Economy and Society, August 30, 2022: Texas lists 10 funds ineligible for business with state over ESG policies

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 

Texas issues list of funds ineligible for business with the state over ESG policies

On August 24, the government of Texas joined West Virginia in issuing a list of companies and funds that are ineligible to do business with the state because of their ESG policies and/or statements. The list – an outgrowth of a law passed last year – hits many of the biggest names in ESG investing, including BlackRock:

“Texas comptroller Glenn Hegar on Wednesday accused ten financial companies, including investing titan BlackRock, and 350 investment funds of taking steps to “boycott energy companies.”

The move could force certain Texas government funds, such as retirement funds for state workers, to sell any shares in these companies. It also places these companies alongside lists of other classes of companies covered under Texas divestment statutes, such as companies with “links to foreign terrorist organizations” and ties with Iran and Sudan.

The list, which grows out of an investigation first announced in March, is an effort to publicly highlight companies that are, in Hegar’s view, advancing agendas that threaten the energy industry in Texas, which is the top oil and natural gas producing state in the country. Texas produced 43% of the total crude oil produced in the United States in 2021 and 25% of its natural gas, according to the U.S. Energy Information Administration (EIA). Texas also has 31 petroleum oil refineries representing 32% of the nation’s refining capacity, making it the state with the most refineries and refining capacity of any state in the country.

Hegar said the focus on environmental, social and corporate governance (ESG) standards in finance had become a proxy for political agenda setting….

In response to the announcement from Hegar on Wednesday, BlackRock said it objected to the ruling.

“We disagree with the Comptroller’s opinion. This is not a fact-based judgment. BlackRock does not boycott fossil fuels — investing over $100 billion in Texas energy companies on behalf of our clients proves that,” a BlackRock spokesperson told CNBC in a statement.”

In fact, the very next day, BlackRock responded to the move by the Texas government, insisting that the declaration was, in its view anti-competitive:

“BlackRock has come out fighting against Texas’s decision to single it out as hostile to fossil fuels, calling the state’s targeting of it “opportunistic”, “anti-competitive” and “bad for business”.

The world’s biggest asset manager was the only US company included by Glenn Hegar, Texas comptroller, on a list of 10 financial institutions that “boycott” fossil fuels. The groups face possible divestment by state pension funds.

“Trying to stop a US company from doing business in its own backyard is bad for business,” said Mark McCombe, the head of BlackRock’s US business, who made multiple trips to Texas to lobby state officials while the list was being drawn up. “It looks opportunistic in this climate.”

“We have never turned our back on Texas oil and gas companies,” said McCombe, noting that BlackRock is the single largest investor in the state’s oil and gas industry and has $290bn in Texas-based assets. “This is anti-competitive.”…

Hegar denied in an interview that the list was politically motivated. Companies on the initial list of 19 as well as the 150 behind the specific investment funds were invited to explain their position on fossil fuels, he said. He added that some were able to provide information that allayed the state’s concerns.

Those who did not, and those who failed to respond, were put on the final list of 10, which included Credit Suisse, UBS and BNP Paribas, among others.

“The process was open and transparent,” Hegar told the Financial Times. “No matter what you do you run the risk of criticism.”…

The financial groups on the list have 90 days to convince Texas to change its mind. State pension funds will then have to notify the comptroller of their holdings, but the law gives them some flexibility on selling out if it affects their fiduciary duty to retirees.”

Texas state Senate committee seeks documents from funds, including BlackRock, in ESG probe

In addition to the state comptroller’s actions, last week, state senators in Texas jumped into the ESG battlespace, demanding documents from large asset management firms about their ESG investment strategies in the state and those strategies’ effectiveness:

“A Texas state Senate committee is demanding that four top financial services firms hand over details of their investment practices as part of an investigation into the companies’ so-called environmental, social, and governance (ESG) standards and how they impact the state’s public pensions.

The Texas Senate Committee on State Affairs, led by Chairman Bryan Hughes, sent letters to investment giants BlackRock Inc., State Street Global Advisors, and The Vanguard Group, along with Institutional Shareholder Services Inc. (ISS) on Aug. 10, requesting documentation related to the companies’ decision-making involving their respective ESG practices….

Neither BlackRock, State Street, Vanguard nor ISS immediately responded to FOX Business’ request for comment on the letters they received from the Texas Senate committee, but Hughes said all have responded to the state via attorneys and signaled that they would comply.

But if the institutions refuse to hand over the documents or the committee finds them insufficient, the panel will start issuing subpoenas. That means lawmakers could force company leaders like Larry Fink, CEO of BlackRock – the largest asset management firm in the world handling more than $10 trillion – to testify under oath about their institution’s ESG initiatives….

Texas lawmakers are particularly interested in the practices of the major financial firms because of their involvement with the Teacher Retirement System of Texas and the Employee Retirement System of Texas, which have entrusted the companies with managing their investments. Hughes says those companies “have a duty to maximize returns, not to play politics, not to push their left-wing agenda.””


