Investing 101

Socially Responsible Investing Is Costing You Money

Editor’s Note: Today’s article comes from a new voice for Profit Trends: ETF Strategist Nicholas Vardy.

Here he says that “socially responsible investing” is costing investors billions of dollars… and that we simply can’t afford to be so picky.

Read on for his take on how political correctness could be hurting your portfolio.

– Rebecca Barshop, Managing Editor


Political correctness has invaded every aspect of American culture.

I can’t watch a single episode of a U.S. television show without being hammered over the head with some politically correct (P.C.) message from the “more enlightened than thou” pen of a “woke” Hollywood scriptwriter.

The feeling reminds me of my days at Harvard Law School when some members of my class – including a certain future president of the United States – worked tirelessly to impose their self-congratulatory “enlightened” social views on the rest of us.

Of course, such virtue signaling on a college campus isolated from the real world is pretty innocuous. However, when this P.C. posturing makes its way into the real world, it has serious implications.

In the investment world, this philosophy is called “socially responsible investing.” It’s an approach that considers both financial returns and social impact to bring about social change.

I prefer to call it simply “P.C. investing.”

And P.C. investing has already cost the largest state pension fund in the U.S. billions of dollars in lost profits.

Let me explain…

The High Price of P.C. Investing

The California Public Employees’ Retirement System (CalPERS) is the Big Kahuna among U.S. pension funds. With $366 billion in assets, it is by far the largest public pension plan.

CalPERS was also one of the first public pension systems to link its investments to social activism. It happily sold off stakes in South Africa in 1986 to protest apartheid. It ditched tobacco stocks in 2000 with equal alacrity.

No one gave much thought to the investment price it would have to pay.

As it turns out, P.C. investing has a cost. Outside consultants recently calculated that CalPERS’ decision to divest tobacco investments cost the fund more than $3.5 billion.

That’s equivalent to about 1% of CalPERS’ value today.

A study by Boston College found that the average annual returns in states that divested non-P.C. investments were 0.4% lower than they were in states where pension funds were not forced to divest.

Applying the figure of 0.4% a year, P.C. investing cost CalPERS $1.35 billion just this past year. That easily works out to well over $10 billion in lost profits over the past decade.

To put that in perspective, $10 billion is approximately the size of the entire endowment of the University of California system, which includes Berkeley, UCLA, UCSD, UCSB and five other campuses.

That’s a high price to pay for cash-strapped California.

Why Norway Can… and California Can’t

CalPERS isn’t alone in its attempts to influence the direction of social and political progress.

Norway’s giant sovereign wealth fund has pursued a similar social and political agenda.

Most recently, Norway’s parliament instructed the fund to divest itself of $13 billion of oil, gas and coal extracting companies. Parliament also ordered it to shift $20 billion into renewable energy companies and projects. All this was in response to political pressure stemming from the Paris Agreement on climate change.

Yet there is one big difference between Norway and California.

Norway’s $1 trillion fund is fully solvent. In contrast, CalPERS’ $366 billion fund was already $139 billion short of what it needed to fulfill its liabilities back in 2017.

In short, Norway can afford P.C. investing. California can’t.

Reality is setting in, even among free-spending California Democrats.

In recent years, CalPERS has quietly changed its tone. It has rejected proposals to sell stocks in private prisons; gun retailers following a deadly high school shooting in Parkland, Florida; and companies tied to Turkey in protest of the country’s failure to recognize the Armenian genocide.

Here’s the reality…

First, P.C. investing hurts investment returns. Divestment policies have already cost CalPERS billions of dollars.

Second, CalPERS’ divestment of Philip Morris International (NYSE: PM) and the South African stock exchange has had no discernable impact on either. The profits from owning Philip Morris stock simply went into the pockets of other, now more well-off shareholders.

The bottom line?

CalPERS’ exclusive mandate should be to maximize investment returns for the retired state employees of California. The mandate should not include the goal of implementing the personal visions of today’s social justice warriors – especially when it costs beneficiaries billions of dollars in forgone income.

Perhaps oil-rich Norway can afford this. However, cash-poor California can’t.

That’s why it’s time to dump P.C. investing.

Good investing,

Nicholas