ESG Developments This Week
In Washington, D.C.
Pence takes on ESG
On May 10, ESG investing was the topic of discussion at an event in Houston, where former Vice President Mike Pence (R), critiqued the ESG role in changing the composition of the board of directors at Exxon-Mobil in 2021 and asked state-level officials to enlist in an effort to push back against politicizing business. The Los Angeles Times reports:
“Former Vice President Mike Pence criticized investor-activist campaigns to force companies such as Exxon Mobil Corp. to follow socially conscious investing principles, saying they elevate left-wing goals over the interests of businesses and their employees.
Pence, a potential 2024 Republican presidential candidate, delivered an energy policy speech Tuesday in Houston and called for states such as Texas to “rein in” the push for employee pension funds to use environmental, social and governance principles in investing.
The former vice president cited activist investor Engine No. 1, which was backed by firms including BlackRock Inc. last year as it mounted a successful proxy campaign that led to the replacement of three directors on Exxon’s board. “Those three are now working to undermine the company from the inside,” Pence said.
ESG investing — the use of environmental, social and governance factors in decision making — has become one of the hottest areas in finance in recent years, with the global market adding as much as $40 trillion in assets, according to estimates from Bloomberg Intelligence.
Yet the strategy has drawn the ire of lawmakers in some states….
Finance was always meant to facilitate investment and spur economic growth that benefits the entire U.S., Pence said. But President Biden and government regulators are “weaponizing the financial system to do the exact opposite,” including through “capricious new ESG regulations that allow left-wing radicals to destroy American energy producers from within.”
Similar accusations have been circulating in Texas for some time, but Pence’s comments are among the most aggressive yet. The growth of ESG investing has pushed some of Wall Street’s biggest investors to become much more active in proxy campaigns….
GOP lawmakers and powerful industry groups, including the U.S. Chamber of Commerce, have opposed increased activity by financial watchdogs on ESG issues during the Biden administration, even as the White House has called for increased oil and gas production to help reduce fuel prices.
Biden has also made fighting climate change a centerpiece of his presidency, and last year ordered regulators to develop stronger plans for measuring and mitigating the risks climate change poses to the financial system.”
In the States
Judge strikes down California diversity law
On May 16, a California state judge handed down a rebuke of ESG/DEI efforts on the part of state lawmakers, the second such rebuke in several months:
“A state judge struck down a California law requiring companies in the state put female directors on their boards, the second legal setback in as many months for efforts to mandate board diversity.
Judge Maureen Duffy-Lewis of the Superior Court of California in Los Angeles ruled that the 2018 law was unconstitutional because it violated the equal protection clause of the state’s constitution, according to a copy of the verdict.
The California law mandated that public companies with headquarters in the state have at least two or three women on their boards by 2021, depending on the size of the board. Those that didn’t faced financial penalties.”
Last month, the same court invalidated the California law requiring publicly traded companies to have a minimum number of underrepresented racial or sexual minorities on their boards of directors.
On Wall Street and in the private sector
Financial Times: “BlackRock says it will not support most of this year’s shareholder resolutions on climate change”
Over the past several weeks, BlackRock, the world’s largest asset management firm and one of the driving forces behind the ESG movement, conceded that its sustainability strategy might be more complicated than it had let on. Although the firm reiterated its long-term sustainability goals and insisted that its strategy has not officially changed, its actions tell a different story, according to a piece in the Financial Times:
“Power without responsibility? The passive fund industry wields substantial clout on the corporate landscape: $16tn of it, according to Morningstar. Now BlackRock, the biggest of them all, has given itself a pass on the knotty issue of climate change.
Pinpointing factors including the timeframe for transitioning from fossil fuels and war-inflated energy costs, the US-based fund manager says it will not support most of this year’s shareholder resolutions on the subject. Such proposals, the $10tn money manager reckons, are too extreme, too prescriptive or entail too much micromanaging.
This is quite the turnround for a firm that has been criticised — by the opposite camp — for its meddling stakeholder capitalism. Boss Larry Fink, a besuited eco-warrior, has long beat the drum for sustainability. This, he explained in his annual letter to chief executives, is “not because we are environmentalists, but because we are capitalists and fiduciaries to our clients”….
Whether or not BlackRock’s rationale is disingenuous is beside the point. For many investors, the one-time climate champion’s abdication represents a big step back. It in effect grants permission to other investors to relax their grip. More worrying still, it puts corporate boards on notice that they can breathe a little easier when irksome proposals appear on the slate.”
On Twitter, Vivek Ramaswamy, the biotech entrepreneur and author of Woke, Inc., argued that BlackRock’s actions and change in tone were, in his view, akin to the asset-management giant trying “to put the toothpaste back in the tube.”
