The overlooked costs of ESG investing.

Environmental, Social and Governance (ESG) investing is shaping how capital is allocated across the economy. This paper, which can be found here, argues that prevailing ESG practices impose costs on pension savers, consumers and the wider economy; such costs are rarely disclosed or consented to and add up to a “quadruple squeeze” on pension beneficiaries and citizens:

· Higher living costs. ESG contributes to “greenflation”, adding an estimated 0.82-1.98% in annual cost inflation passed directly to consumers.

· Deindustrialisation. ESG-driven divestment and regulatory pressure risk accelerating domestic deindustrialisation. Carbon-intensive activity is frequently displaced offshore rather than eliminated.

· Lower investment returns. Constrained portfolios and investment in systematically more expensive, less profitable businesses erode the returns pension savers receive.

· Higher taxes. Fiscal burdens increase from accelerated deindustrialisation.

· ESG can cost the average pensioner over £50,000.

This paper demonstrates that ESG produces a shortfall of c. 0.48% per annum, which amounts to £50,000 for the average pension.

· ESG is a breach of fiduciary duty.

ESG waters down the legal obligation of pension trustees and fund managers to act in the best financial interests of their savers.

· ESG ‘outperformance’ is a mirage.

Claims that so-called “sin stocks”, the assets ESG strategies routinely exclude, including traditional oil and gas companies, fossil fuel bond issuers, tobacco, alcohol and gambling firms, underperform do not stand up to closer inspection

· ESG data cannot be trusted

The data underpinning ESG strategies is itself unreliable. Different rating agencies frequently and fundamentally disagree on whether the same company is “sustainable” or not, making them an inherently unreliable basis for capital allocation.

· ESG is starving the UK defence sector at a time of rising threat

The paper then outlines a range of specific policy recommendations designed to address the distortions caused by ESG investing aimed at ensuring that capital allocation returns to evidence-based principles, clear fiduciary discipline, and democratic accountability.

The paper can be found here.

Share