Economy and Society, September 20, 2022: ESG a campaign issue in state auditor race

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 

ESG a campaign issue in state auditor race

Last Thursday, under the headline “Wait. There’s a ‘Real Issue’ in the State Auditor’s Race?” the MinnPost, a nonprofit, online newspaper that focuses on local issues ran the following, illustrating the impact that ESG and the pushback against it are having, well beyond the bounds of Wall Street:

Many of the campaign issues in Minnesota are issues in races across the country as well, put there by partisan strategists who see them as potent for bringing the right voters to the polls.

Similar talking points on public safety, abortion, inflation and school curricula can be seen and heard in congressional and state campaigns in every state, Minnesota included. And now some national Republicans are trying to add ESG to the list – or, as they call it, “woke investing.”…

Supporters of ESG say it makes financial sense to begin avoiding businesses with financial models that may well be unsustainable, leading to reduced value in the future. 

Opponents, including high-profile Republicans like Texas Gov. Greg Abbott and Florida Gov. Ron DeSantis, have attempted to cite it as the political left using public funds to further political goals. So far, the issue has emerged in only one statewide Minnesota race. As one of four members of the State Board of Investment, the state auditor helps set policy for how the $130 billion in state funds are invested.

“I will not play politics with our pensions,” GOP nominee Ryan Wilson said during the only debate so far with the incumbent DFL Auditor Julie Blaha. “We must put return on investment first.”

Unlike the way some Republicans are stepping gingerly around the issue of abortion and some Democrats are trying to finesee the issues around public safety, Blaha is running toward this political fire rather than away from it. She said considering ESG factors is the trend in retirement fund investing, not just by public systems but by private investors.

“Even if you don’t care about the environment at all, you need to think about climate change in investments,” she said during the WCCO radio debate. “There are significant risks and there are significant opportunities in how climate is changing and how we’re transitioning energy.”

Blaha blamed “MAGA auditors and treasurers” who are trying to discredit ESG in investment decisions. “The evidence is overwhelming, and it’s also common sense. How many of us are sinking our savings into coal right now?”…

Blaha, first elected in 2018, said she called “dibs” on the issue over the other board members – Gov. Tim Walz, Attorney General Keith Ellison and Secretary of State Steve Simon. The board has recently begun assessing how environment, social and governance factors might influence how investment decisions are made. The board has already directed Chief Investment Officer Mansco Perry to remove from the state’s investment portfolio “publicly traded companies which derive 25 percent or more of their revenue from the extraction and/or production of thermal coal …”

In addition, the board has commissioned several analyses from consultants to advise whether it should divest from other industries and, if so, how. And it has recently acted to support federal Securities and Exchange Commission (SEC) rules to require and make uniform disclosures of climate-related factors for all publicly traded companies….

Wilson said he was aware of the issue after looking into the duties of the auditor but decided to focus on it after hearing on the campaign trail from teachers and firefighters who said they were concerned about the health of their pensions. He said he considers ESG investing to be less about maximizing returns and more about furthering political ideals about climate change and equity.

“Return on investment needs to be first,” he said during an interview. The state pension system is in good shape now but he said he worries about its long-term health if decisions are made that damage financial returns.

Democratic states push back against the ESG pushback

On September 15, Quartz ran a short opinion piece, detailing efforts by Democratic states to flip the script on their Republic state counterparts and to argue that Republican treasurers who oppose ESG are the ones who are, in their view, putting retirement assets at risk:

Treasury officials in US states on either end of the political spectrum are butting heads over climate-friendly investing—and both are using the same argument to reach opposing conclusions.

The latest round of shots was fired on Sept. 14 by a dozen Democratic Party state treasury officials, who argued that their Republican peers are working against the fiduciary interests of their constituents in pursuit of a pro-fossil fuel political agenda….

The new letter from Democratic treasury officials in New York, Massachusetts, and California, and 11 other states echoes BlackRock [which wrote a letter to the states, noted in this newsletter last week]. States that penalize climate-conscious investors and “use blacklists to obstruct the free market,” they write, “will miss potential growth because their focus is on preserving the status quo.”…

Rare is the economist who will argue that climate change is immaterial to investment considerations, especially those like pensions with a long time horizon. The longer it takes anti-ESG officials to admit that, the more their constituents’ savings will be at risk.

On September 17, Oregon Treasurer Tobias Read penned an op-ed for the New York Times, explaining and expanding upon the case he and other Democratic state officials are making in rebuttal to ESG-opposing Republican officials’ case:

In several Republican-led states, the officials who oversee pension funds for millions of state workers are being told, or may soon be told, to ignore the financial risks associated with a warming world. There’s something distinctly anti-free market about policymakers limiting investment professionals’ choices — and it’s putting the retirement savings of millions at risk….

These are short-sighted political moves from a party that typically champions the free market, and that is why 12 other state treasurers and New York City’s comptroller recently joined me to urge that these policies be reversed. The people who will likely suffer are the public servants whose retirement money won’t be managed for a world being disrupted by a rapidly changing climate….

Climate change is already affecting the profitability of entire industries in which my fund is invested. Fires, floods and droughts are snarling supply chains and destroying property. It is clear that we need to consider which of our pension fund assets are most exposed.

