Jennifer N. Coombs: Unpacking the many ESG fallacies of Project 2025

Despite recent efforts to tone down political rhetoric over the attempted assassination of former president Donald Trump, the reality is that Project 2025 still looms large as a threat not only to the future of American democracy but to the presumed legitimacy of our work in the sustainable investing field.

For a quick refresher, Project 2025 is an orchestrated compilation of right-wing policy proposals from the Heritage Foundation, designed to fundamentally change the federal government by consolidating executive power should Trump win the 2024 election.

The 900-plus page document opposes environmental, social and governance criteria in various capacities, and completely misses the mark on the definitions, history, and exactly how ESG criteria is used in the first place. The term ‘ESG’ is referenced a total of 40 times and ‘socially responsible’ three times, but the document never once mentions ‘sustainable investing’ — the proper term used throughout the global financial services industry.

Terminology and taxonomy in finance matters, so it would behoove one to ensure a proper understanding of a concept before looking to ban it or punish those who use it. While I could demonstrate how every reference to ESG is incorrect, illogical, misconstrued or just plain false, I’ve decided instead to provide just a few practical takeaways that anyone can use to set the record straight on ESG in all industries:

It’s called sustainable investing because ESG investing is not a thing

ESG investing is cited throughout Project 2025 as “necessarily put[ing] other considerations before the interests of the beneficiary […] is an inappropriate strategy under ERISA.” To be fair, that could be an accurate statement…since ESG investing is not real.

This is most clearly explained by Leslie Samuelrich of Green Century Funds: “There’s is no such thing as ‘ESG investing.’ There’s using ESG data to assess risk and reward. But too often it becomes synonymous with investments that are making an impact in the real world instead of companies that are just addressing their risks.”

Think of sustainable investing as a cake, and E, S and G are the eggs, flour and sugar that go into baking that cake. We can agree that any one of those things in isolation, is not a cake. Also, those three things alone, combined are not a cake – there are other ingredients involved such as valuation metrics, PE ratios, EPS forecasting, etc.

One can combine those ingredients in various ways and the result might be a different cake, but Morningstar, “ESG Turns 20: A Brief History, and why it’s not going away”:  we can still call it a dessert. The point is, to ban the ingredients simply because one is not a fan of (or has never tasted) cake, makes no sense. The ingredients are not the same thing as the finished product and sustainable investing is always the finished product.

ESG factors are pecuniary factors

There are thousands of examples of this, but the easiest one to explain is to look to the state of Florida. Since 2017, 11 property and casualty companies that offered homeowners insurance in the state have liquidated, and others – like State Farm, AAA, and Progressive – have been voluntarily leaving the state.

Climate-related catastrophes are guaranteed to affect Florida homeowners every year, and with each subsequent year the weather events intensify, the damages become greater and the insurance payouts must increase. Insurance is a game of risk and reward, and when the game becomes nothing but risk, it does not make sense to keep playing.

The financial impacts of climate-related events, i.e. ESG factors, are very clearly pecuniary considerations used by insurance companies. How then are ESG factors pecuniary for insurance companies, but not pecuniary for investment companies?

ESG data forecasts long-term value; it cannot be used in the short-term

One of the most disturbing recommendations in Project 2025 is that the U.S. Department of Labor should consider bringing enforcement actions against BlackRock and State Street Global Advisers for their violations of the fiduciary duty while managing the Thrift Savings Plan because they chose to recommend investments with an ESG focus.

The assumption is that the retiree savers of the TSP (the largest retirement savings plan for federal employees and military personnel) missed out on billions in returns by having their investments in ESG-related funds rather than broad-market investments ever since the TSP approved ESG funds in 2022.

It is clear why they would draw this conclusion, if you were to only look at the short-term performance: Blackrock’s largest ESG ETF, iShares ESG Aware MSCI USA ETF ESGU and State Street’s largest ESG ETF, SPDR S&P 500 ESG ETF EFIV have annualized 5-year returns of 11.2% 4 and 16.7%, respectively. Compare this to the S&P 500’s return of 17.2% 6 over the same period.

If we stretch the timeframe out to 10 years for the same investments, a different picture emerges: the ESGU has noted returns of 180.11% 7 compared to the S&P 500 of 178.6% — a 151-basis-point difference. While the EFIV has not yet been around for 10 years, it has effectively been tracking its benchmark, the S&P ESG 500 Index.

ESG data is never meant to be an indicator for the short-term, rather it requires years of consistently ethical and sustainable business practices for higher returns to truly manifest, and many studies have been conducted confirming this theory – some of the most notable, from economist Alex Edmans.

While just a small sample of the misinformation being spread about ESG, these talking points will hopefully spark other conversations with clients and colleagues. It is evident that conservative think-tanks do not understand the very basics of the investing world and are attacking it to their own detriment.

Read more: Veris Wealth Partners Stephanie Cohn Rupp and her 100% commitment to ESG