Economy and Society, September 27, 2022: House Financial Service Committee addresses 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 Washington, D.C.

House Financial Service Committee addresses ESG

Last week, the House Financial Service Committee held a hearing called “Holding Megabanks Accountable,” at which the CEOs of a handful of large consumer-facing banks testified about the banks’ various interests and activities. The hearing hit on ESG and related issues.

At one point, Congresswoman Rashida Tlaib (D) challenged the bank CEOs to agree to stop doing business with fossil fuel companies. She was rebuffed by all, with J.P. Morgan-Chase CEO Jamie Dimon generating headlines with his response:

JPMorgan Chase CEO Jamie Dimon is not committing to divesting from fossil fuels and shrugged off the notion as a “road to hell for America” during a House hearing.

At an Oversight Committee hearing Wednesday, Rep. Rashida Tlaib (D-MI) pressed a cadre of banking executives sitting before the investigatory panel on whether they would commit to stop funding new fossil fuel projects.

“Absolutely not, and that would be the road to hell for America,” Dimon quipped during a tense exchange with the “Squad” member.

Seemingly expecting that answer, Tlaib encouraged those poised to receive student loan relief with accounts at JPMorgan Chase to close their accounts with his company.

“Sir, you know what? Everybody that got relief from student loans [that] has a bank account with your bank should probably take out their account and close their account,” she said. “The fact that you’re not even there to relieve many of the folks that are in debt, extreme debt, because of student loan debt. And you’re out there criticizing it.”…

Dimon, who is widely regarded as one of the foremost voices in the world of finance, previously slammed environmentalists pushing to curb oil and gas production, arguing such steps could lead to increased coal use in developing countries.

“We aren’t getting this one right,” Dimon added. “Investing in the oil and gas company is good for reducing CO2.”

Following the exchange, Tlaib peppered the other banking executives in attendance about their positions on fossil fuels. Executives from Citigroup and Bank of America explained that they are collaborating with their clients to help reduce carbon dioxide emissions.

Also during the hearing, Congressman Sea Casten (D) asked the CEOs if they were aware that their companies were sponsors of the State Financial Officers Foundation (SFOF) and encouraged them personally to see that their companies’ support was withdrawn.

SFOF is a nonprofit organization that aims to encourage state auditors and treasurers to be diligent about being good stewards of the funds entrusted to them by their constituents. As such, it has aimed to help some state officials understand the issues surrounding ESG investing and how it can be seen, in the view of some, as an overtly politicized misuse of taxpayer funds.

Of late, SFOF has become the focus of increased media attention, with The New York Times recently placing it at the center of a conspiracy to, in its view, “‘weaponize’ public office against climate action.” Because of this increased negative publicity, SFOF has also become a political target of those who support ESG and wish to see it become the default investment strategy for state pension funds.

Within hours of the hearing, SFOF CEO Derek Kreifels responded to Casten’s comments in an email blast:

A few hours ago, a member of the house financial services committee grilled the CEOs of JPMorgan Chase and Wells Fargo bank about their support for an organization you may have heard of called State Financial Officers Foundation, claiming that we are “spreading disinformation” about the climate and urging them to stop supporting us.

The congressman goes on to say that SFOF “is blocking the capital sector from freely allocating capital.” As you know, nothing could be further from the truth. At SFOF, we believe that economic freedom has been one of the single greatest drivers of progress and prosperity in human history, and our group of treasurers and auditors promote fiscally responsible financial policy that makes sense for their states and constituents.

It certainly is remarkable to have a sitting congressman calling for SFOFs corporate sponsors to stop supporting us in a U.S. House committee meeting, but rather than feeling threatened by one representative’s demands for SFOF’s cancellation, I take them as confirmation that the work of our organization is doing to push back against ESG investing is making an impact and has our opponents panicked.

In the States 

CalPERS struggles

The California Public Employee Retirement System (CalPERS) is not only the largest public pension system in the United States, but it was also one of the first prominent asset managers to adopt ESG and other sustainability guidelines.

In his book-length critique of ESG, The Dictatorship of Woke Capital, financial analyst Stephen Soukup argued that CalPERS’ decision to “go green” hurt its clients and, by extension, the taxpayers of California:

According to a December 2017 report from the American Council for Capital Formation (ACCF), “One key factor behind this consistently poor performance, according to the ACCF report, is the tendency on the part of CalPERS management to make investment decisions based on political, social and environmental causes rather than factors that boost returns and maximize fund performance.”  The report also noted “that four of the nine worst performing funds in the CalPERS portfolio as of March 31, 2017, focused on supporting Environment, Social and Governance (ESG) ventures. None of the system’s 25 top-performing funds was ESG-focused.”

In his “Best of the Web” column on September 22, The Wall Street Journal’s James Freeman cited years of his newspaper’s coverage of CalPERS to reiterate the case the ESG is costing the pensioners and taxpayers of California money:

There is no such thing as a free lunch. Activists who think they can use public companies to pursue political agendas without endangering shareholder returns are indulging in a fantasy. Disappointing results at a giant government pension fund cannot all be tied to political agendas, but the retired workers who rely on Calpers have every right to demand that fund managers adopt a singular focus on maximizing returns. Heather Gillers reports in the Journal:

The nation’s largest pension fund got a scathing performance review Monday when its new investment chief highlighted the retirement system’s underperforming returns…

The unusually candid presentation to board members of the California Public Employees’ Retirement System, known as Calpers, showed returns lagging behind other large pensions in almost every asset class during the past 10 years, with private equity trailing the most, 1.3 percentage points…

“I am a little disappointed, and I get it, I know there’s lots of things that go into the buckets of why our performance has been poor,” said board president Theresa Taylor.

