Economy and Society: ESG goes to war?

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., and around the world

ESG goes to war?

The Russian war in Ukraine is, inarguably, not an ESG story. And yet, because of the integration of global markets and economies and especially the connection of the Russian oil and gas sector to the rest of the world’s energy needs and commitments, the war has had and will continue to have implications for ESG and its practitioners.

The Financial Times published a story on the biggest losers so far in the wake of the war, a story which noted the following:

“Calpers, one of the world’s largest public pension plans, has around $900mn exposure to Russia, after increasing its emerging market allocation last November to boost chances of reaching its return targets.”

CalPERS – the California Public Employee Retirement System – was one of the earliest adopters of ESG investment protocols among large asset managers in the United States, having been in the ESG business for more than a decade now.

Stephen Soukup, the author of The Dictatorship of Woke Capital, one of the most prominent books critical of ESG published last year, has suggested that a big part of the reason that CalPERS had to take on this hazard and invest in risky Russian-exposed securities is because its ESG returns have been subpar. In a note to readers, Soukup cited the following passage from his book:

“With over $360 bil­lion in assets, CalPERS is the largest public pension fund in the country. It is also one of the most aggressively activist and aggressively “green” public pension funds, despite having some $150 billion in unfunded liabilities.

 According to a December 2017 report from the American Council for Capital Formation (ACCF), “One key factor behind this consistently poor performance…is the tendency on the part of CalPERS management to make investment decisions based on political, social and environmental causes rather than factors that boost returns and maximize fund performance.”  The report also noted “that four of the nine worst performing funds in the CalPERS portfolio as of March 31, 2017, focused on supporting Environment, Social and Governance (ESG) ventures. None of the system’s 25 top-performing funds was ESG-focused.”

As Bloomberg notes, CalPERS is not the only ESG player to be hit hard. Indeed, the biggest player of them all stands to be one of the biggest losers of them all:

“BlackRock Inc., Capital Group Companies and Legal & General Group Plc are the top holders of Russia’s dollar bonds, which lost almost half their value this week, according to data compiled by Bloomberg.

BlackRock, the world’s biggest asset manager, has about $1.5 billion of the $33 billion of bonds outstanding, according to the data. Capital Group and Legal & General are the second and third biggest investors, with holdings of $283 million and $272 million, respectively. The firms didn’t immediately comment on the data when contacted by email earlier today.

Russian dollar bonds were hammered this week on concern the invasion of Ukraine would incur sweeping sanctions that would severely limit Moscow’s ability to access financial markets, including restricting investors’ ability to trade Russian debt on the secondary market. They lost 45%, or $15 billion, of their market value, according to a Bloomberg index that tracks 10 dollar bonds. The selloff on Thursday alone wiped out about $11 billion.”

Additionally, the global reaction to Russian enterprises has hit energy companies – traditional fossil fuel companies, in particular – hard. At least two major fossil fuel corporations, BP and Shell, have said that they are exiting their partnerships with Russian oil and gas companies:

“Shell is to exit its joint ventures with Russian state energy firm Gazprom, a day after BP said it would offload its 20% stake in Kremlin-owned oil firm Rosneft, as British businesses scrambled to distance themselves from Vladimir Putin.

The oil company said it would “exit its joint ventures with Gazprom and related entities”, which are worth about $3bn.

The planned sales include its 27.5% stake in the Sakhalin-II liquefied natural gas facility, its 50% stake in the Salym Petroleum Development and the Gydan energy venture.

Shell will also end its involvement in the Nord Stream 2 pipeline project, in which it holds a 10% stake worth $1bn. Germany, which was due to double its Russian gas imports via the pipeline, had recently called a halt to the project in the light of Russia’s invasion of Ukraine.

“We are shocked by the loss of life in Ukraine, which we deplore, resulting from a senseless act of military aggression which threatens European security,” said Shell’s chief executive, Ben van Beurden.”

The SEC and its delayed ESG disclosures

In a long piece on ESG, stakeholder capital, and the connection between the two, the Washington Examiner explains some of the problems that the Securities and Exchange Commission (SEC) is having in coming to an agreement on the type and form of sustainability disclosures it would like corporations to make. The SEC has been promising the new disclosure rules for nearly a year but has been held up for some time by conflicting perspectives:

“The SEC is debating the extent to which it can compel companies to disclose details about how much energy they buy and how they handle climate risks. Such self-reported disclosures to investors have already become commonplace in business, and adding government-mandated ESG disclosure rules is a big goal for the administration.

The SEC has been working on the disclosure rule for months now, with Chairman Gary Gensler initially announcing that the draft would be released by October and then later pushing that deadline back to January. Now it is unclear when exactly it will be unveiled, although some are beginning to get restless, including Sen. Elizabeth Warren, who called for “quick action” on the matter earlier this month.

The proposed rule is part of President Joe Biden’s broader climate agenda, which envisions cutting greenhouse gas emissions by more than half by the end of the decade when compared to 2005 levels.

At the heart of the SEC’s troubles with releasing a proposed rule is the scope of the reporting requirements. Some of the more hard-charging climate activists want to see stringent reporting requirements, while others fear putting those in place would entail too much red tape for companies to handle and legal challenges for the SEC.

