ESG Developments This Week

In the States

Republican midterm gains could strengthen state opposition to ESG according to Roll Call

Republicans flipped five state financial officer positions previously held by Democrats in Kansas, Iowa, Missouri, Nevada, and Wisconsin during the midterm elections. The partisan changes could strengthen opposition to ESG investing, according to a Roll Call report:

“Republicans picked up state financial officer positions during the midterm elections amid a campaign against environmental, social and governance investing.

Five positions — in Kansas, Iowa, Missouri, Nevada and Wisconsin — flipped from Democratic to Republican in races for state auditor, controller or treasurer. Of the 50 directly elected positions, Republicans won 29 and Democrats won 19, according to an analysis from Ballotpedia. Two races remain uncalled.

A handful of Republicans’ campaigns for state financial officers focused on ESG, echoing sentiments from GOP officials at statehouses across the country and in Congress who say ESG investing is harming capital markets and domestic energy production and reject the case made by Democrats, major investors and other proponents.

At stake is a suite of legislation and rules that would curb ESG as a material consideration, along with other financial factors, for investors. The proposals include policies for states’ pension funds to divest hundreds of millions of dollars from financial institutions that incorporate ESG — and especially climate — in their investment decisions.

At least 17 states are proposing rules that would nearly ban the use of ESG in such decisions. Several Republican state treasurers and other financial officers implied they would double down on such policies in the coming months.

“ESG funds only invest in companies based on their environmental and corporate policies, making returns on investment a secondary concern,” Republican Kansas state Rep. Steven C. Johnson, who beat Democratic incumbent Lynn Rogers in the state’s treasurer race this month, said on his campaign website. In his new role, Johnson will manage the state’s investments and pensions, including the $20 billion Kansas Public Employees Retirement System.

Other elected officials have already shown their opposition to ESG in other capacities. Republican Utah state Treasurer Marlo Oaks, who won reelection, this year joined the state’s congressional delegation to criticize S&P Global Inc.’s credit rating division for plans to supplement its analysis of states with a score on certain ESG indicators.”

BlackRock facing political pressure from state officials of both parties 

Writing at National Review Online last week, Andy Puzder, the former CEO of CKE Restaurants and a visiting fellow at The Heritage Foundation, argues that leading ESG asset management firm BlackRock is facing pressure from Republican states to deemphasize its ESG investing strategy and focus on investment performance. At the same time, Democratic states are pressuring the company to continue with its ESG investing strategy:

“The world’s largest asset manager, BlackRock Inc., has lodged itself securely between a blue-state rock and a red-state hard place because of its environmental, social, and governance (“ESG”) investment criteria.

While left-leaning states have long supported BlackRock’s ESG investing, conservative states increasingly object. In August, 19 red-state attorneys general sent BlackRock CEO Larry Fink a letter stating that BlackRock’s ESG investing violates their laws governing fiduciary duties. According to these AGs, investor returns must be a fiduciary’s sole focus, and BlackRock is sacrificing those returns to advance its “net-zero” carbon emissions agenda.

The AGs’ concerns are not unfounded. BlackRock is a net-zero zealot. Its “Path to Net Zero” website states that “the transition to a net zero world is the shared responsibility of every citizen, corporation, and government” and describes at length BlackRock’s commitment to that transition. But is that commitment really in BlackRock’s clients’ best financial interests?

As John Kerry, President Biden’s climate envoy, stated in a recent interview, some of BlackRock’s clients “want the best return they can get,” and “you don’t get that necessarily from climate” related investments. He’s right, of course. Fink’s own 2022 letter to CEOs conceded that “[w]e need to be honest about the fact that green products often come at a higher cost.” Thanks for the honesty, but you don’t need an accounting degree to know that high-cost/low-return “climate” policies will reduce a company’s profits — and its investors’ returns.

So, perhaps it’s no surprise that, since January of 2022, red-state treasurers in Missouri, South Carolina, Louisiana, Utah, Arkansas, and West Virginia have announced the divestment of over $3 billion in assets from BlackRock’s management because of its ESG and net-zero policies….

the blue-state reaction is already beginning. Concerned that BlackRock might moderate its net-zero stance to retain red-state clients following the AGs’ letter, 14 blue-state financial officers launched a website ironically criticizing red states for the negative financial consequences of “blacklisting financial firms that don’t agree with their political views” and failing to acknowledge that “climate change is real.”

Everybody knew this was a signal to BlackRock and other financial firms not to back away from ESG and net zero. A week later, New York City comptroller Brad Lander went and said the quiet part out loud. He wrote to Fink, concerned that BlackRock might moderate its commitment to net zero to the detriment of both New York City pensions (which fall under his purview) and “our planet” (which does not). Lander wants BlackRock to make its net-zero commitment clear “across its entire portfolio,” dedicate itself “to keeping fossil fuel reserves in the ground,” and work “to end lending and insurance for new fossil fuel supply projects.”

