Economy and Society: ESG-related opposition to Federal Reserve nominee

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.

ESG Developments This Week

In Washington, D.C.

ESG-related opposition to Federal Reserve nominee 

On January 14, President Biden nominated Sarah Bloom Raskin to be the Federal Reserve’s vice chairman for supervision and, thus, the Fed’s chief regulator. Several business-affiliated groups have responded in opposition to the nomination over their perception of her views about climate change and the need to use the Fed to promote energy transition.

Among the first groups to take a public stance in opposition to Raskin was the U.S. Chamber of Commerce, which published the letter it sent to the Members of the Senate Committee on Banking, Housing, and Urban Affairs:

“The Chamber urges the Committee to raise several important issues with Sarah Bloom Raskin when considering her nomination to serve as Vice Chair for Supervision of the Board of Governors of the Federal Reserve System. This position enforces and helps develop the regulations that are the bedrock of competitive financial markets. Some of Ms. Raskin’s past actions and statements have raised concerns among the U.S. business community and merit the Committee’s scrutiny….

Ms. Raskin has been critical of the Federal Reserve for allowing oil and gas companies to access the emergency 13(3) facilities during the COVID-19 pandemic. She has also advocated for federal regulators to transition financing away from the fossil fuel industry in her writings and public comments.

·       Is it the role of the Federal Reserve to direct capital away from certain industries that are politically disfavored or direct capital towards industries that are politically favored?

·       Please explain her statements proposing to deny oil and gas companies access to the Federal Reserve’s 13(3) emergency lending facilities, including those explicitly authorized by Congress via the CARES Act?…

The Federal Reserve is designed to adhere to its statutory mandate and remain independent from political influence. Governors have a long history of collegiality and professionalism in how they interact with each other and of deferring to the Chair on setting the agenda for the Board. After the recent push by Board members at the Federal Deposit Insurance Corporation (FDIC) to usurp the Chair’s authority, we have serious concerns about similar politicization at the Federal Reserve. We encourage you to secure a commitment from Ms. Raskin to maintain the political independence of the Board and stay committed to its statutory mission.”

The day after the Chamber published its letter, the Western Energy Alliance also wrote the Senate Banking Committee opposing Raskin’s nomination:

“We are 41 trade associations representing millions of workers all across the country. We provide 70% of the nation’s energy that supports life-sustaining functions such as keeping Americans warm in the winter, getting them to work and school to better their lives, powering ICUs and enabling medical devices, and delivering food to the dinner table. Oil and natural gas provide the feedstock for thousands of products used every day, from anything with a computer chip to the COVID vaccines that have saved millions of lives across the globe. American oil and natural gas is developed under strict environmental controls with industry-driven technologies that make it the most sustainably produced in the world. Natural gas electricity generation is the number one reason our country has reduced more greenhouse gas emissions than any other over more than a decade. The world would truly be less healthy, safe, and environmentally protected without the energy we provide.

We strongly oppose President Biden’s nomination of Sarah Bloom Raskin as Vice Chairwoman for Supervision at the Federal Reserve, the government’s most influential overseer of the American banking system. She is a strong advocate for debanking the very industry that powers America. Her multiple public statements indicate an agenda at odds with the President’s goal of providing Americans with reliable, affordable energy….

Ms. Bloom Raskin’s favored policies would wreak havoc with the economy, as financial systems would be reoriented around subjective, political factors rather than firm principles of maximizing returns and capitalizing productive human endeavors that create value in the marketplace. A free market is the correct arbiter of value to real people, not activism. The fact that oil and natural gas are used in just about every facet of modern life speaks to their intrinsic value, and hence, their investment worthiness. Further, activists pressure investors and banks to make financial decisions that reflect a political agenda which they have been unable to achieve through the normal democratic process. Activists have been able to convince neither the American people nor the majority of their representatives in Congress to stop using oil and natural gas in the absence of a viable, reliable alternative, as it would mean fundamentally altering Americans’ healthy, safe, and prosperous lifestyles. As they are unable to convince Congress to pass laws that prevent Americans from using or producing oil and natural gas, activists such as Ms. Bloom Raskin are simply inappropriate for the Federal Reserve.”