In analyzing corporate climate emissions, the SEC organizes them into three categories, known as scopes. Scope 1 includes the emissions that a company directly generates — this scope will certainly be included in a proposed rule. Scope 2 refers to indirect emissions, such as those involved in the use of electricity, and Scope 3, which is the most controversial, measures the emissions of other entities, such as suppliers or customers in a company’s value chain.

Gensler and the SEC must be careful with how they proceed because if they are too heavy-handed in the rulemaking, they could face lawsuits that have the potential to strike the rule down, delivering a massive blow to Biden’s climate agenda….

Gensler is reportedly worried about the new climate reporting rule being successfully challenged in court and struck down if the SEC is too liberal with what it establishes as materiality, while the other two Democrats are reportedly pushing for more aggressive climate reporting guidelines. If Gensler’s concerns win out, Scope 3 emissions would likely not be required to be reported.”

In the states

More media attention for state financial officers

Over the course of the last several weeks, this newsletter has noted on several occasions, the pushback against ESG and its practitioners – notably BlackRock and its CEO Larry Fink. This week, it appears that the mainstream conservative media has taken notice of the phenomenon and begun covering the subject for its readers. The above-mentioned piece in The Washington Examiner made the jump from the SEC to discuss Republican-controlled state financial officers as follows:

“While the Biden administration and some companies have embraced the ESG shift and are hoping to make disclosures the norm, they are facing opposition from some Republican states who are trying to use their power to push back.

Last year Texas Gov. Greg Abbott signed a bill that banned state investments in businesses that cut ties with the oil and gas industry. Abbott also signed legislation banning state and local governments from working with corporations whose policies restrict the firearms industry.

Another example is West Virginia. The Mountain State’s Senate recently passed a bill authorizing the state’s treasurer to produce a list of firms that refuse to do business with fossil fuel companies and to reject such companies from consideration for state financial contracts.

“It’s real simple,” West Virginia Sen. Rupert Phillips, the bill’s chief sponsor, recently told the Washington Examiner. “Why should we take our tax dollars that our coal miners and our gas industry has produced and invest it into a bank that is trying to shut them down?”

Additionally, last month West Virginia’s state Treasurer Riley Moore announced that his state would end the use of a BlackRock investment fund. Moore said that BlackRock “has urged companies to embrace ‘net zero’ investment strategies that would harm the coal, oil and natural gas industries, while increasing investments in Chinese companies that subvert national interests and damage West Virginia’s manufacturing base and job market.””

On the same day, The Federalist likewise discussed the states’ pushback, as well as some states that are not pushing back:

“Beyond Moore’s efforts in West Virginia, lawmakers in Texas and Florida have also made moves to counteract BlackRock’s undue influence.

In Florida, Republican Gov. Ron DeSantis recently moved to strip proxy vote power over state finances from companies that foster investment in China while managing taxpayer dollars. That would include BlackRock, which oversees billions from Florida’s pensions and investment funds. According to Bloomberg, BlackRock held $227 million in a fund focused on Chinese markets in late June.

“The state pension plan has also invested in separate private equity and investment funds with exposure to China in particular,” Bloomberg reported….

Other Republicans leading major oil-producing states, such as state treasurers in Ohio and Oklahoma, have remained apathetic as the movement grows to deter Wall Street financial firms from weaponizing taxpayer dollars against American taxpayers.”

In the spotlight

Gallup study: “Where U.S. Investors Stand on ESG Investing”

On February 23, Gallup released the results of a study it recently completed on ESG and investors’ attitudes. Among the study’s findings were the following:

“U.S. investors are receptive to taking personal values into account when making stock purchases, but this is not their highest priority when investing and not something the majority spend much time focused on before making stock buys. Close to half express interest in sustainable investing, but only one in four say they have heard much about it….

Currently, 25% of investors, similar to past readings, say they have heard a lot or fair amount about sustainable investing. Ten percent, also consistent with prior measures, say they are currently invested in such funds.

At the same time, after reading the survey’s description of sustainable investing, 48% of investors say they are very or somewhat interested in purchasing sustainable investing funds. This is statistically unchanged from the 42% to 46% readings taken during the pandemic. Interest was slightly higher, at 52%, in February 2020….

The poll also measured investors’ attention to each aspect of ESG investing — asking investors how much they research or think about a company’s performance on environmental, social and corporate governance matters — along with their attention to a stock’s potential earnings and risk.

The potentials for profit and loss emerge as investors’ main concerns when choosing stock. Seventy-eight percent of investors say they give a lot or fair amount of thought to the expected rate of return when choosing which companies or funds to invest in, and 74% give the same thought to the risk for potential losses.

ESG considerations are secondary, with about half as many investors investigating these factors upfront. Roughly four in 10 say they look into corporate governance policies (41%) or the social values advocated by company leadership (38%) before buying. Slightly fewer (35%) research the environmental record or impact of a company….

Female investors are slightly more likely than male investors, 42% versus 35%, to say they give a lot or fair amount of thought, overall, to the social values of companies they invest in. But women are no more likely than men to look into the environmental impact of companies, their corporate governance, their expected rate of return or their risk for potential losses.”