Economy and Society: Utah pushback against S&P ESG indicators


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 the States

Utah pushback against S&P ESG indicators

In late March, S&P Global released a credit indicator report on the state of Utah that went beyond traditional versions of such reports. This year, S&P, which among other things, rates corporate ESG preparedness, included an ESG component in its reports on each of the 50 states as well. On April 20, Utah Governor Spencer Cox (R), Senators Mike Lee (R) and Mitt Romney (R), all of the state’s congressmen, along with its treasurer and attorney general, sent a letter to S&P, arguing that the ESG component of its report is inherently political and therefore unfair. Bloomberg reported on the letter as follows:

“Utah’s governor and its federal lawmakers are objecting to S&P Global’s move to publish ESG indicators for U.S. states, calling it an undue politicization of the ratings process.

In a letter sent to the firm on Thursday, the politicians — all Republicans — lay out a lengthy rebuke of S&P’s move to release environmental, social and governance assessments, known as ESG. Despite Utah’s results falling in line with many other states, the officials argue S&P should focus strictly on financial fundamentals.

“S&P’s ESG credit indicators politicize what should be a purely financial decision,” reads the letter, which was obtained by Bloomberg News. It was signed by Governor Spencer Cox, Senators Mike Lee and Mitt Romney, all four of the state’s members of the House, as well as its treasurer and attorney general. 

The letter also demands the report is withdrawn, seeks more information from S&P and says the state won’t cooperate in gathering ESG criteria.

S&P has said ESG credit factors are those that “can materially influence the creditworthiness of a rated entity or issue and for which we have sufficient visibility and certainty to include in our credit rating analysis,” and that they are “applied after the credit rating has been determined.””

The Bloomberg piece subsequently explains how and why ESG has become so important to asset managers and corporations but, in the view of some analysts, fails to explain the connection of the corporate ESG trend to the states:

“The row is the latest saga in the emergence of the indicators, which advocates say give a full picture of an entity’s outlook but critics say stray too far from core financial matters. 

Institutional investors like Blackrock Inc. and pension funds are demanding greater clarity from companies on their efforts to diversify their workforces and address a changing climate. Companies seen as under-performing on certain ESG metrics risk challenges to their board from activist investors.

Meanwhile, GOP lawmakers and powerful industry groups, including the U.S. Chamber of Commerce, have opposed increased activity by financial watchdogs on ESG issues. Some Republicans have complained that ESG indicators are skewed to a progressive viewpoint, and have encouraged companies and other organizations to reject the metrics.

S&P’s ESG indicators include categories like human rights, social integration, low-carbon strategies, climate measures and sustainable finance.”

Neither the Bloomberg piece nor S&P addressed the Utah representatives’ concerns or explained why the new ratings are deemed to be relevant and not, in the view of opponents, political. According to Bloomberg, “The ratings agency declined to comment.”

On Wall Street and in the private sector

BlackRock reiterates its commitment to ESG

Over the last several monthswhile energy shortages have gripped Europe and as the Russian war with Ukraine appears to have exacerbated those shortagesBlackRock CEO Larry Fink has, in the view of some analysts, appeared to stray from ESG orthodoxy. Fink has stated that he and his company believe that fossil fuel production is necessary and that it is wise, at this point, to be invested in traditional, fossil-fuel-based energy companies.

Recently, Fink clarified his comments, stating that he still believes firmly in ESG and what he describes as sustainability in particular; however, he simply believes that the path to sustainability is more complicated than many ESG investors have come to believe. Barron’s reports:

“BlackRock CEO Larry Fink, one of Wall Street’s most vocal advocates for sustainable investing, said the transition to greener energy isn’t a straight line, and the past quarter’s lagging performance of environmental, social, and governance, or ESG, funds doesn’t change his long-term outlook for this approach.

“In all my letters, I said an energy transition isn’t a straight line. It’s a 30- to 50-year time frame for us to move that forward. It isn’t today. It isn’t tomorrow,” Fink said in the investment management firm’s first-quarter earnings call.

Fink, who heads the world’s largest asset manager, pointed to first-quarter inflows as evidence of continued interest in sustainable investing, often called ESG investing. 

“We had about $19 billion of sustainable flows,” Fink said.” Obviously that is down from prior quarters, but certainly up from two years ago.”

He added that BlackRock is the largest investor for pension funds and retirements, and has “a long-term responsibility in making sure over the long run that our beneficiaries achieve their long-term aspirations and goals and so there is no question this energy transition is real, but it’s going to be not a straight line.”

Fink also said one of the biggest opportunities in alternatives in the years ahead would be the intersection of infrastructure and sustainability. 

“The interconnectivity between sustainable investing in infrastructure is going to be enormous,” he said.

He noted that, in response to the energy crisis caused by the war, many countries are re-evaluating their energy dependencies and looking for new sources of energy. This may mean increasing production of traditional energy sources in the near term, but longer term, there will be a shift toward greener sources of energy, Fink said.”

Mastercard links all employee bonuses with ESG goals 

Continuingand expanding upona trend that has become more prominent in Europe, Canada, and now the United States, Mastercard has now linked all of its employee bonuses to ESG measures. Previously, ESG-tied performance incentives were largely the purview of management teams. Mastercard, however, has taken the idea one step further:

“Payment processor Mastercard Inc (MA.N) will link all employee bonuses to environmental, social and corporate-governance (ESG)initiatives, expanding an earlier program which was limited to its senior executives, Chief Executive Michael Miebach said on Tuesday.

