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 continues
Responses to President Biden’s nomination of Sarah Bloom Raskin to serve as the Federal Reserve’s vice chairman for supervision continued last week. On February 1, the Competitive Enterprise Institute joined the American Energy Association to write a letter to Chairman Sherrod Brown (D, OH) and Ranking Member Pat Toomey (R, PA) of the Senate Banking Committee opposing Raskin’s confirmation. The letter–signed by Thomas J. Pyle of the AEA and Myron Ebel and John Berlau of CEI–noted the following:
“Ms. Raskin endorses using the powers of the Federal Reserve outside of its statutorily-defined role. Anyone confirmed by the Senate should be committed to executing the law, rather than to pursuing a personal vendetta against certain types of energy.
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“As noted above, nearly 80 percent of America’s energy currently comes from natural gas, oil, and coal. Precipitous action to end financing for these industries would have dire economic consequences such as we are currently seeing in Europe.
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“We urge President Biden to withdraw the nomination of Ms. Raskin, and if he does not do so, we urge the committee to vote against her confirmation. Congress has charged the Federal Reserve with maintaining a stable environment for the effective operation of the financial system, but this is very different from actually directing the flow of capital as Ms. Raskin would like to do. Ms. Raskin’s confirmation would be a recipe for financial instability.”
CEI also issued a news release offering further comment from its policy analysts:
Director of CEI’s Center for Energy and Environment Myron Ebell said:
“The Senate should not confirm Ms. Raskin to the Federal Reserve, where she appears eager to misuse the Fed’s considerable authority to try to destroy the coal, oil, and gas industries.”
CEI Director of Financial Policy John Berlau said:
“As late as 2020, Sarah Bloom Raskin called for the Fed to actively discriminate against oil, gas, and coal firms in its lending programs. If confirmed as Vice Chair for Supervision, she could force banks to deprive these sectors of financial services to the detriment of the economy as a whole. The Senate must reject her nomination and stand up for ordinary American consumers, investors, and entrepreneurs still reeling from the pandemic and the onslaught of inflation.”
On Thursday, The Wall Street Journal’s editorial board weighed in, joining those opposing Raskin’s nomination with an editorial suggesting that, in its views, the nominee is a risk to the economy:
“Markets and businesses have many risks to consider, but President Biden is giving them another: Sarah Bloom Raskin. His nominee for the Federal Reserve’s bank supervision job wants to use regulation to politically allocate credit in a way that would create political and systemic financial risks.
At her Senate confirmation hearing on Thursday, Ms. Raskin tried to walk back her public statements supporting climate financial regulation. “It is inappropriate for the Fed to make credit decisions and allocations based on choosing winners and losers,” she told the Banking Committee. Her denial isn’t credible given her long-time views….
Her statements underline her distorted view of the Fed’s mandate, which is to maintain stable prices and aim for full employment. She thinks it should include the political allocation of credit steered by regulatory policy and even emergency financial tools….
Ms. Raskin justifies punishing fossil fuels by saying she’s trying to reduce systemic financial risk. But the regulation she’s urging could be a leading cause of such risk. It would force banks to write down and liquidate fossil-fuel assets. It would starve companies of capital, which would increase the risk that they and their creditors fail. And it would push banks to make riskier green-energy investments so they could hold less capital and pay out higher dividends….
The Senate should send Mr. Biden a message that it doesn’t want a Fed that punishes industries employing millions of Americans because they’re unpopular on the left. Ms. Raskin is a danger to the economy and the Fed itself.”
ESG-related criticism of BlackRock’s Larry Fink
On February 7, three weeks after BlackRock chief Larry Fink released his annual letter to CEOs, The Wall Street Journal published an op-ed by Vivek Ramaswamy, the author of Woke, Inc., in which he criticized Fink for, in his view, substituting his political purpose for those that should be the purposes of publicly traded corporations.
“Mr. Fink claims he wants CEOs to stay true to the purposes of the companies they run, while also demanding that they advance the corporate purposes that BlackRock favors. He can’t have it both ways….
Mr. Fink argues that he doesn’t foist BlackRock’s own values onto anyone, but simply encourages portfolio companies to adapt to the way the world is already heading: “Every company and every industry will be transformed by the transition to a net zero world. The question is, will you lead, or will you be led. . . . Will you go the way of the dodo, or will you be a phoenix?”
Yet Mr. Fink’s argument is circular. BlackRock is now the world’s largest asset manager, with $10 trillion under management. President Biden’s climate policies are heavily influenced by recent BlackRock alumni. Brian Deese, the firm’s former global head of sustainable investing, is now the director of the National Economic Council. Michael Pyle, BlackRock’s former global chief investment strategist, is Vice President Kamala Harris’s chief economic adviser. Wally Adeyemo, Mr. Fink’s former chief of staff, is deputy Treasury secretary. Mr. Fink’s claim that he is merely responding to the “transition to a net zero world” obscures his own firm’s role in catalyzing that transition….
If stakeholder capitalism is capitalism, as Mr. Fink says, then the public deserves to know why he’s so adamant on drawing the distinction. He should be honest about whether he wants BlackRock’s portfolio companies to pursue their own corporate purposes or the purposes that BlackRock favors.”
