We should not play political games with other people’s money. That gamesmanship is the very essence of ESG investing, with all of the self-dealing and other perversities that politicized investment choices engender.

Unintended consequences are a longstanding effect of public policies, an eternal truth seemingly invisible to one generation after another of policymakers eager to improve upon the economic arrangements emerging from market competition and individual choices. Witness, for example, a regulation implemented by the Securities and Exchange Commission (SEC) in 2003, intended to reduce the scope of supposed conflicts of interest shaping the proxy-vote decisions of mutual funds. It requires management investment companies “to provide disclosure about how they vote proxies relating to portfolio securities they hold.” In the words of the SEC, “funds have been reluctant to disclose how they exercise their proxy voting power” with respect to the securities that they hold in their portfolios.

Because of staff interpretations of that regulation, it evolved from a simple requirement for management transparency into an SEC policy that all mutual funds vote on all proxy issues, with the added feature of an almost blanket exemption from liability for advisers providing fund managers with recommendations on how to vote.

The combination of the requirement and the exemption led unsurprisingly to an outsourcing of the funds’ policies on such proxy voting. After all, neither disclosure nor its adequacy is ever very simple, and disclosure inexorably leads to complaints about the ensuing proxy decisions. Were the decisions consistent with the disclosures in any given case? The plaintiff attorneys would love to ask that question. Accordingly, there is no better way to keep the lawyers and their favorite tool — litigation — at bay than transferring such proxy decisions to outside “experts.” Alas, those outsiders, like most individuals and institutions, have their own set of interests and biases, and there is no particular reason to believe that the experts’ preferences are consistent with those of the investors in a mutual fund.

Read more @AEI