Inviting Utah Gov. Spencer Cox to reconsider his opposition to the environmental, social and governance, or ESG movement, Utah State University professor Lynn Rees argues in a Deseret News editorial that Utah should adopt a popular new standard for investing our taxpayer money and pension funds.  

Instead of seeking the highest investment returns for a given level of risk (called the fiduciary standard), ESG anti-fiduciary standards measure how well a company complies with a political agenda. Capital then flows to the most compliant.  

As the person elected to oversee Utah’s investments, I’m not playing this game. If we pursue dual investment purposes, returns will suffer or volatility (risk) will increase or some combination of both. ESG politicizes the asset allocation process that should be purely financial. Moreover, financially material ESG factors are already part of investment analysis.

This politicization has manifested itself in the capital markets where, for example, financial providers are pressured to cut off capital to the oil, gas, coal and firearms industries. Sadly, the least affluent bear the brunt of these costs, as the price of gasoline has shown us.

I do not share Rees’ confidence either in the preponderance of the academic research or the reliability of the environmental, social and governance rating system. While Rees makes a convincing argument for evidence-based decision making, the evidence itself is hardly convincing. ESG is still an unproven and dubious exercise that seeks to measure qualitative and subjective impacts to which it is difficult to assign a numeric value. 

Rees argues that higher environmental, social and governance scores are tied to better financial performance. However, the academic research on the topic has yielded very mixed results. This is largely because there is little consensus on how to measure the environmental, social and governance variables that go into constructing an ESG index and how to weight them. How should a company measure its commitment to diversity? Is there any diversity measure that is widely accepted and robust?

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Several studies show a negative correlation between ESG and financial performance, including in emerging and developing countries. Importantly, in a recent academic paper, researchers surveyed 1,141 primary peer-reviewed papers and 27 meta-reviews (based on ~1,400 underlying studies) published between 2015 and 2020. They documented a statistically significant negative relation between environmental, social and governance investing and investor returns.

While it’s tempting to believe we could always have our cake and eat it, too, that’s not the reality. When the goal of maximizing returns and the goal of rewarding political compliance are in conflict, what happens then?  

Not only is the evidence supporting environmental, social and governance investing contradictory, but the outcomes of ESG ranking systems can be downright baffling. For example, S&P Global Ratings assigned (and later retracted) Russian-controlled energy producers higher ESG ratings than similar entities in the United States. Russian energy giants Gazprom and Rosneft outscored American energy companies ExxonMobil and Chevron. This despite the fact the Russian government is the majority owner of Gazprom and owns a 40% stake in Rosneft — the same government that invaded neighboring Ukraine in an unprovoked and unjustifiable attack, in violation of international law. 

Following renewed aggressive sanctions by Western governments, any investor who relied on S&P Global’s environmental, social and governance ratings was left to wonder whether those ratings accurately captured the actual “social” risk attributable to the Russian government’s longstanding and documented disregard for human rights and international law.

Our country was founded on the concept of plurality to prevent a consolidation of power. Our constitutional form of government separates power into equal branches with checks and balances. 

The markets represent one of our most pluralistic institutions, comprised of many parties with diverse views about the future. Markets only operate when differing views are allowed. environmental, social and governance moves the market to one view that is generally subjective and political. 

The interpretation of subjective information is the role of investment analysis. The diverse views reflected in that analysis are a foundational element of markets. If one viewpoint is deemed “correct” or definitive we have effectively centralized what is a pluralistic function. Amen to the market system at that point. Do we really want another centralized power that can be weaponized against disfavored groups? 

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Historically, many investors have chosen to align their investments with their values, as is their right. But ESG goes far beyond that. It seeks to drive an outcome through coercion and collusion. It is not a method of employing personal preferences. It is a blunt tool to impose one set of values on the entire marketplace.

Unlike other strategies, which respect the freedom of companies to choose their own missions, environmental, social and governance uses economic force, shareholder activism, collusion and other forms of coercion. A simple values-based strategy of avoiding industries or companies turns into something else entirely: private actors colluding to drive certain industries out of business.

Utah is best served by adhering to the fiduciary standard to maximize investment returns, regardless of which way the political winds blow.

Marlo Oaks is serving as the Utah state treasurer.