The Canada Pension Plan Investment Board (CPPIB), whose mandate is to earn the best financial return on its approximately $550 billion in assets (which belong to Canadian workers forced to pay into the CPP), is redirecting its investment strategy towards its own preferred social and political objectives. Climate change activism, unsurprisingly, ranks near the top of the CPPIB’s list of ESG (Environmental, Social and Governance) priorities.

The CPPIB’s commitment to using other people’s money to achieve such social and political objectives was formalized by, among other things, its publication of a document last year outlining its plan to invest in the “path to net zero” and leverage Canadians’ pension assets to push society in a lower carbon direction, encourage environmental regulatory burdens, and impose climate reporting and other environmental obligations onto corporations.

More recently, at the Bloomberg New Economy Forum in Singapore, CPPIB chief executive John Graham said he would be willing to divest from companies that are insufficiently committed to net-zero climate targets and that CPPIB is “really excited” about ESG. The problem is, as a manager of other people’s money, CPPIB’s sole obligation is to achieve the financial objectives of the people whose money it manages—not social goals, climate-related or otherwise.

Climate change and other ESG factors should therefore only be considered to the extent they are financially material. “When fiduciaries,” writes lawyer Randy Bauslaugh in a recent report, “use climate change and other ESG factors to prioritize social or environmental concerns over financial factors… or to respond to the social or environmental concerns of plan members, they put themselves on shaky legal ground.” While ESG advocates claim ESG investing is financially beneficial, a broad review of the existing research by the Fraser Institute’s Steven Globerman found a lack of evidence of this.

In fact, for ESG to accomplish the environmental or social objectives championed by its advocates, it must necessarily reduce investor returns. Economist John H. Cochrane calls this the ESG catch 22—the point of ESG is to expand favoured industries and companies (those that accomplish the investor’s definition of “social good”) and shrink disfavoured ones. This entails giving favoured industries and companies a cheaper cost of capital and disfavoured ones a higher cost of capital.

The cost of capital to the business, however, is the financial return to the investor. Therefore, if ESG achieves its intended purpose it must raise the expected financial returns for investors in disfavoured industries or companies and lower returns in the favoured ones. “ESG advocates claim,” Cochrane concludes, “that you do not have to trade return for virtue, that you can make alpha by ESG investing! If that is the case, it means ESG investing does not work! Take your pick.” As to whether ESG investing actually accomplishes anything virtuous in the first place, that is itself a dubious proposition, but a separate topic.

Notwithstanding its many problems, some individuals may want their money invested according to ESG criteria. However, when it comes to a pension plan—particularly a public program where workers are forced to enroll—sacrificing financial returns to achieve social or environmental goals is recklessly irresponsible and contrary to the pension plan’s obligations to the people who actually own the money. The CPPIB should know better.