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
Indiana joins the list of ESG-boycotting states
Last week, Indiana became the latest state to declare its opposition to the use of ESG in state-based investments. State Attorney General Todd Rokita (R) made his case that ESG is not, in his view, fiduciarily responsible and is, therefore, a violation of state law:
“Indiana Attorney General Todd Rokita says Environmental, Social, and Governance (ESG) considerations are “activist-driven agendas,” arguing that state law prohibits ESG to influence investments by Indiana government employee pension funds. He says BlackRock, one of the largest investment funds in the world and promotes its “firm-wide commitment to integrate ESG,” has potentially “run afoul” of state and federal antitrust laws by using ESG in its investment decisions….
In an August 29 advisory opinion, the Indiana Attorney General argues the Indiana Public Retirement System (INPRS) must invest citizens’ pensions “with care, skill, prudence and diligence.” He alleges that because ESG investments are based on political interests rather than financial interests, the INPRS cannot legally base its investments on ESG guidelines.
“These woke Big Businesses are collaborating with their leftist allies to subvert the will of the people, including by investing Hoosiers’ hard-earned money in ways that work against the best interests of Indiana families,” Rokita said. “Our advisory opinion makes clear that oftentimes this collusion is not only unconscionable and unethical, but it’s also illegal. And we’re going to hold these firms accountable and give INPRS the tools to do so as well.”
In his opinion, Rokita says ESG is “an investment strategy that focuses less on the financial health of a company and more on its social and environmental impacts, as well as how a company governs its own internal affairs regarding issues such as diversity.” According to Rokita, environmental goals include eliminating fossil fuels and supporting enforcement of the Paris Accord, social goals include access to abortion, and governance goals include things like “board diversity quotas.”
Rokita also says ESGs are imprudent because they “are not reasonably calculated to maximize the risk-adjusted return of trust assets.” For example, because of ESG, BlackRock committed to divesting from coal by the middle of 2020, according to Rokita. Around mid-2020, coal was around $50 per ton. Recently, the price of coal has exceeded $400 per ton. “Because of BlackRock’s ESG commitment, the opportunity to profit from this change was likely lost, meaning gains that could have compounded for decades were forgone.”
Arizona’s Pension Board goes anti-ESG as well
On August 30, the Arizona State Pension Board became the latest state entity to alter its rules to deter the use of non-pecuniary factors in state pension investments, updating its policies to prevent the adoption of ESG or related investment strategies:
“Arizona State Board of Investment, Phoenix, has adopted anti-ESG revisions to its investment policy that specify that only “pecuniary factors” may be considered in the investment management of its asset pools.
The board approved the revisions at its meeting on Tuesday, according to a news release from Arizona Treasurer Kimberly Yee, whose office oversees the board.
The investment policy now specifies that “non-pecuniary factors may not be considered,” and that includes any agreements related to “environmental or social goals” or “corporate governance structures based on social characteristics.”
Ms. Yee said in the news release the adoption of the policy revisions is a reaction to “big government overreach to manipulate the private sector and force its hand in the business of picking winners and losers, based on radical ESG policies.”
The board oversees the Arizona state treasurer’s office investment pools, which includes the $7.1 billion Permanent Land Endowment Trust Fund. The endowment fund has a target allocation of 60% domestic equities and 40% domestic fixed income.”
Meanwhile, companies flip the script in Texas, arguing the state is playing politics with its ESG-related bans
Last week, several companies included on the Texas state banned financial services list complained publicly that, in their view, the state is playing politics with its ESG-related bans. Previously, BlackRock had pushed back against the new black list, insisting that Texas had misinterpreted both its intentions and practices:
“Financial groups included on a blacklist of companies that Texas considers hostile to fossil fuels have attacked the process as politicised and arbitrary.
Texas comptroller Glenn Hegar is implementing a 2021 law that requires state pension and school funds to divest shares they hold in listed financial groups which, in the government’s view, “boycott energy companies”.
But critics complain that his office relied on a single ESG ranking to reduce the pool to 19 banks and asset managers. Meanwhile, targeted firms claim the state communicated with them so haphazardly that it was not clear that all companies knew that they were on the final list of 10, which was announced last week. BlackRock was the sole US entity on the list, which also included Credit Suisse, UBS and BNP Paribas.
A parallel list of nearly 350 investment funds that Texas has also targeted for divestment drew similar complaints from sponsors who said some of the products were standard money market funds….
The Texas comptroller denied that the process was politicised or arbitrary.
“I wanted to make sure that the process that we follow in coming up with our list is one that is open, is transparent, and it is explainable to everybody,” Hegar told the Financial Times.
He said BlackRock had not been singled out. His office has given companies and fund sponsors 90 days to offer new information.”
As some analysts supportive of the Texas move have commented, one of the key charges leveled by businesses against Texas comptroller Hegar and Texas is also one of the chief complaints of state officials like Hegar, who have insisted that one of the biggest flaws with ESG is that it is based, in their view, on arbitrary and inconsistent principles:
“The initial process that selected 19 financial groups for potential inclusion on the “hostile” list came in for particular criticism. The state included companies that were in the top half of corporate ESG-risk ratings compiled by MSCI. That knocked out a number of very large banks and asset managers that have signed official commitments to reduce their carbon footprint, another criteria.
