May 11, 2018
Wednesday, in the Capitol Building, the Savings & Retirement Foundation (SRF) hosted an event in conjunction with the American Council for Capital Formation (ACCF) which examined the impact that environmental, social, and governance (ESG) investments have on retirement wealth.
Commissioner Mike Piwowar of the Securities and Exchange Commission (SEC) delivered the keynote speech exploring the relationship between ESG investments and other macro trends, in particular the decline of the Main Street investor. Commissioner Piwowar, who is not only an SEC Commissioner but also a Ph.D. economist, echoed many of the same concerns that MSIC has highlighted concerning current ESG investment practices.
He argued that the investment community has increasingly begun to prioritize strategies that further social and political goals rather than focusing on maximizing returns for shareholders. These trends have been embraced by large, institutional investors while disproportionately affecting individuals or as Commissioner Piwowar called them, “forgotten investors.”
The colloquialism “forgotten investors” is especially apt. In 1950, retail investors, those who manage their own investments, owned more than 90 percent of the stock in U.S. companies. However, that number is now closer to 30 percent. Additionally, despite the U.S. GDP being three times larger, there were more public companies in 1976 than there are today.
Commissioner Piwowar suggested that part of the reason for this trend is that public companies are now inundated with costly ESG resolutions which disadvantage them against private corporations and international competitors. Additionally, smaller entities are disproportionately impacted, causing many entrepreneurs to choose to remain private. As a result, Main Street investors are left with fewer investment opportunities and smaller returns which has consequences for the U.S. economy and retirement security.
After Commissioner Piwowar’s address, a panel featuring Tim Doyle, Vice President of Policy and General Counsel at ACCF, James Lucier, Managing Director at Capital Alpha, and Ike Brannon, Founder of SRF, expanded further on the impact of ESG investments on retirement savings.
Doyle introduced ACCF’s new report The Conflicted Role of Proxy Advisors which found that proxy advisory firms like Institutional Shareholder Services and Glass Lewis have exploited their position as quasi-regulators to promote social, political, and environmental issues regardless of their positive or negative effect on a company’s performance.
As ISS and Glass Lewis not only advise companies on corporate governance and responsible investment decisions but also rate these companies, ACCF’s research highlighted a troubling conflict of interest which further marginalizing retail investors.
According to Commissioner Piwowar and the other panelists, ESG investment strategies have had a significant impact on Main Street investors. Proxy resolutions and activist shareholders have become increasingly burdensome to companies’ profitability. Rather than deal with these obstacles, many potentially high-return companies are choosing to simply remain private, providing retail investors with fewer investment opportunities and smaller returns.