DeSantis declares win in an effort against ESG

Last week, the Florida State Board of Administration agreed to changes Governor Ron DeSantis (R) had requested concerning ESG investing. Although the decision was not unexpected, it gave the Governor an opportunity to declare a win over ESG:

“Gov. Ron DeSantis of Florida yesterday advanced his campaign against environmental, social and governance investing. The State Board of Administration, on which he sits, adopted his proposal to ban the consideration of “social, political or ideological interests” when making investment decisions for the state’s pension fund.

“Corporate power has increasingly been utilized to impose an ideological agenda on the American people through the perversion of financial investment priorities under the euphemistic banners of environmental, social and corporate governance and diversity, inclusion and equity,” DeSantis, a Republican, said in a statement.

The resolution imposes broad limits on the pension fund’s investments. State administrators will be instructed to prioritize “the highest return on investment for beneficiaries, without consideration for nonpecuniary beliefs or political factors.”…

Red and blue states are increasingly split: In the past year, more than a dozen have introduced new initiatives, either to divest state pension funds from gun and ammunition companies, or oil and gas companies and coal companies — or, conversely, to divest from ones that boycott fossil fuel companies.

Asset managers may not be as divided as states, according to Joshua Lichtenstein, a partner at the law firm Ropes & Gray who has been tracking the battle. “Florida and Texas have a lot of money, but it’s not clear we’ll see enough money line up for the red states to change things,” he said, noting that the European Union has already adopted E.S.G. investment principles. When it comes to pensions, managers play a long game, and ignoring E.S.G. could be risky.”

On Wall Street and in the private sector

The SEC isn’t scaring people away from ESG

The Securities and Exchange Commission (SEC) has, for more than a year, been warning ESG providers that it will be paying close attention to them and to the promises they make to investors. And regulators in the European Union have, if anything, been even more aggressive with investors than the SEC has, going so far as to strip some companies of their ESG/sustainable designation. That has not, however, stifled the growth in the industry, at least as measured by companies offering new ESG products:

“In the U.S., the Securities and Exchange Commission may soon start requiring managers to disclose additional information about how environmental, social and governance principles fit into their investment strategies. Industry trade groups, including the Investment Company Institute, and some asset managers are already opposing parts of the SEC’s plan.

And in Europe, almost a quarter of funds claiming to “promote” sustainability were stripped of their ESG labels by influential market researcher Morningstar Inc. because they fall short of applicable standards.

Given this backdrop, one would think managers would be hesitant about bringing more ESG-labeled funds to market, but instead, that’s exactly what they’re doing.

“If a new fund is created in the EU, there’s a good chance it’s sustainable — at least in name,” wrote BloombergNEF analyst Maia Godemer in a note published last week. In fact, 67% of exchange-traded funds introduced since 2020 factor in sustainability, she said.

While BlackRock Inc., the world’s largest asset manager, said it supports the overall push to clarify asset managers’ strategies, the firm added that the SEC’s proposal to require new disclosures for funds that just consider ESG criteria among many other factors may further confuse the situation. It could end up overstating the significance of ESG considerations for some funds, BlackRock said.”

Notable quotes

To Delist or not to Delist. That is the Question.

Scott Shepard, the Director of the Free Enterprise Project and the National Center for Public Policy Research, used his regular column at RealClear Markets to argue that the delisting of Chinese companies from American stock exchanges is likely to create significant problems for investors and for American corporations:

“Chinese government-owned companies are beginning to delist from American stock exchanges. While this might seem like a minor win for those who seek to decouple the American and Chinese economies in the wake of, among other things, tensions over Taiwan, the bigger story is – as is so often true these days – one of the so-called ESG movement and the insurrection of the C-suites. That story is predictably one of giant investment managers and lenders holding American publicly traded companies to debilitating and stifling political-policy-driven standards that they do not apply to private-equity firms or to foreign companies with which these managers and lenders happily deal.

Last week two companies owned by the Chinese government delisted from American exchanges: PetroChina Sinopec and China Life Insurance. Reports indicate that Aluminum Corporation of China and Sinopec Shanghai Petrochemical will also delist soon, and some analysts expect that other China-owned companies will follow. Alibaba, meanwhile, has released plans to have dual primary listings in both New York and Hong Kong, raising its secondary Hong Kong listing to primary.

By delisting from American exchanges, these corporate arms of the Chinese government – and therefore of the Chinese Communist Party – excuse themselves from having to submit to audits by the Public Company Accounting Oversight Board (PCAOB), a federal statutory oversight outfit. By moving now, the companies are also getting out before the SEC finalizes new disclosure rules that, as proposed, would force companies traded on American exchanges to make highly expensive and speculative carbon-emission disclosures – including the emissions created by all of a company’s suppliers….

Fink and other stewards of Americans’ assets are once again faced squarely with a test of their fidelity. They have already violated their fidelity to their fiduciary duties by embracing the ESG push that privileges their personal policy preferences over their duty to invest the assets entrusted to them only in consonance with the law (broken by equity-based discrimination) and complete and objective research (the opposite of which underpins their activist-schedule decarbonization demands). Now we will see if they even have fidelity to the policy positions that they have staked out here in the States.”