In recent decades, there has been substantial growth in the so-called “sustainable” investments movement, which encourages portfolio managers to invest their clients’ funds in assets that are perceived to promote social benefits, especially assets believed to benefit the environment. According to a recent report by the U.S. Forum for Sustainable and Responsible Investment, the total U.S.-domiciled assets invested “sustainably”—a term broadly defined to include socially targeted investments—is $12 trillion.
A significant catalyst behind environmentally targeted investments is the belief that humans, through our use of fossil fuels, are primarily responsible for causing global warming and other environmental harms. A growing number of activists and investors believe fossil fuels cause serious harm to life on Earth and that the problems allegedly associated with fossil fuels will only get worse if levels of carbon-dioxide (CO2) emissions are not reduced. This view is severely flawed and has caused numerous investors to improperly manage investments.
The recent riots in the streets of Paris against motor-vehicle fuel tax hikes make clear the public is catching on to the serious harm done by “green” policies, including many of those supported by sustainable investments. Portfolio managers can no longer accept without serious doubts the claim that anti-fossil-fuel investments benefit society.
This Policy Brief critically examines—from the point of view of a fiduciary or any other investor whose primary duty or goal is to maximize returns—the arguments made in favor of investing in so-called “sustainables.” This paper shows that fiduciaries have a moral obligation—and, in some cases, a legal obligation—to avoid sustainable investment practices. Such investments usually involve government subsidies and are made as a result of pressure from governments, meaning they are not promising on their own merits. Rather than embrace sustainable investment practices, fiduciaries should focus on sound science and investment practices that maximize risk-adjusted returns.
The paper will consider the following:
1. The Aims and Claims of Sustainable Investments
Calls for sustainable investments are often directly or indirectly related to “Environmental, Social and Governance” criteria, . While often well-meaning and helpful, the environmental criteria pose a danger to portfolios and society.
2. Fiduciary Duties
The environmental element of sustainable investment guidelines run counter to the goals of fiduciaries and other investors whose primary duty or goal is to maximize returns on an investment portfolio.
3. Institutional Biases
Sustainable investment materials from the United Nations and other organizations devoted to climate alarmism are extremely biased and ignore strong research findings that disprove many of their primary arguments.
4. Pressures to Invest and Virtue Signaling
Sustainable investments are often a form of “virtue signaling” made in reaction to pressure from governments and special-interest groups. They are typically not compatible with fiduciary obligations.
5. Risks Associated with Relying on Government Subsidies
Many sustainable investments are made much more attractive by government subsidies. On their own merits, such investments are typically risky.
6. Promoting Cronyism and Corruption
Investors who succumb to the temptation to invest their client’s funds in sustainable investments are an integral part of a corrupt, crony system. This is contrary to the letter and spirit of the “Environmental, Social and Governance” criteria.
7. Global Effects and Risks of Sustainable Investments
Investors in sustainable assets promoted or mandated by government are complicit in the serious economic damage they have and will continue to cause, and they are undermining the markets upon which a sound economy depend.
This paper further argues portfolio managers should seize the moral high ground by resisting the pressure to invest clients’ funds in risky sustainable investments. Instead, they should educate their clients about the fallacies involved in such investments.
Martin Hutchinson is a former merchant banker with more than 25 years of experience working for some of the world’s most prominent financial institutions, including banks in his native Britain, United States, and Europe.
