Economy and Society, September 13, 2022: Former Attorney General highlights recent state action against ESG

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 

Former Attorney General highlights recent state action against ESG 

In an op-ed for The Wall Street Journal on September 6, former U.S. Attorney General Bill Barr and Yale Law School professor Jed Rubenfeld addressed state action on ESG and the conflicts of interest that, in their estimation, make ESG a problematic investment premise:

“Nineteen state attorneys general wrote a letter last month to BlackRock CEO Laurence D. Fink. They warned that BlackRock’s environmental, social and governance investment policies appear to involve “rampant violations” of the sole interest rule, a well-established legal principle. The sole interest rule requires investment fiduciaries to act to maximize financial returns, not to promote social or political objectives. Last week Attorneys General Jeff Landry and Todd Rokita of Louisiana and Indiana, respectively, went further. Each issued a letter warning his state pension board that ESG investing is likely a violation of fiduciary duty.

The Louisiana and Indiana opinions didn’t make headlines but have seismic implications: They suggest that state pension-fund board members, investment staff and investment advisers may be liable if they continue allocating funds to ESG-promoting asset managers such as BlackRock….

Mr. Landry’s guidance spotlights potentially explosive, undisclosed conflicts of interest in the Big Three’s “selective” promotion of ESG criteria against U.S. companies but not Chinese companies. According to Mr. Landry, in 2021 BlackRock exercised its proxy voting rights as Exxon’s second-largest shareholder to lead “an activist campaign that forced Exxon to cut oil production,” without disclosing that many of the “oil fields dropped by Exxon” are “poised to be acquired by PetroChina” and that BlackRock is “one of PetroChina’s largest investors.”

Mr. Landry has a point. BlackRock has an enormous stake in PetroChina, reporting holdings of between one trillion and two trillion shares, representing between 5% and 10% ownership, from 2018-22. If Mr. Landry’s allegations are correct, BlackRock’s ESG-based promotion of oil production cutbacks at Exxon might have been a staggering conflict of interest.

[B]oth Mr. Landry’s and Mr. Rokita’s letters are warnings to public pension-plan trustees, who are under the same fiduciary duties that BlackRock is. Mr. Rokita’s opinion concludes that public pension boards are “prohibited” from retaining asset managers who “make investments, set investment strategies, engage with portfolio companies, or exercise voting rights appurtenant to investments based on ESG considerations,” which the Big Three all do….

Although the letters are tailored to Louisiana and Indiana law, the principles they invoke are part of the common and statutory laws of almost every state. Under those principles, social-impact investing has long been viewed as legally problematic. As stated by the drafters of the Uniform Prudent Investor Act, a model statute that has been substantially adopted by a majority of states, “no form of so-called ‘social investing’ is consistent with the duty of loyalty if the investment activity entails sacrificing the interests of trust beneficiaries . . . in favor of the interests of the persons supposedly benefitted by pursuing the particular social cause.” The letters are therefore a warning to public pension trustees across the U.S.”

Meanwhile, BlackRock fires back at the 19 states pushing back on ESG 

Last week, BlackRock continued pushback against the 19 state attorneys general who had accused the firm of violating the sole interest rule to maximize financial returns. In its letter, BlackRock argued that the state regulators do not understand the risks ESG is meant to address and are, therefore, making a mistake:

“BlackRock is hitting back at “inaccurate” accusations from Republican attorneys general who allege the firm is hurting their states and its own customers by pursuing environmental and social justice goals.

Last month, 19 GOP attorneys general sent a letter to BlackRock CEO Larry Fink, who is increasingly becoming a Republican target, challenging the money manager’s commitment to environmental, social, and governance principles. They claimed that BlackRock’s policies are undercutting shareholder profits in managing state pension funds.

In response, Dalia Blass, BlackRock’s head of external affairs, said in a letter to the group of attorneys general that climate change is becoming a major risk and that investors and clients want to be apprised of the risks in order to achieve better returns.