The move will help Mastercard achieve its goals of cutting carbon usage, improving financial inclusion and gender pay parity. Mastercard in November accelerated its net zero timeline by a decade, to 2040 from 2050.

“We’re tying compensation to emissions, financial inclusion and the gender pay gap because we have a substantial impact in these areas and because they closely align with our vision,” Miebach wrote in a note on the company’s website….

Last March, Mastercard said it would link compensations for executive vice presidents and above to ESG initiatives.”

From the ivory tower

Harvard Business Review: “An Inconvenient Truth About ESG Investing”

In late March, the Harvard Business Review published a piece by Sanjai Bhagat, the Provost Professor of Finance at the University of Colorado. Whereas most finance-derived critiques of ESG have focused on the questionable nature of the investment technique’s promise to deliver better-than-market returns, Professor Bhagat focuses instead on its capacity to effect actual environmental or social change. He writes:

“As of December 2021, assets under management at global exchange-traded “sustainable” funds that publicy set environmental, social, and governance (ESG) investment objectives amounted to more than $2.7 trillion; 81% were in European based funds, and 13% in U.S. based funds. In the fourth quarter of 2021 alone, $143 billion in new capital flowed into these ESG funds.

How have investors fared? Not that well, it seems.

To begin with, ESG funds certainly perform poorly in financial terms. In a recent Journal of Finance paper, University of Chicago researchers analyzed the Morningstar sustainability ratings of more than 20,000 mutual funds representing over $8 trillion of investor savings. Although the highest rated funds in terms of sustainability certainly attracted more capital than the lowest rated funds, none of the high sustainability funds outperformed any of the lowest rated funds….

Unfortunately ESG funds don’t seem to deliver better ESG performance either.

Researchers at Columbia University and London School of Economics compared the ESG record of U.S. companies in 147 ESG fund portfolios and that of U.S. companies in 2,428 non-ESG portfolios. They found that the companies in the ESG portfolios had worse compliance record for both labor and environmental rules. They also found that companies added to ESG portfolios did not subsequently improve compliance with labor or environmental regulations.

This is not an isolated finding. A recent European Corporate Governance Institute paper compared the ESG scores of companies invested in by 684 U.S. institutional investors that signed the United Nation’s Principles of Responsible Investment (PRI) and 6,481 institutional investors that did not sign the PRI during 2013–2017. They did not detect any improvement in the ESG scores of companies held by PRI signatory funds subsequent to their signing . Furthermore, the financial returns were lower and the risk higher for the PRI signatories….

The conclusion to be drawn from this evidence seems pretty clear: funds investing in companies that publicly embrace ESG sacrifice financial returns without gaining much, if anything, in terms of actually furthering ESG interests.”

In the spotlight

A proxy preview from a different perspective

For years, at the start of annual shareholder meeting season, As You Sow, an environmental activist group in the capital markets generally in favor of ESG positions and in favor of making changes to boards and management in order to advance sustainability commitments has issued its annual “Proxy Preview.” This massive publication details all of the ESG-related shareholder proposals on the proxy statements of large, publicly traded companies and advises investors on how to vote on them. 

Over the last couple of years, however, a new proxy preview publication has been issued, specifically to counter the influence of As You Sow’s effort and to give investors a choice in their decision-making process. This previewtitled the “Investor Value Voter Guideis in its third annual edition and is published by the Free Enterprise Project, a program of the National Center for Public Policy Research that describes itself as the “only full-time conservative shareholder activist” organization. The guide offers a different perspective from other such publications and promises its readers a much different investment strategy. It begins as follows:

“The time has come for the center and the right to begin to emulate the left – not, certainly, in worldview, but in tactics. As shareholders, we must begin to sue corporate managers when they forsake their fiduciary duties to us, the company’s owners. And in response to the pretenses of stakeholder capitalism, ESG, wokeism and the rest, we must brace ourselves to new duties:

–  as engaged customers, objecting in person and in writing, in the world and on the Internet;

–  as discerning customers, who, if they decide to abandon a particularly noxious company, let that company know clearly and in certain terms what it is that pushed them away;

–  as community activists, organizing and participating in protests of the worst corporate malefactors, directors and self-appointed masters, at corporate headquarters, annual shareholder meetings and other high-profle locations and occasions;

–  as proud employees, resisting (when possible) corporate racism and sexism regardless of the race or sex of the target (all racism is racism; all sexism is sexism – the standards have to be objective, and uniformly applied), including by litigation;

–  as insistent investors, not only with individual corporations, but with investment houses, demanding exchange-traded funds (ETFs) and other investment options that cater to our moral and ethical concerns and interests, as the ESG funds cater to the left; and

–  as motivated constituents, demanding legislation at the state level that would forbid companies from using monopoly power to deny equal service without discrimination to all customers, regardless of their viewpoints or political participation; that would require investment houses to vote proxies according to the wishes of their own investors, not according to their own personal policy preferences; and other enactments that would help to end this monopolist threat to the Republic.”