The virtue bubble is about to burst. Good riddance.

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There are costs to living a virtuous life; It requires doing without it. This is true psychologically, for sacrifice gives meaning to virtue. But it is also true mathematically. You pay a price when you limit who you will buy from, who you will work for, and what you will invest in. When times are good, the costs of virtuous living may not seem too high, but the bill eventually comes due.

This judgment is now. We may be witnessing the end of the virtue economy bubble. And that’s not necessarily bad, because the virtue economy didn’t make the world a better place. It may even have made it worse.

The idea of ​​letting your values ​​guide your financial life has grown over the past decade and has really taken off during the pandemic. The amount of environmental, social and governance (ESG) funds is expected to reach $41 trillion this year.

According to a recent survey by Charles Schwab, 73% of participants surveyed said that personal values ​​have become a bigger factor in how they make life decisions over the past two years; 82% say their values ​​impact their investments; 76% said when making a purchase that “the values ​​of the company that made the product are an important consideration”.

But how much these same people are really willing to pay to satisfy their values ​​is unclear. When it comes to investing, a company’s performance was ranked first among survey considerations; just like the price when it came to shopping. Virtue may have ranked so high in recent years because virtuous economic decisions did not come at a great cost – stocks were rising and inflation was almost non-existent. The times have changed.

Five years ago, hedge funder Cliff Asness caused a stir in the ESG investing community when he pointed out an obvious truth. He argued that ESG investment funds will generally earn less than funds that are free to invest anywhere. He explained that constrained optimization will result in lower returns than unconstrained ones. It’s intuitive: if you have to turn down a good investment because it’s not ESG compliant, that means you’ll make less money than someone who is free to invest in it. The more you constrain yourself, the less you can expect to earn. Asness was baffled that ESG was sold as a good investment.

For a time, as ESG funds grew in popularity among retail and institutional investors, it seemed that their returns were superior to those of sinful funds. Since 2010, a US ESG index fund (SXEIMUV) has outperformed the S&P 500.

But the true test of any asset class is its performance in all markets. Once the market started falling this year, the S&P fund did better, or worse, than ESG funds. An S&P fund is down 17.3% year-to-date, while the ESG index is down 18.7%. A bull market covers many sins – or virtues. Now that the market is turning, even ESG industry insiders are expressing skepticism.

The same goes for where you choose to work or what you buy. You’re selling your work, and if you limit the pool of buyers to companies that share your policy, that means fewer offers and possibly turning down more money. When the job market is tight and you have many employers to choose from, chances are you won’t have to sacrifice much to make that choice. This may be one of the reasons why companies have been quick to adopt political positions on issues that may correspond to the values ​​of their workers.

Workers may not be able to be as picky if the labor market eases. Shared values ​​can run out if you have bad managers or the job doesn’t pay so well. In an environment of higher inflation, accepting a pay cut is not so easy.

Virtuous consumption is also becoming more expensive. There’s less opportunity to buy the lowest price if you only buy cinnamon from a spice merchant who hates the same politicians you do. As inflation rises, virtuous purchases cost even more, because the ability to replace and compare prices is your best defense against rising prices.

It’s hard to say how many workers and consumers have actually let virtue guide their decisions. It’s one thing to say something in a poll; it’s another to take an actual pay cut or choose to pay 20% more for groceries. Is it a coincidence that, as the economy looks more precarious, companies are beginning to hesitate to take a stand on contentious issues? Or is it because they see less interest in it as the economy becomes more risky?

Virtue-based policies may entail more costs than benefits. Vanessa Burbano, a professor at Columbia Business School, studied the reaction of workers when their employer publicly supported gender-neutral bathrooms. She found that this political stance did little to motivate supporters, but alienated and demotivated workers who disagreed with the cause.

We need not mourn the demise of the virtue economy. It was horribly inefficient. It takes time to research all the companies you could invest in, work in, or buy things from. If you miss something in your search (how can you not), you will later have to sell stocks (perhaps at a loss), quit your job (and possibly get paid less elsewhere), or dispose of the property of the offending company, perhaps by burning it and spreading the fire on social media (not just wasteful, it poses many other harmful externalities).

Obviously, these costs can be worth it if the offender supports really heinous things like genocide or overt racism. But in these difficult times, the moral and ethical standards we expect of each other have become far too high and there are too many causes to follow. Keeping in touch with who is pure and worthy of your money or work is a full-time job – which is why it was so tempting to outsource the whole business to BlackRock. We were condemned from the start to be disappointed and sometimes hypocritical.

Don’t feel too bad. Chances are your virtue of investing/buying/working won’t do much good anyway. Because virtue has become so complicated and arbitrary, it is not clear that it has made much difference in anyone’s behavior. Many companies have pulled out of Russia, but almost all are still doing business in China. Furthermore, arguably the biggest problem we face today is polarization, and the virtue economy is making the situation worse.

In these uncertain times, we need more shared experiences, even if they include attacking television, tedious workdays, and managing a volatile stock market. So, if you want to save the world, it’s better to buy what you want, invest in any business that seems profitable, and work for the employer that pays you the most. Then take all those extra savings and donate them to charity.

More other writers at Bloomberg Opinion:

Matt Levine’s Money Stuff: SEC tackles greenwashing

The tricky politics of anti-ESG investing: Liam Denning

Prepare for even greater electric shocks: Javier Blas

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Allison Schrager is a Bloomberg Opinion columnist covering the economy. A senior fellow at the Manhattan Institute, she is the author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk”.

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