Responsible investment is dominated by political correctness and is being pushed through by super funds with too little debate, according to Jack Gray, adjunct professor of finance at the Paul Woolley Centre for Capital Markets Dysfunctionality at the University of Technology Sydney.
Talking to the annual Fund Executive Association Limited National Conference in Melbourne, Gray said a debate around the interpretation of the sole-purpose test to maximise returns was being bypassed in the rush to environmental, social and governance (ESG).
He said only an open and free discussion could determine whether social responsibility outstripped the legal responsibility to maximise returns.
He blamed political correctness for an effective censorship of debate, citing the term “responsible investing” as Orwellian for inferring that all other styles of investment were irresponsible.
He added this censorship was preventing analysis of the effectiveness of ESG.
“It has become a cottage industry, an enormous amount of time is spent on it and the net benefit to members does not justify it.”
He cited a European survey which showed that 30 per cent of investors were pursuing ESG as part of long-term risk management.
Adding that it was not a contradiction to have personal views and actions in support of limiting climate change, but to invest in polluting companies as a fiduciary.
Another statistic cited in favour of his argument was that the premium on well governed companies was now no longer a source of alpha, partly due to the popularity of ESG strategies.
He concluded his argument by stating: “There has been a rush towards ESG and United Nations-backed Principles for Responsible Investment without thinking this through, and my advice would be to not weaken the sole-purpose test and let’s open up this world to much more debate.”