Adhering to ESG limits when making investment decisions, however, exposes the over 20 million working and retired CPP members to added investment risks and poor returns.
ESG induces institutional and other investment managers to place funds into debt, equity, and other financial instruments of firms found acceptable based on ESG criteria. Those criteria try to make corporate behaviour less environmentally damaging, labour-abusing, or ‘corrupt’. Existing laws, however, already prohibit egregious environmental, labour and corruption crimes, making ESG’s need doubtful.
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Portfolio managers who follow ESG criteria limit their investment choices by shrinking the available investment ‘universe’. For example, following ESG investing parameters usually rules out investing in firms involved in oil and gas production, transport, processing, coal mining, some forestry and agriculture businesses, tobacco products, and, sometimes, defence firms, casinos, alcohol, and fast foods, adult entertainment and cannabis.
Following the subjective dictates of ESG investing, investors risk having lower returns than those reached by managers who do not adhere to such limitations. Even ‘passive’ management, such as holding investments tracking indexes such as the TSX/S&P Composite or TSX/S&P 60, the S&P500 index for U.S. stocks, or the MSCI Capital International Global Index for the world, would likely, over time, exceed returns from following the narrower, ‘green’, ESG-dictated limitations.
Such broader indices’ returns have already exceeded those of ESG-oriented funds in recent quarters as the latter contain fewer strongly performing energy and defence firms while holding more of the sagging IT and ‘Green Transition’ stocks. If the CPP and its institutional peers persist in an ESG-style investment strategy, subpar returns could hinder the asset growth needed to keep the pensions of Canadians fully funded.
ESG’s primary goal is to reorient investment towards a ‘Green Transition’. However, as presently formulated, ‘green’ investing is based on a false assumption: that renewable energy sources are reliable, clean and cheap. This assumption is invalid without pairing renewables with expensive energy storage. It has also been proven to be false, as can be seen by the European Union’s current dire situation when it comes to energy and Texas’s dark and cold debacle last year.
ESG scoring is also inconsistent and often makes little sense. For example, some Asian exports to Western firms are made by UN-deemed forced labour – which should be unacceptable. Another ESG flaw that is oft-ignored is the extra environmental costs of solar, wind installations, and rare metals (some mined from horrific places like the Democratic Republic of Congo) that are used in electric vehicles.
Finally, working and retired CPP members haven’t been asked if they are willing to reduce their pensions on the ESG alter of virtue signalling. They are being forced to accept it.
If the CPPIB opposes providing higher-return non-ESG alternatives to members, then we must begin a serious discussion about transforming the CPPIB into a system of private pension accounts. This would leave political pension investment choices where they should be – up to the individual.
Ian Madsen is the senior policy analyst at the Frontier Centre for Public Policy.
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