Written by 11:00 am EU Investment

If Florida can ban ‘ethical’ investing, then Britain should do the same

It did not take long for the backlash to start.

Mike Bloomberg, the billionaire former New York mayor and occasional presidential candidate, weighed in with an opinion piece on his own news site arguing that Republicans like DeSantis “don’t understand capitalism”.

“All these anti-ESG crusaders position themselves as defenders of the free market,” he argued. “But they are attempting to use the government to block private firms from acting in the best interests of their clients.”

There is no question there is a real debate to be had here. ESG has grown to dominate the investment world. It already controls a total of $50 trillion worldwide. The EU is making it mandatory, and many other countries are likely to follow that lead, and just about every major company now has to publish reams of material on its environmental and social policies just to make sure its shares are not dumped.

Just about every pension fund is making investment decisions partly based on its guidelines. We are all impacted by ESG whether we like it or not.

And yet the case for ESG investment is far from proven. In fact, there is a litany of problems. True, the returns have been perfectly respectable over most of the last decade. 

But that is largely because the main ESG guideline is that you drop oil and gas, mining, defence, tobacco, and any kind of heavy industry, and switch into tech stocks, and from 2010 to 2022 that just happened to be a great strategy. It is a lot less likely to prove successful over the next decade, especially as the fossil fuel giants come storming back.

Furthermore, it will inevitably mean that investors crowd into the same few sectors and companies. There are relatively few major companies with perfect ESG credentials – right now the leading ones are Microsoft, the chip manufacturer Nvidia, and the footwear manufacturer Nike – and as the funds grow, they will all pile into the same tiny group of stocks.

If that is not a recipe for a huge bubble, it is hard to know what is. And when it bursts, everyone will lose a ton of money.

There is already a lot of “greenwashing” going on, with perfectly standard funds merely just environmental and social window dressing, none of which actually has any real substance. Indeed, Deutsche Bank has already been raided by investigators over allegations of greenwashing, a trend that is only going to get worse.  

In reality, DeSantis is making a perfectly sensible point, and his critics are wildly over-reacting. Florida is not actually banning ESG. The state government is simply stipulating that pension funds, along with any other form of pooled investment, have to be invested strictly in accordance with maximising returns, and that all other considerations should be ignored.

There shouldn’t be anything controversial about that. As it happens, the ESG movement has hijacked the investment industry, and turned it into an ideological mission that trumps any other objective.

For many funds, their ESG credentials are now more important than how much money they make. Of course, some ESG investment is genuinely world-beating, but the Florida law allows funds to switch into that. The only catch is that they will now have to genuinely prove that it is a great investment, and not just a politically correct one.

In reality, the UK should follow Florida’s lead, and put in place a similar rule for the investment houses of the City of London. Funds should be told to prioritise maximising returns and nothing else.

There is nothing wrong with fighting climate change, promoting equality and inclusion, and making sure supply chains are ethically run. But that is a job for governments, with laws and regulations to back it up, and not for the self-appointed ethical and environmental police of the fund management industry.

The real social mission of a business is to make a decent product and fair price, and to pay staff and suppliers on time. And the social responsibility of fund managers to find those companies, back them, and provide decent returns for their investors.

Everything else is just a distraction. The sooner the UK adopts its own version of the Florida law the better – and then ESG will only survive if it can justify itself as an investment. 

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