As of January 31, twenty-four state financial officers released their own letter, addressed to the White House, expressing their concerns about Raskin and her environmental beliefs:

“A coalition of Republican state financial officers is pushing back against Sarah Bloom Raskin, President Biden’s nominee to become the Federal Reserve’s top Wall Street regulator, over concerns that her economic views on issues like climate change and the private banking sector are “radical.”

In a Monday letter addressed to the White House, 24 state treasurers, auditors and financial officers urged Biden to withdraw his nomination of Raskin as the Fed’s vice chair of supervision, warning that her past statements indicate she is “willing to place the growth and stability of the U.S. economy at risk to achieve her preferred social outcomes.”

A major point of contention for the state financial officers is Raskin’s stance on climate change and her view that it poses a systemic risk to the U.S. financial system. Raskin has previously argued that all financial institutions should re-evaluate their relationships with energy companies and has advocated for a push toward sustainable investments that do not depend on carbon and fossil fuels. If banks and other financial institutions do not take these steps to distance themselves from fossil-fuel companies, Raskin has said the Fed should penalize them….

Signatories included the financial officers from Nebraska, Arkansas, Missouri, Utah, Louisiana, Arizona, Florida, Georgia, Idaho, Indiana, Kentucky, Mississippi, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, West Virginia and Wyoming.”

Raskin is scheduled to testify before the Senate Banking Committee on February 2.

On Wall Street and in the private sector

ESG pioneer worries about a potential ESG bubble

Jerome Dodson, founder of Parnassus Investments, one of the world’s first ESG-only investment firms, is worried that the strategy he helped create has, in his view, turned into a bubble and laments that it appears to serve as a marketing tactic:

“Few people have benefited more from the boom in ESG investing than Jerome Dodson.

Almost four decades ago, Dodson founded Parnassus Investments — a little known firm outside of ESG circles — and watched it grow into the world’s largest money manager dedicated to environmental, social and governance factors. The 78-year-old retired in October after he and his family sold their stakes in the business.

Dodson lauds how ESG has over the years helped push corporations and investors alike to act on issues such as worker rights and environmental protections. But as more money piles into the strategy, many companies and investors are exaggerating their efforts and impacts, Dodson said.

The ESG bubble is “a little disconcerting,” Dodson said in an interview. “It’s good that more people are talking about ESG. But if you look at how some money managers determine if a company is socially responsible, it’s not very rigorous and they’re not really strict in their criteria. We have a lot of money coming in and they use ESG as a marketing tactic.”…

To counteract overstated claims, Dodson said investors need to be more rigorous in their analysis of companies by pressing them for specifics on the actions they’re taking on ESG issues, and disregard answers that are too general. Investors themselves should specify what standards they are using in their strategies, while regulators should require fund managers to provide more details about their ESG tactics, he said.

A deluge of money has flowed into ESG in the past several years, making it one of the hottest areas of investing. The enormous growth has prompted other current and former sustainability executives and academics to criticize ESG for having limited impact in tackling systemic environmental and societal issues.”

In education

Financial Times: “Business schools find sustainability is hard to teach” 

Over the last several years, media outlets have covered the increased demand for ESG education at business schools throughout the United States and Europe. Two weeks ago, one of those media outlets, The Financial Times, ran a piece describing some of the difficulties associated with educating about ESG:

“In recent years, there has been a surge in attention in business schools about environmental, social and governance (ESG) issues. This has reflected shifting attitudes among students, faculty and employers who have moved beyond a traditional focus on maximising financial returns for shareholders towards benefiting a wider range of stakeholders.

GIBS, for example, is one of more than 800 schools to sign up to the Principles for Responsible Management Education (PRME). This initiative, supported by the UN, aims to promote the teaching of sustainability in business and management schools so that graduates have the skills to balance economic growth with wider objectives such as the Sustainable Development Goals (SDGs) and climate change.

But despite the increased attention, academic leaders face tough challenges including how to define and prioritise the disparate skills and values associated with ESG; how to integrate them into teaching, research and operations; and the extent to which a failure to do so will undermine the future of business education….

