Economy and Society: Arizona AG argues ESG may be antitrust violation

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 goes to war, continued

The New York Times reported last week that some ESG investors are keen to change the way ESG considers some seemingly long-settled issues; two CITI analysts argue that social responsibility means “putting your investment money into the stocks of companies that make weapons”:

“Russia’s invasion of Ukraine has upset the world order. It could conceivably alter the way some people think about investing, too.

At least that’s the view of two analysts with Citi, who argue that the height of social responsibility at this moment requires putting your investment money into the stocks of companies that make weapons.

“Defending the values of liberal democracies and creating a deterrent, which preserves peace and global stability,” is so important that weapons makers should be included in funds that carry an E.S.G., or “environmental, social and governance,” label, the two analysts, Charles J. Armitage and Samuel Burgess, wrote.

That labeling seems utterly bizarre for some E.S.G. investors, however.

It certainly does to Andrew Behar, the chief executive of As You Sow, an advocacy and research group that frequently files shareholder proxy proposals on E.S.G. issues.

“We don’t think that you should have any weapons systems in an E.S.G. fund,” he said. The group provides an online tool on the web site Weapon Free Funds that enables investors to screen mutual funds and exchange-traded funds on this issue.

Leslie Samuelrich, president of the Green Century Funds, which was founded by nonprofit groups, including the California Public Interest Research Group and the Citizen Lobby of New Jersey, was appalled by the notion.

“This is absurd,” she said. “It feels very opportunistic and shallow.” She added that Ukraine needed to be defended. “I’m part Ukrainian,” she said. “Of course, they need weapons.”

But she said that had nothing to do with investing in funds devoted to socially responsible investing. “Those who argue that weapons belong in a sustainable portfolio are capitalizing on the horrific attack,” she said. “Excluding military and civilian firearms has been a long-held screen by authentic responsible investors.”

Mr. Armitage and Mr. Burgess, the Citi analysts, make a vigorous counterargument. Essentially, it boils down to this: Without strong militaries capable of “defending the values of liberal democracies and creating a deterrent” against geopolitical adversaries like Russia and China, there can’t be much progress on other pressing global issues.”

Financial Times: “Putin’s war on Ukraine exposes the folly of ESG”

In London’s Sunday Times newspaper, associate editor Oliver Shaw argues that, in his view, the Russian war in Ukraine “exposes the folly of ESG” investing as a whole:

“Putin’s invasion of Ukraine has transformed reality in Europe and blown away the cosy assumptions on which it had operated since the fall of the Berlin Wall. The investment industry has some hard questions to answer in this bleak new light. They say the first casualty of war is truth; in finance, it has been the ESG movement’s credibility.

For some time, the monomaniacal focus of certain investors on compliance with environmental, social and governance metrics has been proving counterproductive. In some cases it has even begun to undermine the tenets of democracy, as decisions that should be made by governments are instead taken by fund managers based on external pressure from campaigners. Putin’s thinly veiled threats of nuclear war on Nato expose the dangerous folly of what has become a fully fledged industry.

The clearest examples of this rude awakening are in defence and energy.

Arms companies have traded on tobacco-type multiples in recent years as they have been shunned by ever more banks and investors. Ironically, the charge has been led by institutions in Germany and the Nordics, now feeling the heat of Putin’s ambitions. Last year, the state-owned Bayerische Landesbank stopped doing business with companies sourcing more than 20 per cent of their revenues from munitions, ruling out loans to national champions such as Airbus Defence and Space. Swedish banks have been doing similar things.

Most seriously, some investors have started ditching companies involved in nuclear weapons, on the basis that nukes are nasty and shouldn’t be funded. Last November, for example, the Norwegian pension fund KLP sold $147 million of shares in 14 groups including Babcock and Rolls-Royce, because their work touched on “controversial” weapons.

It is difficult to put this cowardice and idiocy into words. KLP and its clients are presumably happier in a world where Russia and North Korea have to think twice before starting a nuclear war. The 14 companies’ customers are sovereign states whose electorates have voted to maintain a nuclear deterrent. And yet, for the sake of a press release, KLP took away a sliver of their capital.

On its own this would be meaningless, but multiplied many times it raises the cost of operating for defence companies. And multiplied many times it is. Robert Stallard, an analyst at consultancy Vertical Research Partners, told the Financial Times that the sector had been “blacklisted by many European investors — and even if defence companies replanted the Amazon, they would still be on the blacklist”.

Germany’s decision to address years of anaemic defence spending with a €100 billion fund flips the narrative. It has become painfully clear that in an unstable era, hard power is not a “nice to have”. It is perfectly ethical for states to reinforce themselves against tyranny.

The situation is more advanced in energy, where financial backers have — more understandably — been trying to push companies to phase out fossil fuels….”

Debates about whether Russian investments mean potential ESG black mark 

Over at Bloomberg, three reporters make the case that, for some investors, simply having been invested in or having done business in Russia is now a potential black mark in the ESG world:

“An investing movement that promotes itself as a protector of people and the planet has somehow found itself providing capital to the autocratic regime behind Europe’s worst military conflict since World War II.

