
A couple of years ago, another financial advisor with whom I work related the following story to me: He was at a conference chatting with an executive from a global financial firm when the topic of ESG (environmental, social, and governance) investing was brought up. ESG is a popular label for investing in companies most aligned with woke values. Companies that have a carbon-neutral commitment or a certain number of minorities on their boards, for instance, are prime targets for ESG investing.
The executive candidly admitted, “Yeah, we can only make a tiny margin on the rest of our products, so this ESG is the greatest thing—we take our S&P 500 fund, kick out the fifty or sixty worst offenders, and then slap the ESG label on it and charge five times more for the portfolio—and people eat it up.” Hearing this story, I was both amused and concerned. Was this the truth behind one of the fastest-growing strategies in the industry?
My concerns were valid. At the time of this exchange, both ESG and its close cousin DEI (diversity, equity, and inclusion) had been gaining popularity in business for a number of years. Even the Department of Labor was looking into how it might increase this style of investing inside employer-sponsored plans like your 401(k).
But there are major issues with this investment strategy. Both ESG and DEI are moral frameworks that put perceived social goods before the basic financial principle of making returns on investments. Using ESG to guide investments, the 401(k) plan fiduciary (the individual charged with selecting investment options) would be allowed to choose companies to invest in based on intangible factors such as whether or not they use affirmative action to screen job applicants, rather than simply judging if the investment would yield returns. That’s because the point of ESG is not to make money, but to virtue signal. Mr. Bigshot the Fiduciary’s woke ethics could trump the financial interests of Joe the Employee.
In the last year or two, however, one could distantly hear the death knell tolling for the ESG movement and DEI, as corporate America began to shift away from both. Now, with Trump in the White House, the downfall of ESG and DEI is all but guaranteed. Trump has already eliminated DEI from the military, among other federal programs, and many companies are following suit.
After years of following ESG crusader Larry Fink and his firm BlackRock in lockstep, there’s been a distinct mutiny in the financial industry. In late 2022, Vanguard announced that it would pull out of the Net Zero Asset Managers initiative, which focused on reducing carbon emissions. Then in early 2024, J.P. Morgan and State Street both announced that they would be exiting a similar initiative called Climate Action 100+. More recently, companies such as Target, Meta, and Microsoft are cutting or eliminating their DEI initiatives. Even regulations like the aforementioned Department of Labor rule, challenged by dozens of state attorneys general, seem headed for demise.
Americans have woken up to the fact that they are being told to act, think, and invest in a certain way. The undercurrent of American rebellion and independence just won’t stomach that, even less so now that the status quo has changed. Not to mention, ESG investing was a terrible idea to begin with. If you intentionally limit your options for investing based on a shaky philosophy of woke totemism, you will likely find it handcuffs you and your firm to an ever-changing chimera of values and taboos that may or may not align with financial success for your clients. It appears some of the world’s largest financial institutions found this out the hard way and decided to make a hasty exit—after all, one cannot deny the age-old truth that money talks.
Perhaps one of the surest indicators of change is the notable difference in tone at the World Economic Forum in Davos this year, as elites and executives from numerous industries distanced themselves from these terms. Hastened by Trump 2.0, it seems clear that the corporate zeitgeist has shifted, marking a farewell to a therapeutic individualism freed from physical reality, toward a saner acknowledgment of immutable truths and common sense—namely that the purpose of investing is to make money, not enforce compliance with the morality du jour.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations.
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