Federal opposition to ESG in 2023

ESG Developments This Week

In Washington, D.C.

Congress makes plans to lead federal opposition to ESG in 2023

From state treasurers divesting pension and operating funds from BlackRock and other ESG providers to state attorneys general investigating the same providers over the impact of ESG on assorted policy matters, state officials led the pushback against environmental, social, and corporate governance investing in 2022.

While the states are expected to continue pushing back against ESG in the new year, the shift in control of the House of Representatives has Republican elected officials making plans to increase their visibility and activity opposing ESG at the federal level as well:

Republicans are planning to use their control of the House of Representatives in 2023 to intensify attacks on companies that account for climate-related risks when they’re making investment decisions….

Republicans say they’re fighting a coordinated effort by big investors to impose progressive policies that threaten capitalism itself.

Rep. Andy Barr, a Republican from Kentucky and a senior member of the House Financial Services Committee, says ESG investing is aimed at “politicizing capital allocation and actively discriminating against fossil energy.”

ESG is “a cancer in our capital markets that must be eradicated,” Barr said in a statement to NPR….

A December hearing that Texas lawmakers held on ESG investing could be a preview of things to come in Congress. Texas lawmakers said the practice of analyzing climate risks to make investment decisions is threatening fossil fuel companies in the state and the entire American economy.

Under questioning in Texas, Dalia Blass, BlackRock’s head of external affairs, said the firm considers ESG issues that pose financial risks and opportunities for clients in order to deliver “the best risk-adjusted returns we can for them.”…

Rep. Patrick McHenry, a Republican from North Carolina and the incoming chairman of the House Financial Services Committee, said in a statement to NPR that GOP lawmakers will “conduct appropriate oversight of activist regulators and market participants who have an outsized impact.”

On Wall Street and in the private sector

ESG funds underperformed broader markets in 2022

Equities markets had a rough 2022, but ESG investments had it even worse, generally underperforming the broader markets by a significant margin:

Funds linked to environmental, social and governance principles are by definition supposed to minimize risks tied to those three factors. In 2022, the approach did little to help protect investors from the brutal slide in the financial markets.

The 10 largest ESG funds by assets have all posted double-digit losses, with eight of them falling even more than the S&P 500’s 14.8% decline. The laggards include BlackRock Inc.’s $20.7 billion iShares ESG Aware MSCI USA exchange-traded fund (ESGU) and Vanguard Group’s $5.9 billion ESG US Stock ETF (ESGV).

The $6 billion Brown Advisory Sustainable Growth Fund (BAFWX) was the worst performer of the bunch, having slumped 28.1% this year as of the close of business on Dec. 5….

The performance of the 10 largest funds compares with the average 12% decline of ESG-labeled stock funds with more than $500 million of assets so far in 2022, according to data compiled by Bloomberg.

Despite the losses, a paper released this month by the National Bureau of Economic Research said that investors are willing to be charged “higher fees for ESG-oriented index funds in exchange for their financial and non-financial benefits.”

Rupert Darwall of the RealClear Foundation argues that this underperformance is the natural progression of the ESG investment story. As a result, Darwall says ESG as an investment strategy is losing or has lost much of its credibility:

The year 2022 brings an end to an era of illusions: a year that saw the end of the post–Cold War era and the return of geopolitics; the first energy crisis of the enforced energy transition to net zero; and the year that brought environmental, social, and governance (ESG) investing down to earth with a thump—for the year to date, BlackRock’s ESG Screened S&P 500 ETF lost 22.2% of its value, and the S&P 500 Energy Sector Index rose 54.0%. The three are linked. By restricting investment in production of oil and gas by Western producers, ESG increases the market power of non-Western producers, thereby enabling Putin’s weaponization of energy supplies. Net zero—the holy grail of ESG—has turned out to be Russia’s most potent ally.

It wasn’t only a bad year for ESG on the stock market. Earlier this month, Vanguard announced that it was quitting Glasgow Financial Alliance for Net Zero (NZAM), set up by former governor of the Bank of England Mark Carney a little over a year ago. “We have decided to withdraw from NZAM so that we can provide the clarity our investors desire about the role of index funds and about how we think about material risks, including climate-related risks,” the world’s second-largest asset manager said. 