ESG risk ratings are not standardised and they measure the way a company is managing a range of issues. They are not “necessarily focused on climate change. It is not a good tool for what [Texas officials] are using it for,” said Simon MacMahon, global head of ESG research at Sustainalytics, which produces a similar screening tool.
Indeed, if Texas had used Sustainalytics’ version, its list might have been quite different. US fund managers Janus Henderson and Franklin Templeton come out with better scores than BlackRock on Sustainalytics’ ranking. Similarly, Citigroup and Bank of America come above Credit Suisse.”
On Wall Street and in the private sector
ESG performance woes continue
As volatility and economic apprehension roil markets in general, ESG investments, in particular, continue to struggle. ESG fund returns are underperforming anti-ESG strategies and trailing the market as a whole, while inflows are shrinking:
“In late 2021, Cathie Wood’s ARK Investment Management introduced its first exchange-traded fund with a socially conscious bent. Less than eight months later, the ARK Transparency ETF was shuttered—the firm’s first-ever closure—and Wood declared on Bloomberg Television that “there was a lot of slapping lipstick on a pig” in the environmental, social, and governance investment industry.
ARK’s experience is part of a broader ESG reckoning. After two years in which more than $32 billion flowed into US exchange-traded funds with an ESG focus, investors have put only about $4.5 billion into such ETFs in 2022. Seven have closed, and US and European regulators are starting to crack down on claims made by fund creators.
Inflows of $4.5 billion in a year when almost every asset class is underwater is far from a death knell. About $40 billion has been invested over the past decade in US-listed ETFs that emphasize ESG principles, according to Bloomberg Intelligence. The amount allocated to sustainable investment funds altogether is about $2.5 trillion, researcher Morningstar Inc. estimates.
But the ESG crown has been slipping: The investor base is highly concentrated, many funds cast too wide a net to appeal to single-issue investors, and several high-profile greenwashing scandals have tarred the industry’s virtuous image….
This year has delivered a double blow to performance. Technology shares, which are heavily represented in ESG portfolios, have suffered from soaring inflation and higher interest rates, while the war in Ukraine has made a winner out of energy shares, which many ESG funds exclude. Just 3% of the 166 US-listed ESG stock funds have positive returns in 2022, vs. about 9% of overall exchange-traded stock funds, Bloomberg data show. The Point Bridge GOP Stock Tracker, which goes by the ticker MAGA and invests in companies that support the Republican Party, is down about 3% as of Aug. 30 yet was outperforming the S&P 500’s 16% drop….
Meanwhile, regulators are sharpening their focus on labeling. In the US, the Securities and Exchange Commission may soon require additional disclosures about how ESG principles fit into managers’ investment strategies. And in Europe, Morningstar stripped the ESG label from almost a quarter of funds claiming to promote sustainability because they fell short of standards. That lack of nuance is muddling the message for investors looking to put money behind their principles, says Ben Johnson, Morningstar’s head of client solutions for asset management. While more-targeted funds focus on specific issues such as clean energy and diversity and inclusion, the bulk of ESG assets are held in broad-based index-tracking funds. “My ESG is not your ESG is not the next person’s ESG,” says Johnson. “It’s inherently subjective.””
In the spotlight
Conservative think tank launches anti-ESG initiative
The Heritage Foundation, one of the oldest conservative think tanks in Washington, D.C., has decided to launch its initiative to fight back against ESG investing. The move was announced on September 1:
“The Heritage Foundation, a conservative think tank, has launched a campaign against economic policies known as ESG that it says are being used by the Left as a social credit score to force businesses and financial institutions to adopt progressive ideologies across the globe.
“Under ESG, traditional American energy like oil and gas is punished and the Left’s ‘woke’ cultural agenda is implemented from the boardroom down to the factory floor,” the website for the new Heritage Foundation program, named ESG Hurts, states. “This agenda is being pushed by green activists, woke culture warriors, global elites, and the big businesses they control.”
Andrew Olivastro, vice president for outreach at Heritage Foundation, told Fox News Digital that ESG is a “direct assault on the free market economy” due to its incompatibility with self-governance.
“What you see is today’s political left is decidedly intolerant and can not stand a people that can self govern because it reduces their power and control,” Olivastro said. “So ESG can be seen as this grand umbrella for what is often celebrated as public private partnerships but it’s really the nexus of the administrative state and the managerial class.”…
The Heritage Foundation argues that Americans can protect the environment without implementing the negative toll that ESG policies bring.
“Americans should know that #ESG is not at all the same thing as environmental stewardship,” Heritage Foundation President Kevin Roberts tweeted Wednesday. “We can be morally upright stewards of nature, of what God has given us, while realizing that ESG actually gets in the way of human flourishing.”…
Olivastro told Fox News Digital that ESG represents a push by the Left to “weaponize capital” in order to “change the way corporate America operates.”
“CEOs who let their businesses be treated as vessels for left wing activism and cultural indoctrination deserve our scrutiny and our ridicule,” Olivastro said.”