Funds labeled ESG — an acronym that denotes a commitment to environmental, social and governance interests — own shares of Russia’s state-backed energy behemoths Gazprom PJSC and Rosneft PJSC, as well as its biggest lender Sberbank PJSC. The funds also hold Russian government bonds, providing money that ultimately helped pad the coffers of President Vladimir Putin’s autocracy.

Paul Clements-Hunt, who led a group that coined the term ESG back in the mid-2000s, said it’s now clear that “ESG investors have failed.”

“ESG is being used ineffectively,” said Clements-Hunt, founder of advisory firm Blended Capital Group. Investors should be measuring risks across entire systems not just corporate risks, but instead, “the obsession with easy money-making is overriding everything,” he said.

Russia’s invasion of Ukraine is rapidly laying bare unexpected exposure in much of the ESG universe. Industry researchers at Morningstar Inc. estimate that 14% of sustainable funds globally held Russian assets right before the war. That’s as sustainable investing morphs into a $40 trillion industry embraced by the financial behemoths of Wall Street, where funds that track benchmark indexes are ubiquitous.”

In the process of reporting on the ESG aspects of the conflict, the Bloomberg reporters stumble on one of the key rifts in the ESG world:

“But those representing the more mainstream side of ESG investing argue the term is widely misunderstood. It is, in fact, just a screening tool to protect investments from environmental, social and governance risks, according to some of the biggest firms working with and analyzing ESG data.

“There are still people who inappropriately conflate sustainability and ethics,” said Hortense Bioy, Morningstar’s global head of sustainability research. “Sustainable and ESG funds aren’t the same as ethical funds.”

For that reason, ESG funds can buy everything from makers of conventional weapons to producers of fossil fuels. The world’s biggest ESG-focused exchange-traded fund — BlackRock Inc.’s $23.7 billion iShares ESG Aware MSCI USA — holds shares of companies ranging from Raytheon Technologies Corp. to Exxon Mobil Corp. 

Bioy said ESG portfolio managers, “just like any other managers holding Russian assets or not, will be evaluating the situation and trying to understand the broader implications of the conflict and impact on their portfolios.” The war “has broader implications for ESG investors than just ethical ones,” she said.”

Will war put ESG on the backburner?

Finally, over at MarketWatch, Debbie Carlson writes that oil and gas are the new kings and that the war in Ukraine means that ESG will be put on the backburner:

“There’s nothing like sticker shock to make consumers rethink priorities, and interest in climate action may be one of those.

Assets under management in environmental, social and governance (ESG) exchange traded funds and mutual funds have grown sharply, coinciding with greater public demands to mitigate climate change.

But near-term crises can overshadow long-term threats, and Russia’s war against Ukraine kicked concerns about climate change off headlines, replaced by oil and gas shocks, and geopolitical worries.

Crude oil prices have topped $100 a barrel and retail gasoline prices jumped 20% in a week, leading President Biden to announce a release of oil from the Strategic Petroleum Reserve to take the edge off prices. European consumers will pay astronomical prices for energy since they are much more dependent on Russian oil supplies.  

Fossil-fuel proponents are using the high prices to call for greater U.S. hydrocarbon production to ease prices on consumers in the short-term and secure domestic energy independence in the long-term. In Europe, Germany proposed Sunday to build two liquefied natural gas terminals to import U.S. natural gas, while also calling to speed up its transition to all renewable energy by 2035. 

The acute need for energy supplies now has climate concerns taking a back seat, say several sustainable fund managers.

“I think probably the ‘drill, baby, drill’ mentality is back in the U.S.,” says Tony Tursich, co-portfolio manager at Calamos Global Sustainable Equities Fund.”

In the states

Is ESG an antitrust violation?

Arizona attorney general Mark Brnovich wrote an op-ed, published by the Wall Street Journal, suggesting that ESG investing may amount to an antitrust issue that his state and others might pursue. He wrote:

“The biggest antitrust violation in history may be in plain sight. Wall Street banks and money managers are bragging about their coordinated efforts to choke off investment in energy. It’s nearly impossible to raise money to explore for oil and gas right now, and we may all be experiencing rising energy costs because of this market manipulation. Russian and Chinese aggression overseas also is exacerbating inflation.

Here’s what is happening: The biggest banks and money managers seek to implement a political agenda, such as compliance with the Paris Climate Accord. Then a group mobilizes: Climate Action 100+, for example, comprised of hundreds of big banks and money managers that together manage $60 trillion. The group uses its coordinated influence to compel companies to shut down coal and natural-gas plants. The activism can include pushing climate goals at shareholder meetings and voting against directors and proposals that don’t comport with the agenda, even if other decisions may benefit investors.

Firms report their plan to carry out these activities back to Climate Action 100+ headquarters. This helps ensure maximum coordinated effort toward the common goal of overhauling the energy industry. Money managers wield influence over these companies because they represent investors who are shareholders, often through their 401(k)s or pension plans. In other words, your retirement funds are likely helping facilitate these political campaigns to advance far-left policy goals, with consumers bearing the costs of increased energy prices.”