“Governments representing over 90% of global GDP have committed to move to net-zero in the coming decades,” said Blass. “We believe investors and companies that take a forward-looking position with respect to climate risk and its implications for the energy transition will generate better long-term financial outcomes. These opportunities cut across the political spectrum.”…

BlackRock said in its response letter that the attorneys general misunderstand BlackRock’s ESG policies, noting that they ask companies to provide disclosures on material issues that affect their businesses so that investors can appraise risks, such as climate change, and make informed financial decisions. BlackRock claims that its policies are merely “focused on enhancing transparency.”

“We do not, as suggested in your letter, dictate to companies what specific emission targets they should meet or what type of political lobbying they should pursue,” Blass said. “That is the role of the company’s management team and the board of directors — it is not the responsibility of minority investors such as BlackRock.”…

Following BlackRock’s letter, Arizona Attorney General Mark Brnovich told the Washington Examiner that the response “was disappointing, to say the least.”

“It’s sad that some groups are more interested in pushing a far-left agenda than protecting Americans from skyrocketing energy costs,” he said.

Indiana Attorney General Todd Rokita said BlackRock’s ESG initiatives are at odds with what should be its mission.

“The reason for this leftward drift of corporate America is the rise of ‘woke capital.’ ESG investments are not designed to maximize profits. They are purely to shove the Left’s social and economic agenda on to every consumer,” Rokita told the Washington Examiner.” 

On Wall Street and in the private sector

Strive Asset Management delivers Chevron what it calls a post-ESG shareholder mandate

Last week, Strive Asset Management, which launched its first anti-activism exchange-traded fund in August, sent a shareholder letter to Chevron, encouraging the company to break away from the strictures placed upon it by ESG and ESG-friendly asset managers. The letter read, in part:

“Strive Asset Management recently became a shareholder of Chevron. We write to you and your board of directors on behalf of our clients to deliver what we term a “post-ESG” shareholder mandate.

 We believe that Chevron has the potential to become one of the world’s most valuable companies, both in terms of market capitalization and impact on human flourishing. As recently as 2013, Chevron was among the top 10 most valuable public companies in the world by market capitalization. At the beginning of 2022, Chevron did not make the top 50 and is still outside the top 20, but we believe that can change: the growing supply-demand imbalance for energy around the world creates a unique opportunity for a great American oil company like Chevron to meet that need. 

 To seize this opportunity, Chevron must produce and distribute more fuel to customers around the world – proudly, publicly, and without apology. We are concerned that Chevron faces immense pressure from its large institutional “shareholders” including BlackRock, State Street, and Vanguard to adopt value-destroying limitations on its business that do not align with Chevron’s best interests. 

 Rejecting these firms’ mandates will require courage. We believe you have already exhibited unusual courage in your leadership as CEO, including most recently in your public letter to the President of the United States explaining the vital role that oil companies like Chevron play in addressing the current energy crisis. We also believe that Berkshire Hathaway’s recent investment in your company affords Chevron greater flexibility than its peers to resist the demands of ESG-promoting asset managers. We are hopeful that with your continued leadership, Chevron can outperform certain of its larger U.S. competitors who have visibly buckled to “shareholder” pressure and misguided activist campaigns….

We understand that you are in a challenging position when Chevron’s top “shareholders” mandate your board to adopt a course of action that you believe is not in the best interests of Chevron’s shareholders. But here is the reality: your purported “shareholders” are not the actual owners of your company. 

Today the three largest passive asset managers in the world – BlackRock, State Street, and Vanguard – manage over $20 trillion, approximately equal to the total U.S. gross domestic product. In 2021 these firms appeared in public filings as Chevron’s top 3 shareholders. By contrast, the actual owners of Chevron are not BlackRock, State Street, Vanguard – or, for that matter, Strive. Chevron’s actual owners are the clients of these institutions: everyday citizens whose capital is invested in passively managed index funds. 

You owe a fiduciary duty to the actual owners of Chevron, not to the institutions who claim to represent these owners. There is strong reason to believe that these large asset managers are not voting with their clients’ best interests in mind. Indeed, nineteen state Attorneys General have explicitly accused BlackRock of as much. Last month, they sent a letter alleging that the company “use[s] the hard-earned money of our states’ citizens to circumvent the best possible return on investment.” It further accused BlackRock of violating the law by “commit[ing] to accelerate net zero emissions across all of its assets, regardless of client wishes.””

