Editor’s Note: Sanjai Bhagat is the author of “Financial Crisis, Corporate Governance, and Bank Capital,” Cambridge University Press. He is Professor of Finance at the University of Colorado. The views expressed here are his own. Read more opinion on CNN.
CNN
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President Joe Biden has issued the first veto of his presidency, preserving a Labor Department rule that permits fiduciary retirement fund managers to consider climate change and social criteria when making investments.
This is a mistake. By vetoing the measure to nix the rule, the President is not supporting middle class American retirees (and future retirees) or their ability to receive the highest possible investment returns to meet their retirement financial needs.
During the past decade, open-end funds and exchange-traded funds that have focused on non-traditional investment priorities — namely, environmental, social and governance factors (ESG) — have drawn considerable attention.
As of December, ESG funds had $2.5 trillion of assets under management across the globe; 83% of these assets are in Europe, 11% in the US. Investment money flowing into global sustainable funds peaked in the first quarter of 2021. During the past two years, there has been a dramatic decline in investor interest in ESG funds, especially in the US.
That’s likely because finance research has found that investor returns are generally lower from ESG investing compared to non-ESG (or traditional) investing.
In a 2019 Journal of Finance paper, researchers compared the investment performance of funds that were focused on ESG investments to funds that were not focused on ESG. Specifically, the researchers considered sustainability ratings from Morningstar — a commercial vendor of mutual fund information — for 20,000 mutual funds.
Morningstar gave funds focused on high sustainability investments “five globes” and funds focused on low sustainability investments “one globe.” Using the value-weighted market portfolio — which gives more weight to larger companies — as the benchmark, the authors found that funds with five globes underperformed funds with one globe by 5.76% annually.
Using the equal-weighted market portfolio — which gives equal weight to large and small…
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