On February 4, RealClear Politics published a piece co-authored by Andy Puzder–the former CEO of CKE Restaurants, chairman of the board of 2ndVote Advisers, and a visiting fellow at the Heritage Foundation–and Stephen Soukup–the author of The Dictatorship of Woke Capital, a book critical of ESG. In the op-ed, the two argue that Fink’s perspective concerning stakeholders betrays an intention to, in their view, politicize capital markets and note that the BlackRock CEO has stirred anti-ESG sentiment among some state-government officials:
“The tone of [Fink’s] 2022 letter to CEOs is very different from his previous two, both of which pushed Environmental, Social and Governance (ESG) investment criteria and “stakeholder capitalism” relentlessly. As far as Fink was concerned, ESG, “sustainability,” and the agenda for what we have termed “woke capital” would dominate the markets for years, while he and his $10 trillion asset management behemoth would, in turn, dominate them. Fink was to be king of the stakeholder world.
But then something fascinating happened.
Shortly after Fink’s triumphant 2021 letter, Encounter Books published “The Dictatorship of Woke Capital.” The book turned out to be the tip of the proverbial iceberg, heralding a massive backlash that was already building against ESG, woke capital, and the hubris that animates top-down, anti-democratic efforts to undermine free-market capitalism for partisan ideological ends.
By year’s end, the resistance to ESG and woke capital had increased in size and variety. Everyone from shareholder activists to U.S. senators, state treasurers, legislators, and governors, as well as the former director of “sustainable investing” for BlackRock itself – were charting various forms of pushback against the newly woke masters of the financial universe….
Texas has enacted legislation banning companies that engage in political vendettas against oil and gas or gun companies from doing business with the state. Lt. Gov. Dan Patrick has asked the state’s comptroller to place BlackRock on this list of banned companies. West Virginia Treasurer Riley Moore announced that the Board of Treasury Investments, which manages the state’s roughly $8 billion operating funds, will cease doing business with BlackRock because it embraces “‘net zero’ investment strategies” that harm the energy sector, “while increasing investments in Chinese companies.”
“[T]o combat woke corporate ideology,” Florida Gov. Ron DeSantis and the trustees for the State Board of Administration voted to “clarify the state’s expectation that all fund managers should act solely in the financial interest of the state’s funds” and revoked “all proxy voting authority of outside fund managers,” including BlackRock. The board also voted to conduct a survey “to determine how many assets the state has in Chinese companies.”…
It’s certainly a positive development that some states are reacting to this attack on free market capitalism. But while necessary, none of these state actions is ideal. The better idea would be to get politics out of business, not to turn capital markets into a partisan or ideological battleground. Nevertheless, only by imposing real financial costs on Fink and his ilk is it possible to force the changes needed.”
On Wall Street and in the private sector
Will ESG suffer as markets grow volatile?
On February 3, Bloomberg reported that ESG funds have taken a hit from this year’s market volatility and might be in for even greater turmoil if the markets continue to be unsettled:
“Investors’ desires to do good are melting away in the market downturn.
Inflows into U.S. exchange-traded funds with higher environmental, social and governance standards have dropped sharply in the past two months. ESG equity ETFs added about $1.2 billion in December and January combined, compared with roughly $10.8 billion in the same period one year earlier — an 89% drop-off.
Volatility has whipsawed markets as investors reprice stocks in the face of inflation risks and Federal Reserve hawkishness. The benchmark S&P 500 Index had its worst month in January since the beginning of the pandemic and the technology-heavy Nasdaq 100 has tumbled 11% from its November peak.
In such periods of turmoil, ESG investing can end up taking “a back seat,” said Victoria Greene, chief investment officer at G Squared Private Wealth.
“It’s all well and good to be an ESG investor until you start losing money,” Greene said. “Your first priority is protecting your portfolio, then your second priority is your investment strategy, including ESG.”
Overall interest in ESG topics tend to taper off when markets face steep declines, as investors turn their attention to performance. Alongside each recent drop for the S&P 500, media mentions of ESG have tumbled….
Ultimately, consistent outperformance from ESG funds will be needed to sustain inflows, said Athanasios Psarofagis, ETF analyst for Bloomberg Intelligence. Just 29% of ESG ETFs beat the performance of the S&P 500 in 2021, compared with 57% in 2020, according to data compiled by BI.
If the ESG sector “doesn’t as least keep pace with the market, investors might get fed up with it,” he said.”
Tighter monetary policy may well exacerbate ESG’s current woes, although Bloomberg tries to conclude on a more positive note:
“[I]n the long term, it’s right to be optimistic about the transition to clean energy because 80% of governments have made decarbonization commitments, up from less than 10% five years ago, said Marina Severinovsky, head of sustainability at Schroders North America. More companies are announcing voluntary net-zero pledges, regulatory pressures are increasing and consumer awareness is rising.
“This suggests a dominant investment theme for the coming decades, with capital moving at an unprecedented scale to fund innovations and renewable technologies,” she said.”