ESG developments this week
Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the environmental, social, and corporate governance (ESG) trends and events that characterize the growing intersection between business and politics.
In Washington, D.C.
House Judiciary Committee probes Glasgow Financial Alliance for Net Zero
The House Judiciary Committee late last week interviewed at least two leaders of the Glasgow Financial Alliance for Net Zero (GFANZ), a global network of financial firms supporting ESG. The committee has also requested interviews with several other GFANZ officials and affiliated individuals, including billionaire and former New York City Mayor Michael Bloomberg. According to Reuters:
A U.S. lawmakers’ committee conducted interviews with two Glasgow Financial Alliance for Net Zero (GFANZ) leaders, former central bank governor Mark Carney and former U.S. Securities and Exchange Commission Chair Mary Schapiro, in an escalation of their push against global coalitions to tackle climate change.
The House of Representatives’ judiciary committee, which is controlled by Republicans led by its chairman Jim Jordan, set up the interviews earlier this year out of concern that GFANZ “appears to facilitate collusion that may violate U.S. antitrust law,” according to letters to GFANZ staff reviewed by Reuters and people familiar with the matter. …
The judiciary committee also asked to interview Michael Bloomberg, the majority owner of the eponymous financial data and news provider who helps fund GFANZ’s secretariat, as well as GFANZ officials Patricia Hudson and Sara Simonds, according to the letters reviewed by Reuters. They have not yet made an appearance and Reuters could not learn if they plan to do so.
European ESG rule may force funds to sell American stocks
ESG investment funds may have to sell a relatively large number of American stocks following last month’s European Securities and Markets Authority rulemaking that established requirements for financial products making environmental claims, according to a new Morningstar analysis:
The US stock market has emerged as the most exposed to divestment after the European Union unveiled new rules limiting how freely asset managers can attach ESG labels to their funds. …
For fund managers overweight US stocks, that requirement looks set to have outsize implications, according to an analysis by Morningstar Inc. “The US could see the largest impact in terms of stock market value,” Morningstar said in a report.
Some 42% of the potential stock divestments that may be triggered by ESMA’s new rule will hit the US, measured in terms of stock market value, Morningstar estimates. France is a distant second, at 17%, followed by China at 12%, the research shows.
In the states
American Energy Institute releases new study supporting Oklahoma anti-ESG law
The American Energy Institute (AEI) released a new study that offered different findings than an April study by the Oklahoma Rural Association (ORA) regarding the effect of Oklahoma’s 2022 anti-ESG law (the Energy Discrimination Elimination Act) on local government borrowing. The ORA study argued that the law increased borrowing costs for municipalities in the state by 15.7%. The new AEI study argued that the ORA study was “riddled with flaws and omissions that skewed its findings.”
“As we release this comprehensive analysis, it’s clear that the Energy Discrimination Elimination Act of 2022 is crucial for safeguarding Oklahoma’s economic interests and ensuring sound fiduciary practices,” said Jason Isaac, CEO of the American Energy Institute. “Our research debunks the flawed claims against the EDEA, highlighting its role in protecting vital energy sectors and promoting financial stability for the state.”
“Fact versus Fiction: Examining Oklahoma’s Energy Discrimination Elimination Act of 2022” was authored by Vance Ginn, former chief economist of the White House’s Office of Management and Budget and a fellow at the American Energy Institute, and Byron Schlomach, an economist with 30 years’ experience in state-level public policy who served on the Piedmont City Council and was the director of the 1889 Institute in Oklahoma.
The two men examined the “Energy Discrimination Elimination Act” and the Oklahoma Rural Association’s critique of the law, and found the critique deeply flawed.
On Wall Street and in the private sector
Investors continue ESG fund selloff
Global investors have steadily pulled money out of ESG funds so far this year. The Financial Times reported last week that the trend marks “the first sustained exodus” from such funds since their creation:
Global investors are turning their backs on sustainability-focused stock funds, as poor performance, scandals and attacks from US Republicans hit enthusiasm for a much-hyped sector that has pulled in trillions of dollars of assets.
Clients have withdrawn a net $40bn from environmental, social and governance (ESG) equity funds this year, according to research from Barclays, the first year that flows have trended negative. Redemptions, which include a record monthly net outflow of about $14bn in April, have been widespread across all main regions.
The outflows mark a significant reversal for a sector that investors have flocked to in recent years, attracted by the claim that such funds could help change the world for the better while also making as much — or even more — money as traditional stock portfolios.
In the spotlight
Study argues that government policies drive ESG investing
A new study by two business professors at Troy University argues that “government policies, rather than investor preferences, primarily fuel ESG.” The researchers—Allen Mendenhall and Daniel Sutter—also summarized their argument in a shorter article for the American Institute for Economic Research:
Governments worldwide have imposed numerous ESG-related regulations, with many more in progress or under consideration. In fact, governments activate the surge in ESG as forward-looking investors aim to divest from soon-to-be penalized sectors such as oil, natural gas, or firearms.
In a level playing field, ESG-weighted portfolios struggle against market-tracking index funds, which provide better diversification and risk reduction. Government regulations mandating climate-related disclosures benefit ESG funds by reducing investor options, making securities in ESG portfolios more attractive than they would be under (more) perfect competition. …
We document the diverse government measures pushing ESG integration within financial markets. Governments are unleashing an entire policy arsenal, including mandates, regulations, taxes, and subsidies.