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
Proposed bill would clarify fiduciary duty of retirement plan administrators to invest solely based on monetary factors
Last week’s edition of Economy and Society highlighted an op-ed co-authored by the entrepreneur and Strive Asset Management founder Vivek Ramaswamy and the former Secretary of Labor Alex Acosta, in which the two argued that the Biden Labor Department’s proposed rule for retirement plans could force plan managers to incorporate ESG principles into their management schemes.
This week, Roll Call reports that Senate Republicans are taking that argument seriously:
“Senate Republicans are teaming up to curb retirement plan sponsors’ ability to consider environmental, social and governance factors in selecting investments, as a counter to the Biden administration’s efforts to expand worker and retiree access to such investing.
Sen. Mike Braun of Indiana this week unveiled a bill that would specify the fiduciary duty of plan administrators is to select and maintain investments based solely on monetary factors under 1974 legislation known as the Employee Retirement Income Security Act, a law that governs a broad range of retirement and health benefit plans.
If plan sponsors want to consider non-pecuniary factors when choosing between funds, they could do so only if they are unable to distinguish them “on the basis of pecuniary factors alone,” according to the bill text. Even if an ESG investment choice is able to meet that standard, plan advisers would also have to make lengthy justifications to include it.
The bill essentially would reinstate a Trump administration Labor Department rule that took away retirement plan sponsors’ ability to direct investments into ESG options.
The bill is also similar to recent legislation from Sen. Steve Daines of Montana, who joined Braun’s bill as a co-sponsor, as did Sens. Richard M. Burr of North Carolina, Tommy Tuberville of Alabama, Cynthia Lummis of Wyoming, Roger Marshall of Kansas, Roger Wicker of Mississippi and James M. Inhofe of Oklahoma.” …
While Braun’s legislation and similar bills are unlikely to advance with Democrats in charge, it may foreshadow what’s to come if Republicans take control of either chamber of Congress after the midterm elections this fall.
“Forcing ESG standards on retirement accounts is a clear violation of the Employee Retirement Income Security Act, which requires fiduciaries to put the financial interests of plan participants first,” Rep. Virginia Foxx, R-N.C., said in a July 13 House floor speech. “ESG requirements pressure investors to subject retirement savings to low-yield investments. This is irresponsible.”
Democrats largely support ESG options and have sided with activist shareholders and sustainable investing organizations, arguing that such factors are just as material as traditional financial considerations. The Democrats’ tight margin in the Senate makes it tougher to pass additional legislation to support ESG investors.”
Can an energy crisis become an ESG crisis?
In large part due to the conflict between Russia and Ukraine and the related economic sanctions against Russia, many nations of Europe are facing an energy crisis that is expected to worsen as summer turns to fall and then to winter. In response, some European governments are turning to coal to fill in the gaps left by Russian natural, which, according to Reuters, threatens to create ESG-score challenges for energy companies operating on the continent:
“European companies turning to coal as an alternative to Russian gas face a hit to their environmental, social and governance ratings, leaving them scrambling to impress investors still vocal on sustainability.
Despite an energy crisis following sanctions on Russia, major European investors say they will not relax their investment principles of reaching net zero targets on greenhouse gas emissions by 2050 or earlier.
Investors increasingly use ESG ratings, developed by companies such as MSCI or Sustainalytics, to judge firms’ merits. Burning coal, which puts out more carbon dioxide than alternatives like oil and gas, gives companies a black mark.
European countries including Germany and Italy are nonetheless considering bringing back coal due to the Ukraine crisis, which has cut Russian gas flows. Some companies, such as German speciality chemicals maker Lanxess (LXSG.DE), have also said they may consume more coal….
Other companies, such as Europe’s top copper smelter Aurubis (NAFG.DE), also said their aim remains to decarbonise, despite the additional short-term complication of including coal in the energy mix.
Investors insist they are similarly committed. AXA Investment Managers, Allianz Global Investors and Zurich Insurance, which between them manage $1.8 trillion in assets, all said they were keeping to their plans to cut back on coal despite the war in Ukraine.
“We are not changing our position and we are not changing our policy – we are sticking to the course,” said Zurich group head of sustainability Linda Freiner.
So far Europe’s energy crisis is showing few signs of being resolved. It remains to be seen how far either companies or investors can keep faith in the importance of long-term ESG principles like cutting out coal if the situation worsens.”