ESG with Chinese characteristics

ESG investments are booming in China, although the fact that ESG defies easy definition means that that boom doesn’t necessarily mean what Westerners might think it does, as Bloomberg reported last week:

“In a 40-minute livestream in June, fund manager Hou Chunyan made her pitch directly to China’s growing population of retail investors: ESG investing is uniquely compatible with Beijing’s growing push for carbon neutrality and “common prosperity.”

To that end, her portfolio — the Da Cheng ESG Responsibility Investment Mixed Fund — doesn’t rule out coal companies or liquor stocks. Chemical manufacturers are fair game, according to China’s main ESG benchmark, the CSI 300 ESG Leaders Index. So are solar energy and technology firms with alleged ties to forced labor in the Xinjiang region….

Of more than 170 ESG funds domiciled in China, about 15% are invested in coal companies, by far the country’s biggest source of greenhouse gas emissions, according to Bloomberg data. More than 60% have holdings in the steel industry, a massive consumer of the country’s coal….

“People say ESG like we’ve agreed upon what it is — we’ve not,” said Bradford Cornell, emeritus professor of financial economics at UCLA, who wrote a recent paper on ESG investing in China. “In China, the rules on environmental and social issues are made by the Chinese Communist Party.”…

China’s unique approach demonstrates some of the universal appeal of a general ESG principle, that companies that consider environmental costs and social risks will, in the long term, generate higher returns. It also shows that there’s lots of room for countries and regions to define those costs and risks for themselves — and often at odds with each other.

“A local analyst would consider being a state-owned enterprise a good thing, while their counterpart in Europe might consider it a deal-breaker,” said Liu Xiangfeng, whose Beijing-based firm, QuantData, specializes in ESG analysis. “There is culture and ideology involved.”

As a result, alcohol giant Kweichow Moutai Co., with its rural employment initiatives, is one of the top holdings in the CSI 300 ESG Leaders index, which tracks the 100 Shanghai- and Shenzhen-listed companies with the highest ESG ratings. China Shenhua Energy Co. which gets 78% of its revenue from coal mining, is another top holding, because it’s generating some renewable power and boosting energy security. 

Roughly 10% of Chinese ESG funds also hold Hangzhou Hikvision Digital Technology Co., a surveillance technology company under US trade sanctions related to alleged human-rights violations against Muslim minorities in Xinjiang….

“The government is bound to generate its own interpretation of ESG, because they want to make sure it will not conflict with the country’s national economic strategies,” said Boya Wang, an ESG analyst at Morningstar Inc.. Under Beijing’s “common prosperity” push, “social inequality and local unemployment top the agenda.”

Global firms are also joining the rush. Axa SA and Morgan Stanley are launching new ESG funds with their joint venture partners, adding almost 2 billion yuan ($290 million) in combined assets in less than two years.”

Notable quotes

Michael Bloomberg argues ESG opponents don’t understand capitalism 

Last week, former New York Mayor, billionaire, and key player in the ESG investing movement, Michael Bloomberg declared that anyone who opposes ESG doesn’t understand capitalism.

“Billionaire U.N. climate envoy Michael Bloomerg published an opinion piece Tuesday in his eponymous Bloomberg publication that was highly critical of Republican state officials who have taken actions to protect their citizens and retirees from environmental, social, and governance (ESG) policies. 

The op-ed, titled, “On Climate Change, Republicans Need a Crash Course in Capitalism,” argued that Republicans are “making a terrible mistake.”

“Republican elected officials seem to think they’ve found three new evil letters to pair with their favorite bugaboo, CRT, or critical race theory,” the former New York City mayor wrote mockingly….

Bloomberg wrote, “Critics call [ESG] ‘woke capitalism.’ There’s just one problem: They don’t seem to understand capitalism.”

He called policies that protect consumers and citizens alike against ESG “a terrible economic mistake” and “a political loser.””