For people in my position to actively avoid information about such profound risks is a breach of their duty as a fiduciary. For policymakers to mandate willful ignorance about an entire category of risk and block private companies from doing business with their states because they might not share the same ideology is un-American.

If you still don’t believe that the financial risks are real — and that pension funds should be mitigating them — then consider the actions of comparable institutions with enormous balance sheets and investment horizons that span decades. This year, the U.S. Navy released a climate strategy that aims to help its bases to adapt to rising seas and other changes. Insurers continually strive to understand the evolving risks posed to properties in areas increasingly prone to flooding and wildfire. Oil and gas companies go through “scenario planning” exercises to investigate how severe weather and climate change may hurt future business.

Unlike Texas and Florida, these institutions are committed to considering how environmental risks will affect their bottom line now and in the future.

Why is it that the elected officials in these states are so far out of sync? The answer is politics. These state officials are putting their political views before the best interests of the firefighters and teachers they serve….

I encourage those charged with oversight of state funds and pension funds to return to the core values we all share: Transparency and accountability are good for investors. Markets should be free from excessive manipulation. Prudent investors should be allowed to weigh long-term risks.

State officials were not the only ones who spent the last week accusing state Republicans of misunderstanding ESG and therefore misinterpreting their fiduciary responsibilities to their clients/constituents. Large pension funds also got into the act, according to Bloomberg:

After watching key GOP figures launch an all-out political attack on ESG, senior officials from the $57 trillion global pension industry are speaking out against the risks such an agenda poses to long-term savings.

Matti Leppala, chief executive at PensionsEurope, said efforts to lambaste ESG based on an assessment of short-term returns are “ridiculous” and “meaningless.”

“We would argue that not taking ESG into consideration is in fact the real risk factor that will have an impact on long-term, sustainable returns,” Leppala, whose association represents firms overseeing a combined $7 trillion in assets, said in an interview….

Brian Graff, chief executive of the American Retirement Association, said US savers ought to be free to get ESG-integrated plans if that’s what they want.

“We believe that, you know, American workers who are interested in investing in this area should have the option to do so,” said Graff, who represents the interests of his association’s more than 34,000 members. He also suggested that the debate around ESG has become riddled with confusion.

“People tend to—even policymakers—they just conflate, they conflate everything,” Graff said in an interview….

“If you don’t take ESG into consideration, then you increase the risk that you are not able to pay for pensions policyholders,” Leppala said.

For those designing the principles guiding ESG investing, protecting savings has always been an essential element.

“The fiduciary debate is at the very, very core” of how ESG is viewed, said Helena Viñes Fiestas, rapporteur of the EU Platform on Sustainable Finance and a member of the United Nations Secretary General High-Level Expert Group on net-zero pledges.

“If you think about the whole movement of ESG, it is in a way questioning the current economic model and saying, ‘Look, it’s no longer finance on one hand and environmental and social aspects on the other, it has to be unified,’” she said.

Notable quotes

Former BlackRock employee argues “ESG Does Neither Much Good nor Very Well”

In an op-ed published on September 12 by The Wall Street Journal, Terrence R. Keeley became the second high-profile former BlackRock employee to argue that, in his view, ESG doesn’t do much of anything at all. He joins former global head of sustainable investing, Tariq Fancy, who expressed his disillusionment with BlackRock just over a year ago:

Trillions of dollars have poured into environmental, social and governance funds in recent years. In 2021 alone, the figure grew $8 billion a day. Bloomberg Intelligence projects more than one-third of all globally managed assets could carry explicit ESG labels by 2025, amounting to more than $50 trillion. Yet for a financial phenomenon this pervasive, there is astonishingly little evidence of its tangible benefit.

The implicit promise of ESG investing is that you can do well and do good at the same time. Investors presume they can make a market return while advancing causes such as lowering carbon emissions and income inequality. But multiple studies find ESG strategies are doing little of either. Bradford Cornell of the University of California, Los Angeles and Aswath Damodaran of New York University reviewed shareholder value created by firms with high and low ESG ratings—scores provided by professional rating agencies. Their conclusion: “Telling firms that being socially responsible will deliver higher growth, profits and value is false advertising.”

What Messrs. Cornell and Damodaran found at the micro level is also apparent on a macro basis. Over the past five years, global ESG funds have underperformed the broader market by more than 250 basis points per year, an average 6.3% return compared with a 8.9% return. This means an investor who put $10,000 into an average global ESG fund in 2017 would have about $13,500 today, compared with $15,250 he would have earned if he had invested in the broader market.

Did the forgone $1,750 somehow do $1,750 worth of good for mankind? Apparently not. A new report from researchers at the universities of Utah, Miami and Hong Kong finds there is “no evidence that socially responsible investment funds improve corporate behavior.” But this shouldn’t come as a surprise. The same outcome followed decades of investors avoiding so-called sin stocks—alcohol, tobacco, firearms and gambling. In doing so, investors sacrificed returns while the behavior they disapproved of continued. Impact investors want their capital decisions to create outcomes that wouldn’t have existed otherwise, not perpetuate the status quo.