ESG Developments This Week
In the states
Florida divests from BlackRock over its ESG policies
Last week, the state of Florida, at the direction of Governor Ron DeSantis (R) and State Chief Financial Officer (CFO) Jimmy Patronis, became the latest state to divest funds from BlackRock over its sustainability and ESG policies:
“Florida will replace BlackRock as the manager of $2bn in state Treasury funds, part of a spreading Republican backlash against sustainable investing.
The move comes after Florida governor Ron DeSantis, a potential Republican US presidential candidate in 2024, led a resolution to stop the state’s pension funds from considering environmental, social and governance principles to guide investment.
BlackRock, the world’s largest asset manager, has been outspoken about the need to consider climate change in investing decisions under chief executive Larry Fink.
Republican state leaders have argued that ESG investing incorporates unwarranted concerns about climate change and curtails exposure to oil and gas companies in a way that can hurt performance.
“Florida’s Treasury Division is divesting from BlackRock because they have openly stated they’ve got other goals than producing returns,” state chief financial officer Jimmy Patronis said on Thursday. “There’s no lack of companies who will invest on our behalf, so the Florida Treasury will be taking its business elsewhere.”
Florida will divest $1.4bn of long-term securities and $600mn in short-term funds from BlackRock, Patronis’s office said.
The assets are a tiny fraction of the $8tn that BlackRock managed at the end of the third quarter. Republican states had already pulled more than $1bn from BlackRock as of October. Florida is the first state to remove some of its longer-term investments from the manager over ESG concerns.
At least 19 Republican-leaning states including Florida have now taken action to restrict ESG factors in investing or targeted asset managers for potentially boycotting the energy sector, according to an analysis by law firm Ropes & Gray.”
State attorneys general file motion to oppose Vanguard utility company stock purchases
Last week, 13 Republican state attorneys general filed a motion asking the Federal Energy Regulatory Commission to hold a hearing on ESG-mutual-fund player Vanguard’s plans to purchase large numbers of shares in public utility stocks. The states said they were concerned that, as an ESG advocate, Vanguard might engage in environmental activism with its stakes in the utilities:
“A coalition of 13 Republican attorneys general filed a rare motion Monday, asking a top federal energy regulator to prevent a financial institution from purchasing shares of publicly listed utility companies.
The state officials, led by Utah Attorney General Sean Reyes, asked the Federal Energy Regulatory Commission (FERC), to hold a hearing examining whether Vanguard Group should be given blanket authorization to purchase large quantities of public utility stocks due to its support for environmental, social and governance (ESG) investing. ESG standards broadly promote investments in green energy over fossil fuels.
As it and other major financial institutions do every three years, in February, Vanguard asked FERC for the green light to own more than $10 million worth of public utility shares. Under the Federal Power Act, FERC is required to periodically review and approve or deny such applications.
“The Commission granted the 2019 Authorization based on assurances from Vanguard that it would refrain from investing ‘for the purpose of managing’ utility companies,” the state officials wrote in the filing Monday. “Vanguard also guaranteed that it would not seek to ‘exercise any control over the day-to-day management’ of utility companies nor take any action ‘affecting the prices at which power is transmitted or sold.’”
“Now, Vanguard’s own public commitments and other statements have at the very least created the appearance that Vanguard has breached its promises to the Commission by engaging in environmental activism and using its financial influence to manipulate the activities of the utility companies in its portfolio,” the filing continued.
The filing stated that the FERC should at least hold the requested hearing to examine the previous authorization it granted Vanguard in 2019….
In addition to Utah, Kentucky, Indiana, Alabama, Arkansas, Louisiana, Mississippi, Montana, Nebraska, Ohio, South Carolina, South Dakota and Texas also joined the motion. The filing noted that there are investor-owned utilities in each of the states represented and argued that if those companies were weakened, their residents would be harmed.”
On December 1, in a related piece, The Wall Street Journal carried an op-ed by Will Hild, the executive director of Consumers’ Research, who gave his opinion on why the states don’t trust Vanguard’s intentions. Consumers’ Research has been involved in opposition to ESG in recent years:
“Americans are paying sky-high electricity rates and companies like Vanguard are making the problem worse. This week my organization, Consumers’ Research, joined 13 state attorneys general in a complaint against Vanguard at the Federal Energy Regulatory Commission. With more than $7 trillion in assets under management, the Pennsylvania-based investment firm has publicly committed to pressuring utilities to lower their emissions. Vanguard appears to be not only putting America’s critical infrastructure at risk but violating its agreement only to control utility company shares passively. To protect U.S. consumers and safeguard national security, FERC should investigate the company’s conduct….
Vanguard isn’t shy…and it has made climate its top priority. In March 2021 the company joined a group of other asset managers in the Net Zero Asset Managers Initiative—a U.N.-linked organization dedicated to transforming the global economy to reach net-zero carbon emissions. Before joining the initiative, each member must commit to implementing a “stewardship and engagement policy” consistent with “achieving global net zero emissions by 2050.” Asset managers like Vanguard then use their clients’ assets—not their own—to “accelerate the transition.”
Translation: They pressure companies through meetings and board votes.
Committing to net zero isn’t an abstract goal. The Net Zero Asset Managers Initiative requires its members to prescribe specific emissions targets for industry sectors, especially utilities. The International Energy Agency’s net-zero road map envisions eliminating fossil fuels from electricity generation by 2050. That would require every American utility to remake its operations radically.
