation that preserves their wealth, in this case maintaining the subsidies for fossil fuels which do not make long-term economic sense to many investors 
    • A 2020 study found that the US Government provides direct subsidies for fossil fuels  of about $20 Billion.  In addition, according to a 2020 study by the International Monetary Fund, fossil fuels received $5.9 Trillion of subsidies globally.
  • It seems to me that many in the GOP are afraid of fairness, good working conditions along with equality in the workplace.  Maybe what their greatest fear is in a totally level playing field they cannot compete.  
  • Another is equality of pay.  An article from the Economic Policy Institute published in October, 2022 stated that CEO pay has increased by 1,460% since 1978 and is currently 399 times average worker pay.  By comparison, CEO pay in 1965 was 20 times the average worker pay.  Are members of the GOP afraid that ESG screens which eliminate companies [stocks] in which CEO pay is exorbitant compared to their  employees?  More important are is the anti-ESG group afraid this will eventually effect the value of the stock?  

And is this the real reason many Republicans are afraid of ESG investing?  Not because it will reduce returns, but they are afraid ESG screens may enhance returns weeding out companies which do not meet ESG screens.    

Essentially is not this what the anti-ESG groups are doing?  It seems to me that they are stating the ESG investments will have lower returns.  But what if over the next 10-20 years ESG lead to higher returns because the screens eliminate less profitable companies.  Are Republicans then financially responsible for the lower returns?

Every investor, be it an individual or pension plan should decide for themselves if ESG strategies make sense to them.  Understandably investors look backwards in making investment decisions, but it is also important to look forward.  Remember, past performance really does not predict future results.  

I do get why some in the GOP are afraid of ESG investing, but I would suggest it has nothing to do with returns and a whole lot to do with protecting their wealthy donors who are afraid their stock prices may be hurt long-term by ESG strategies. 

My suggestion to those in the GOP who are afraid is let investors make they investment decisions which they believe are best for them and then let the markets do their thing.  Remember, it is never a good investment strategy to put your money on horses as a form of transportation when the new companies across the street are building a cars. 

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.