Robert Strand, executive director of the Center for Responsible Business at Berkeley’s Haas business school, has observed growing calls by employers for skills such as analysis of ESG factors.  

The problem, he adds, is that the “faculty at most American business schools . . . need to catch up.”…

Yet there is disagreement and confusion about what constitutes responsible business education. “The words ESG mean different things to different groups. We have to understand how to measure it and hold people accountable,” argues Professor Glenn Hubbard, former dean of Columbia Business School….

Even for those who are more favourable to the new focus on responsibility, there remains strong disagreement about how it is taught and what knowledge will be displaced — if only so that students can successfully find jobs in a world that, in places, remains ambivalent to ESG. Business schools have become a microcosm of the broader debate within companies about how to define ESG and how far it simply represents superficial “greenwashing”.”

In the spotlight

Wall Street Journal three-part series on potential ESG downsides

Between January 24 and 26, the Wall Street Journal’s Streetwise column, written by financial journalist James Mackintosh, ran a three-part series on ESG and what are deemed to be the potential downsides associated with it. Mackintosh says the series will continue in various columns over the next few weeks and months.

In the first column, titled “Why the Sustainable Investment Craze Is Flawed,” Mackintosh noted the following:

“The financial industry has spotted an opportunity to make money by helping people feel good about themselves. Despite claims to the contrary, these investments don’t do much to make the world a better place.

ESG funds, as they are known, promise to invest in companies with better environmental, social and governance attributes, to save the planet, improve worker conditions or, in the case of the U.S. Vegan Climate ETF, prevent animals from being eaten. 

Money has poured into ESG funds as noisy lobby groups push pension funds, university endowments and some central banks to shift their investments. The United Nations-supported Principles for Responsible Investment says signatories have $121 trillion of assets under management; even assuming lots of double-counting, that is most of the world’s managed money.

Over the next few weeks, Streetwise will explore the explosion of ESG investing and why I think it is mostly—but not completely—a waste of time. I will also offer up some solutions and discuss how to use your money to make a difference, while understanding the inevitable trade-offs.”

In the second column–“ESG Investing Can Do Good or Do Well, but Don’t Expect Both”–Mackintosh wrote:

“The biggest and boldest claim of ESG investors is that investing based on environmental, social and governance conditions will not just improve our world, but make you more money. I have problems with both parts of the claim. The burgeoning market for green bonds shows the difficulties clearly, and stocks with a sustainability label aren’t so different….

The claim that investors will make more money investing in green bonds is patently absurd. Green bonds typically have a slightly lower yield than a standard bond from the same issuer. This locks in guaranteed underperformance for taking identical risks that the government or company will fail to pay the bonds back.

Worse, the rapidly expanding sales of sovereign green bonds of developed countries are doing nothing for the environment, and most corporate green bonds achieve nothing either.”

And in his third column–“Sustainable Investing Bubbles Can Change the World—and Sink Your Portfolio”–Mackintosh argued the following:

“If you want a company to do more of what it does, one way to accelerate its expansion is to buy its stock; get all your friends to buy its stock; persuade fund managers, Reddit readers and pension funds to buy its stock; and watch the price soar. Eventually the board will take advantage of the bubble you create to raise what is for the company very cheap money and invest it in the business. Job done.

Something like this happened to clean-energy companies, with a mini-bubble in their stocks that ended in early 2021. Unfortunately, there was a downside: While many of them raised cash to spend on clean-energy projects, investors who stuck with the strategy have watched the stocks plunge 45% from their peak.

A huge trend in global investing is environmental, social and governance investing, a topic that I’m taking a critical look at in a series of columns. One major aim of ESG investing is to starve dirty companies of capital and redirect the money to clean ones. In practice, that’s not happening, much. And if it does, it will probably be a bad investment, as the clean-energy bubble showed….

Bubbles give investors too much of what they want. The price then collapses. Investors who don’t flee in time lose big.

Another problem for ESG adherents is that without a bubble, the investing strategy doesn’t in fact encourage companies to do much more of what they want.”