ESG is dead – for the US federal government, at least. Last month’s incendiary speech to the OECD by President Trump’s employee benefits chief shows just how serious the US government is in challenging the business community’s climate change orthodoxy.
This blistering attack by Justin Danhof, senior policy advisor of the Employee Benefits Security Administration (EBSA), the body within the US Department of Labour that oversees pensions and benefits for more than 150 million Americans.
Speaking in the OECD’s Paris premises, Danhof did not mince his words: “ESG, at its core, looks a lot like a Marxist march through corporate culture. What is the point of Marxism? The complete destruction of capitalism.”
Danhof also linked ESG with “its companion acronym DEI”, which was slotted into the ‘S’ of ESG. “What is a social good? It’s at once everything and nothing since it’s in the eye of the beholder. It also happens to be the goal of many ESG proponents – to use the money of others to change society by changing business behaviour.”
Many European pension professionals’ first reaction will be outrage and repulsion. But his comments demand clear responses, and should be used as a call to focus minds. And with Reform UK ahead in whatever opinion poll you look at, it is a message our industry needs to take seriously.
Danhof’s first point is well understood – the sole purpose test of maximising returns for members. UK fiduciary duty is more nuanced than US law, but our ESG regulations do not require schemes to invest in climate transition funds. Instead they require them to fully consider climate risk alongside other risks, and report on their progress.
That said, there is a growing concept in the UK of extending fiduciary duty to ‘the world scheme members will retire into’, a logic extended to UK private markets in the recent Eversheds Sutherland opinion. The evidence as to whether ESG or non-ESG funds perform better is mixed, depending on the time scale you choose. But these concepts are clearly designed to support trustees and IGCs in making environmental or social investment decisions that could lead to lower short-term monetary outcomes.
Danhof asks a fair question – will an older scheme member with, say, a 10-year investment horizon, really reap a future society benefit equal to or greater than any foregone return? That is a hard thing to prove.
It is also true that defaults in the UK workplace pension sector have demands that are arguably not 100 per cent aligned with maximising returns. Providers are chosen by employers, often because their characteristics support the employer’s corporate identity – this can include an ESG or DEI lens. Similarly, brand and customer sentiment play a role. Providers screen out some stock because their their customers expect them to hold certain standards. The worst climate polluters, and other so-called sin stocks, can be excluded on this basis, regardless of whether they might give a higher return.
The UK government’s Mansion House Accord and mandation power drive schemes further from Danhof’s purist version of the sole purpose test. Antipathy towards mandating allocations in DC schemes for anything other than member returns is at least one area where he and the OECD are in agreement.