Under FERC rules, asset managers aren’t permitted to meddle in a utility’s operations. Vanguard is aware of this; that’s why the company promised FERC at its August 2019 authorization hearing it would be a passive investor in the utilities in which it holds shares. The commission granted authorization, and Vanguard’s investment has been anything but passive, actively pushing corporate managements to pursue net-zero targets and shutter coal and natural-gas electricity generation….
FERC should investigate Vanguard’s activities to determine exactly what the asset manager has been telling utilities.”
On Wall Street and in the private sector
Deutsche Bank and BNP downgrade ESG funds
Deutsche Bank AG and BNP Paribas SA have downgraded their ratings for several European ESG funds, joining others in the research and management business. The move is raising concerns about what ESG opponents describe as greenwashing:
“BNP said it was stripping Europe’s top ESG designation from $16 billion worth of funds, while DWS Group’s reclassification will hit eight funds holding about $265 million, after announcing $2.1 billion in downgrades last week. The industry has blamed unclear rules for the chaos, as investors start to voice their anger.
The DWS and BNP cuts are the latest in a string of ESG fund downgrades that have ensnared investing giants including BlackRock Inc. and Pacific Investment Management Co. Amundi SA revealed last week it will reclassify almost all its $46 billion in so-called Article 9 funds, as the EU’s highest ESG designation is known. In all cases, the decisions were triggered by fresh guidance from the EU Commission on how to interpret the bloc’s regulations.
The development has alarmed onlookers, with the head of Europe’s main retail investor organization now planning to meet with regulators and legislators to convey concerns that members are being exposed to greenwashing.
“We need to have much clearer guidance from the authorities to make sure we aren’t misled and we aren’t being sold greenwashed investment products,” Guillaume Prache, managing director of Better Finance, said in an interview.
BNP is downgrading 26 so-called Article 9 funds. Of those, 24 are index funds, it said in an email to Bloomberg on Friday. The majority of its actively managed Article 9 funds, equivalent to about $20 billion, will be unaffected, BNP said.
The current lack of clarity has the potential to damage the reputation of Europe’s ESG rulebook, the Sustainable Finance Disclosure Regulation, Bioy said.
“The credibility of SFDR and the whole asset management industry is at stake here,” she said. “We can’t ignore the fact that some investors have invested in these Article 9 funds thinking they were dark green strategies. Even if these strategies haven’t changed and the portfolios remain the same, the perception of the ‘greenness’ of these strategies will change.”
European pension managers are also voicing concerns.”
In the spotlight
ESG funds underperform other funds and charge higher fees, argues AIER fellow
On December 1, Law & Liberty published an essay critical of ESG by Samuel Gregg, the Distinguished Fellow in Political Economy at the American Institute for Economic Research and author of the recently released book “The Next American Economy: Nation, State, and Markets in an Uncertain World.” Among other things, Gregg said:
“Based on a large sampling of Morningstar-identified American ESG mutual funds from 2010 to 2018, Raghunandan and Rajgopal determined “that these funds hold portfolio firms with worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds managed by the same financial institutions in the same years.” As if that is not enough, Raghunandan and Rajgopal conclude that “ESG funds appear to underperform financially relative to other funds within the same asset manager and year, and to charge higher fees.” In short, not only have such funds failed to deliver on many of their ESG goals; they also cost more and provide less by way of financial return.
A similar picture of ineffectiveness emerges when we take a closer look at the composition of ESG funds. In his analysis of the makeup of ESG funds managed by some major investment houses, the Wall Street Journal’s Andy Kessler found that their composition differed only marginally from non-ESG-labeled funds. He discovered, for instance, that BlackRock’s ESG Aware MSCI USA EFT had “almost the same top holdings as its S&P 500 EFT.” Nevertheless, Kessler noted, the ESG-labelled fund cost 5 times more by way of fees. If this was the subtext to Elon Musk’s tweet proclaiming that ESG “is a scam,” he may have had a point.
Another complication involves the stability of the issues that preoccupy ESG investment vehicles. The areas covered by ESG are numerous and fluctuating. Once upon a time, the focus was on products like tobacco. Then climate change became popular, thereby making fossil-fuel industries a major target of ESG ire. More recently, ESG has embraced the universal prominence given to diversity, equity, and inclusiveness.
These ongoing shifts in emphases have generated substantial disparities and disagreement within and between ESG ratings providers about, among other things, what counts as ESG and what doesn’t; how to measure ESG compliance; and how much weight should be assigned to a particular ESG goal (e.g., protect the environment) vis-à-vis other ESG objectives (e.g., promote diversity). In a May 2022 Review of Finance article surveying these methodological and measurement issues, Florian Berg, Julian F. Kölbel, and Roberto Rigobon found that ESG scores across six of the most prominent ESG ratings providers correlated on average only by 54 percent. You don’t need a degree in statistics to recognize that such a low number indicates significant disagreements about which measures and goals really matter. In an earlier 2021 article, Berg, Kornelia Fabisik, and Zacharias Sautner presented evidence of unexplained and undocumented retrospective alterations to the data on which ESG scores were based. Data alterations are not unusual. Not explaining the reasons for the alteration, however, is.”