Hurray! New Hampshire’s investment managers might, after all, avoid going to jail for acting as responsible investors. On 30 January, the New Hampshire House of Representatives committee voted unanimously to oppose a bill that would have made it a criminal offence for the state’s pension funds to knowingly invest according to ESG principles.
It is not a joke, I assure you. “It shall be a felony punishable by not less than one year, and not more than 20 years imprisonment,” states the anti-ESG legislation proposal. Rather serious then, compared to, say, kidnapping, first-degree assault, or sex trafficking, all crimes for which the maximum permissible sentence in New Hampshire is 15 years.
The bill, co-authored by representative Mike Belcher and a couple of his republican peers, prescribes that the pension funds “should adhere to their fiduciary obligation” and that “the investment goal should be to obtain the highest return on investment for New Hampshire’s taxpayers and retirees.” So far so good. But then comes the big leap, prohibiting investments “based on non-financial considerations (that) may include environmental, social and governance criteria, which have shown to produce lower returns compared to investment decisions based on financial considerations alone.”
Of course, whether incorporating ESG factors into the investment process leads to better or worse returns is still a topic of contention. Although there are plenty of logical arguments as to why it should make sense, the statistical evidence largely depends on definitions, investment horizons, etc. There is certainly enough academic literature to support either view.
But, banning all non-financial considerations, really? Where do you even draw the line? Investment managers have cared deeply about corporate governance, for instance, long before it was shortened to the ‘G’ in ESG. I doubt anyone who takes their fiduciary duty seriously would ever dare neglect the perils of a poorly governed company, ever. Should they go to prison for being prudent?
Disregarding non-financial considerations would make the job of investment managers so much easier, though, wouldn’t it? A quick number-crunching exercise along the lines of a simplified model in your standard financial textbook would suffice. Passive investing, here we come. Forget about trying to find those additional factors that might hold some predictive power and help you outperform other investors.
No, wait, that can’t be the spirit of the bill. The reps who proposed the bill clearly still expect outperformance. Exactly how the managers of the pension funds should achieve those superior returns without the freedom to (pro)actively manage some of the material risks to the portfolios and explore factors that they have worked hard to uncover is, however, a bit of a mystery.
Mind you, the poor New Hampshire officials are still not completely off the hook. Although the committee has recommended that the House kill the bill, it is ultimately up to the representatives to vote for or against it. And they might still find the arguments of Belcher & co., alongside last year’s executive order by Governor Christopher Sununu, compelling. We have all witnessed by now the weird attraction of conspiracy theories about the ‘ESG cartel’ trying to manipulate the free market.
Exciting times to be an investment manager indeed!