In the States
Governor DeSantis bans the use of ESG criteria in state pension fund management
On July 27, Florida Governor Ron DeSantis announced that he had banned the use of ESG criteria in the management of Florida’s state-sponsored pension funds. The Governor made his announcement at a press conference during the day and then reiterated it that evening on Fox News’s “Tucker Carlson Tonight”:
“The Florida State Pension System will now be under a “flat ban” against incorporating the globalist ESG platform into its investments, Gov. Ron DeSantis announced on Fox News Wednesday.
DeSantis told “Tucker Carlson Tonight” the proponents of ESG – which places what its supporters say are environmentally-necessary regulations – like to “wiggle around” definitions and verbiage to supersede the purely fiduciary responsibilities of fund managers.
“It’s basically a way for [ESG proponents] to do politics,” the Republican governor said. “So we’re going to make sure that that fiduciary duty is defined very clearly and that they stick to that. We also want to provide protections for people in the financial marketplace from being discriminated against based on ideology.”
DeSantis said some Wall Street banks are already inserting their politics in their investments in other ways – discriminating against contractors unfriendly to unfettered immigration or those firms who invest in firearms manufacturers while Democrats seek to pass gun control laws opponents say infringe on the Second Amendment.”
ESG policies of five financial institutions land groups on West Virginia’s restricted financial institution list
In West Virginia, State Treasurer Riley Moore announced that five firms have been placed on his state’s restricted financial institution list because their ESG policies conflict with what the Treasurer says are his state’s financial interests, namely coal and other fossil fuels:
“West Virginia State Treasurer Riley Moore today announced he has published West Virginia’s first Restricted Financial Institution List, deeming five financial institutions ineligible for state banking contracts.
Treasurer Moore has determined that BlackRock Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co. are engaged in boycotts of fossil fuel companies, according to a new state law, and are no longer eligible to enter into state banking contracts with his Office.
“As Treasurer, I have a duty to act in the best interests of the State’s Treasury and our people when choosing financial services for West Virginia,” Treasurer Moore said. “Any institution with policies aimed at weakening our energy industries, tax base and job market has a clear conflict of interest in handling taxpayer dollars.”
Six financial institutions were initially identified as potentially engaged in boycotts of energy companies and provided with written notice. These institutions then had 30 days to submit additional information disputing their potential inclusion on the Restricted Financial Institution List. All six institutions submitted responses, which the Treasurer reviewed alongside each institution’s public policy statements.
Out of the six financial institutions initially noticed, U.S. Bancorp was not placed on the List because it demonstrated to the Treasurer that it has eliminated policies against financing coal mining, coal power and pipeline construction activities from its Environmental and Social Risk Policy.
“Each financial institution placed on the Restricted Financial Institution List today has published written environmental or social policies categorically limiting commercial relations with energy companies engaged in certain coal mining, extraction or utilization activities, rather than considering the financial or risk profile for each company,” Treasurer Moore said. “These policies explicitly limit commercial engagement with an entire energy sector based on subjective environmental and social policies.””
Aswath Damodaran speaks
On July 28, wealth manager David Bahnsen – who is also a trustee of the National Review Institute – hosted Aswath Damodaran on his National Review-produced podcast, the Capital Record. Damodaran is a professor of finance at NYU’s Stern School of Business and has, in the past, expressed skepticism about ESG and its impact.
In an accompanying article published at National Review Online, Bahnsen wrote about “A few points I find worth highlighting for those interested in a deeper dive on the subject,” including:
“The claim that ESG comes at “no cost” — that investing in a way that meets these environmental, social, and governance tests involves no trade-offs — ought to ring some alarm bells. Basic laws of economics tell us that there is no such thing as a free lunch. As Damodaran puts it, “constrained optima cannot beat unconstrained optima” (this should be so elementary to any first-year business student, it hurts). It would be one thing if ESG zealots were claiming that although we have to accept lower returns or more difficult business conditions, it is worth it in exchange for the alleged environmental, social, and governance benefits that investing subject to ESG constraints will provide. But alas, that’s not what most of them have been saying. Instead, they claimed they would make the world a better, more “sustainable” place by forcing restrictions on others, and that no sacrifice would be involved. These intelligence-insulting claims are a great place to start one’s critique….”
“Fundamentally, and I cannot say this emphatically enough, ESG is a pharisaical way for people to feel virtuous and good without having to do anything at all. The lack of individual sacrifice being made by those who push so hard for ESG is damning. The sacrifices that are being made are being made by the shareholders in the companies (or the underlying shareholders in the funds that invest in those companies), now expected to measure up to ESG’s standards. Virtue is not something exhibited at no cost to the individual; agency, sacrifice, and cost are part of character and justice. The ESG movement has put the cost on other actors, abusively so, and feigned progress and moral superiority.”