Biotech entrepreneur puts his assets where his mouth is
On May 10, The Wall Street Journal broke an exclusive story detailing a plan by Vivek Ramaswamy, in conjunction with a handful of prominent investors, to push back against BlackRock, its CEO Larry Fink, and the ESG and sustainability investment trend:
“An upstart financial firm backed by Peter Thiel and Bill Ackman has a message for American corporations: Focus on making money, not taking stands.
Vivek Ramaswamy, who made his fortune in pharmaceutical startups before writing a book last year called “Woke, Inc.,” says he has raised $20 million to start a fund manager that would urge companies not to wade into hot-button social or environmental issues. Mr. Thiel invested both personally and through his Founders Fund, joined by Palantir Technologies Inc. PLTR -21.31% cofounder Joe Lonsdale and other venture investors.
Mr. Ramaswamy’s ambitions speak to the culture wars nipping at U.S. corporate executives. Under growing pressure from employees, investors and customers, many have taken public positions on political issues only to face criticism from the other side….
The firm, called Strive, will be based far from Wall Street in Mr. Ramaswamy’s home state of Ohio. In an interview Monday, the 36-year-old dubbed his approach “excellence capitalism,” focused on letting companies do what they do best—and nothing else—and inveighed against what he sees as a creeping liberal bias inside BlackRock Inc. BLK -3.67% and its peers, Vanguard Group and State Street Corp., which he called an “ideological cartel.”
Those three firms in recent years have become almost unimaginably large, managing $20 trillion of assets. They have pushed companies to improve diversity, cut their climate emissions, and embrace other changes—largely under the banner of “stakeholder capitalism,” which considers other outcomes, not just profits, when assessing corporate behavior….
Mr. Ramaswamy’s project began under cover months ago, code-named “Whitestone” to capture its aim of being the anti-Blackrock, people familiar with the matter said. It isn’t known what products it will offer, and it has a long way to go to rival the combined market power of the financial giants it seeks to challenge.
“A majority of Americans want companies to stay out of politics,” he said. “They want to have a separate space for where they shop, where they work, and where they invest from the places where they cast their ballots or engage in their political debates.””
Among Ramaswamy’s first hires at his new firm, was Justin Danhof, the director of the Free Enterprise Project at the National Center for Public Policy Research. Danhof, a notable ESG opponent, has been profiled in at least two books about the emergence of ideology-based investing.
In the spotlight
Should companies focus on water, not oil?
In a long ESG analysis, Reuters cites a recent study that suggests that executives and asset managers who are concerned about the ways in which the environment can affect corporate success and profits should worry more about water than about oil:
“For something that is so crucial to all aspects of life, including the most fundamental business operations, water risk is a blind spot for many investors and businesses.
There is little understanding of how overuse, pollution and increasingly frequent extreme weather events, such as the years-long drought in California, the recent heatwave in India and Pakistan, and last year’s floods in Europe, are affecting water availability, says Cate Lamb, global director of water security at disclosure not-for-profit CDP.
A third of listed financial institutions do not assess exposure to water risk in their financial activities, although 69% of listed equities told CDP in 2021 that they are exposed to water-related risks.
“A large proportion of businesses still have the mindset that water will always be available to them whenever and wherever they need it, and that they don’t need to manage it like other issues,” Lamb says.
Yet with the United Nations predicting a 40% global shortfall in water supply by 2030 if current consumption and production patterns do not change, it is a mindset that will increasingly open companies up to operational risk, according to a new report from CDP and UK-based non-profit financial think-tank Planet Tracker….
Businesses in key industries are already losing billions of dollars as a result of the global water crisis, CDP and Planet Tracker say in the report, which highlights how changes in regulation, high levels of pollution and community opposition have “stranded” assets, including the Keystone oil pipeline in Canada, a gold mine that straddles the border of Chile and Argentina, an Australian coal mine and a nuclear facility in the United States.
But a host of other sectors also face significant risks around water availability and quality, from fashion to agriculture to chip-making and data centres.
In Chennai, in India’s Tamil Nadu state, one of the world’s fastest growing cities, a devastating drought in 2019 caused it to run out of groundwater. This led to a number of the local tech companies having their licence to operate constrained, or rescinded altogether, Lamb says. In the recent heatwave, India’s largest tributary completely dried up for the first time ever, threatening agricultural production that feeds the vast majority of the country, and huge amounts of energy production, too.
“When events like this happen, we see governments having to make really difficult decisions to ensure water supplies for citizens and food production, at the expense of energy and other businesses,” she adds.”