Let’s hope Calpers finally gets it, and a good fresh start would include a determination to urge portfolio companies to simply pursue profits, not politics. For years, the big fund has been fairly active in pursuing the latter, despite early red flags.

The Journal’s Carolyn Cui reported in 2010:

New funds are springing up that blend quantitative investing, using financial data and computer models, with socially responsible investing, a method of picking stocks based on a company’s environmental, social and governance practices, known as ESG… Calpers has committed $500 million to ESG investing, mainly by avoiding stocks that rank low on the ESG scale. But the returns haven’t been satisfactory, Calpers said.

That should have been the end of what was a relatively small experiment by Calpers standards, but the big pension fund pressed ahead….

By 2018, the political agenda was clearly annoying a lot of the people who rely on Calpers to fund their retirements. That year former SEC commissioner Paul Atkins wrote in the Journal:

The California Public Employees’ Retirement System this month said no thank you to pension-fund activism. Government workers unseated Priya Mathur, the sitting Calpers president. She was defeated by Jason Perez, a police-union official who criticized Ms. Mathur’s focus on environmental, social and governance investing, or ESG. Mr. Perez emphasizes the agency’s fiduciary duty to maximize investor returns.

Calpers represents almost two million California public employees, retirees and families. Yet it mostly makes headlines for its activism, such as divestiture from the tobacco industry. “It’s been used more as a political-action committee than a retirement fund,” said Mr. Perez. “I think the public agency [employees] are just sick of the shenanigans.”…

Calpers’ disappointing decade is another reminder that taking care of retirees’ investments requires profits, not politics.

On Wall Street and in the private sector

U.S. banks are considering leaving the Glasgow Financial Alliance for Net Zero

On September 20, the Financial Times reported that several large U.S. banks and are considering leaving Glasgow Financial Alliance for Net Zero because they are increasingly uncomfortable with the legal risks posed by participating in the effort.

Wall Street banks including JPMorgan, Morgan Stanley and Bank of America have threatened to leave Mark Carney’s financial alliance to tackle climate change because they fear being sued over increasingly stringent decarbonisation commitments.

In tense meetings in recent months, some of the most significant members of the Glasgow Financial Alliance for Net Zero have said they feel blindsided by tougher UN climate criteria and are worried about the legal risks of participation, according to several people involved in internal discussions.

“I am close to taking us out of these global green commitments — I’m not going to allow third parties to create legal liabilities for us and our shareholders. It is immoral and irresponsible,” one senior executive at a US bank said. “What if we get it wrong, make a mistake or someone lies? Then the bank can be sued, that is an unacceptable risk.”…

European banks including Santander have also expressed misgivings.

The potential loss of some of the world’s biggest and most influential banks would be a serious blow for Carney’s Gfanz group, which was formed last year and took centre stage at the COP26 climate talks in Glasgow in November.

More than 450 finance companies accounting for $130tn of assets have joined Gfanz, which is co-led by Carney, a Canadian and former Bank of England governor, who is currently a Brookfield Asset Management executive.

The banks’ biggest concern is over strict targets on phasing out coal, oil and gas introduced over the summer by the UN’s Race to Zero campaign, a UN-led net zero standard-setting body that accredits pledges made by Carney’s alliance….

Of the 116 banks that have signed up to the Net Zero Banking Alliance (NZBA), the Gfanz banking subsidiary, none are from China or India, while Sovcombank is the only Russian lender. By comparison, Liechtenstein has three members.

Notable quotes

Strive shifts from energy to tech

Strive, the post-ESG asset management firm co-founded by entrepreneur and author Vivek Ramaswamy launched a new S&P 500 tracking fund recently and used the occasion to send shareholder letters to Disney and Apple, asking them to focus on excellence not politics. The letter to Apple included the following:

Strive Asset Management recently became a shareholder of Apple. On behalf of our clients, we write to deliver a simple message to your board: hiring should be based on merit – not race, sex, or politics. 

Apple is one of the world’s greatest companies, ceaselessly showcasing American innovation on the global stage. Your success is undoubtedly powered by your talented workforce. We admire your track record in repeatedly attracting the best and brightest minds to work at Apple. However, we are concerned that over the last year, Apple has faced severe pressure from its large institutional “shareholders” – including BlackRock, the world’s largest asset manager – to adopt value-destroying human resources policies that jeopardize Apple’s ability to hire top talent in the future. We believe these externally imposed hiring constraints create severe economic, legal, and reputational risks for Apple.

In particular, we are concerned by Apple’s recent decision to conduct a “racial equity audit” in response to a 2022 shareholder proposal that received support from BlackRock and certain other of your shareholders. We believe this decision jeopardizes Apple’s value by elevating divisive identity politics above its commitment to excellence, while also raising serious legal and commercial risks for the company.

Racial equity audits do not benefit the companies that conduct them. They are non-neutral evaluations designed to embarrass the companies who elect to conduct them, and there is no evidence to suggest that such audits increase shareholder value. Indeed, the 2022 shareholder proposal essentially admits as much: its proponents claimed that such an audit was required to determine “how [Apple] contributes to social and economic inequality” and to force Apple to “identify, remedy, and avoid adverse impacts on its stakeholders.” Color of Change—one of the activist groups pushing for a racial equity audit at Apple—explains that its mission is “to hold companies accountable for the ways they perpetuate white supremacy.” The purpose of advocacy groups such as Color of Change may be to agitate for social change, but the role of Apple’s board of directors is to serve its shareholders.