Lander also noted, with little subtlety, that he “will be prudently reassessing” the city’s business relationship with BlackRock, “through the lens of our climate responsibilities.” Talk about blacklisting financial firms that don’t agree with your political views! BlackRock manages approximately $43 billion for New York City.

And that’s why BlackRock is between a rock and a hard place.”

On Wall Street and in the private sector 

ESG engagement in practice

One of the distinctions between ESG and its social investing predecessors is that ESG is an engagement-based strategy, meaning its goal is not to divest from poor-performing companies but to leverage shareholder investments to compel poor performers to improve. While shareholder resolutions and contentious proxy votes garner much of the attention in corporate governance, behind-the-scenes negotiations are often where the most significant changes in corporate behavior are made. Reuters notes one recent example of this leveraging tactic from Costco:

“Costco Wholesale Corp (COST.O) will set new targets by next year to cut its greenhouse gas emissions, according to an activist investment firm that said the retailer had been a laggard on climate matters.

Rivals including Walmart Inc (WMT.N) and CVS Corp (CVS.N) already have targets to cut their own emissions and those from their supply chains and customer bases, or have plans to set such goals.

Costco’s new approach “shows that the company is starting to treat climate change with the gravity that the issue – and shareholders – demand,” said Leslie Samuelrich, president of Green Century Capital Management, which had pressed for the change and described the company’s new position in a statement.

“Costco is no longer a laggard among its peers,” she added….

Green Century withdrew a similar resolution meant for Costco’s next shareholder meeting in exchange for the forthcoming targets, yet to be described in detail, a representative for the Boston-based firm said….

Green Century said under the deal Costco will update those targets by next month and will set further targets in the coming year to bring down its Scope 3 emissions including those from goods it acquires and goods it sells to consumers.”

Canadian bank will soon track personal ESG metrics for individuals

For years, corporations have been able to negotiate credit terms using ESG data and targets as leverage. According to a report from Summit News, similar negotiating tactics will soon be available to individuals for personal ESG behaviors. Vancity, a Canadian bank, will soon track the carbon emissions of individual customers based on purchases made with personal credit cards:

“A bank in Canada has become the first in the country to launch a credit card that tracks a customer’s carbon emissions, amid concerns that such a scheme could one day be used to restrict purchases.

In an effort by the credit union to display its commitment to ‘climate action’, Vancity will offer a credit card that links purchases to carbon emissions, allowing customers to compare their monthly carbon footprint to the national average.

The bank will also advise customers on how to limit their carbon footprint.

“We know many Vancity members are looking for ways to reduce the impact they have on the environment, particularly when it comes to the emissions that cause climate change,” said Jonathan Fowlie, Vancity’s Chief External Relations Officer.

“As a member-owned financial cooperative, we believe it is our job to do everything we can to help, especially when it comes to the decisions people make with their money. This tool will equip Vancity Visa credit cardholders with valuable information on their purchases and enable them to connect their daily spending decisions to the change they want to see in the world.”

According to research carried out by Visa, more than 50% of Canadians are interested in monitoring their carbon footprint.”

In the spotlight

FTX Founder Sam Bankman-Fried criticizes ESG

Recently, FTX Founder Sam Bankman-Fried discussed ethics, investing, and ESG in a long Twitter thread. The editors of The Wall Street Journal turned SBF’s comments into an editorial:

“Crypto dark knight Sam Bankman-Fried may have deceived investors, customers and various journalists and politicians. But now the FTX founder is at least telling the truth about a few things. Lo, he says that environmental, social and governance (ESG) investing is a fraud, and so was his progressive public posturing….

Mr. Bankman-Fried virtue-signaled by committing to make FTX “carbon neutral” and donating generously to fashionable progressive causes such as a foundation working to provide solar energy in the Amazon River basin. “We’re giving millions each year to launch sustainability related initiatives,” he said in an April Forbes magazine interview with—you can’t make this up—Brazilian super-model Gisele Bündchen.

Meanwhile, he was leveraging FTX customer funds to make risky, ill-timed bets. “Problems were brewing. Larger than I realized,” he tweeted. “In the future, I’m going to care less about the dumb, contentless, ‘good actor’ framework,” he added. “What matters is what you do—is *actually* doing good or bad, not just *talking* about doing good or *using ESG language*.”…

“ESG has been perverted beyond recognition,” Mr. Bankman-Fried confessed in an interview this week with Vox in which he also acknowledged that his advocacy for strong crypto regulations was “just PR.”

He said he feels “bad for those who get” harmed by “this dumb game we woke westerners play where we say all the right shiboleths [sic] and so everyone likes us.” Ah, yes, the poor saps who invest in companies because they claim to be sustainable.”