Opinion Page: The Charities Hiding in Your 401(k)

Environmental, social and governance investing is like the wrinkle in the rug; stomp it down and you shift the problem somewhere else. As investors and lawmakers push against ESG’s presence in portfolios, it is infiltrating index funds wearing a new disguise: the public-benefit corporation, or PBC.

Unlike a standard corporation, obligated only to its owners, a PBC has a charter that requires it to pursue both shareholder profit and a specific social good. Shoemaker Allbirds  says its purpose is “environmental conservation.” Lemonade  Inc. says its insurance products will enable charitable giving “for the benefit of communities and their common causes.”

Socially conscious investors are free to use their money however they wish. The problem is that they have made their goals everyone’s. PBCs are beginning to sneak into indexes and the funds that track them. Twelve are already part of the Russell 2000 Index. One of those—AppHarvest, a food company seeking sustainability—declared bankruptcy in July. Allbirds stock has plummeted 96% since its initial public offering; Lemonade is down 83% since its IPO. These results are typical for PBCs, and worse than regular companies that went public at the same time.

Since 2017, when the first PBC went public, at least 18 companies, mostly S&P 500 constituents, have faced shareholder proposals from left-wing activists asking them to become PBCs, following in the footsteps of Veeva Systems  and United Therapeutics, members of the Russell 1000 Index that became PBCs. PBCs’ underperformance is no surprise. The PBC structure allows corporations to burn cash and otherwise destroy value by claiming to balance shareholders’ interests with those of other stakeholders.