Two months ago, Alex Edmans, coauthor of the latest edition of the standard textbook on the principles of corporate finance and professor of finance at the London Business School, published a paper titled “The End of ESG”—without a question mark. Edmans criticizes what has become the primary justification for ESG: the claim that business can generate higher returns for investors by tackling climate change. Since governments are democratically elected by a country’s citizens, they are best placed to address externalities, whereas investors disproportionately represent the elites. “If ESG is pursued for its externalities, companies and investors should be very clear that it may be at the expense of value,” Edmans says.

October also saw the publication of Terrence Keeley’s Sustainable, where the former BlackRock senior executive penned what amounts to a requiem for ESG. Rather than “doing well by doing good,” the logic of Keeley’s case, as I reviewed for RealClear Books, is that investors in conventional ESG investment products are likely to end up not doing very well and leave investors feeling good, not doing good….

According to ESG doctrine, there are two types of climate financial risk—physical risk and transition risk—and it’s straightforward to demonstrate that both are spurious….

Although the disintegration of ESG as an investment strategy became unmistakable in 2022, its existence as a political doctrine will continue until it is challenged and defeated politically.

The largest bank in Europe is doubling down on net-zero commitments

HSBC, the Britain-based largest bank (by assets) in Europe, announced recently that it is doubling down on its net-zero commitments, promising to stop funding oil and gas projects and to demand greater disclosure from its existing energy clients:

HSBC (HSBA.L) will stop funding new oil and gas fields and expect more information from energy clients over their plans to cut carbon emissions, the banking giant said on Wednesday, as part of a wider update of its sector policy.

Activist groups that have been critical of HSBC in recent years mostly hailed the move by one of the biggest lenders to energy companies in the world as a keenly awaited update that will drive companies towards a cleaner future.

“HSBC’s announcement sets a new minimum level of ambition for all banks committed to net-zero,” said Jeanne Martin, a campaigner at Share Action.

HSBC is among the biggest banks to confirm it would not support oil and gas projects that received final approval after the end of 2021, a move the International Energy Agency has said is needed for the world to reach net-zero emissions by 2050….

HSBC said it would continue to finance energy companies at the corporate level to help them overhaul their businesses and drive development of cleaner energy sources, and would assess their strategic plans annually.

Covering everything from biomass projects to hydrogen, nuclear and thermal coal, the policy was aimed at driving progress across regions with different energy systems, Celine Herweijer, HSBC’s Chief Sustainability Officer, told Reuters….

Also on Wednesday, Barclays (BARC.L) said it had increased its sustainable and transition finance target to $1 trillion by 2030 and would pump more of its own money into energy startups.

In the spotlight

How clean is clean energy?

Cobalt is an indispensable component of the batteries that power electric vehicles. And its extraction and production, some have argued, is not clean, as Siddharth Kara, the author of Cobalt Red: How The Blood of The Congo Powers Our Lives, recently told podcaster Joe Rogan:

A Harvard visiting professor and modern slavery activist exposed the “appalling” cobalt mining industry in the Congo on a recent episode of “The Joe Rogan Experience” that went viral. The video has already racked up over 1 million views….

Kara told Rogan that the level of “suffering” of the Congolese people working in cobalt mines was astounding. 

When asked by Rogan if there was any cobalt mine in the Congo that did not rely on “child labor” or “slavery,” the Harvard visiting professor told him there were none. 

“I’ve never seen one and I’ve been to almost all the major industrial cobalt mines” in the country, Kara said. 

One reason for that is that the demand for cobalt is exceptionally high: “Cobalt is in every single lithium, rechargeable battery manufactured in the world today,” he explained.

As a result, it’s difficult to think of a piece of technology that does not rely on cobalt to function, Kara said. “Every smartphone, every tablet, every laptop and crucially, every electric vehicle” needs the mineral.

“We can’t function on a day-to-day basis without cobalt, and three-fourths of the supply is coming out of the Congo,” he added. “And it’s being mined in appalling, heart-wrenching, dangerous conditions.” 

The Biden administration recently entered into an agreement with the Democratic Republic of the Congo and Zambia to bolster the green energy supply chain, despite the DRC’s documented issues with child labor. 

Cobalt initially “took off because it was used in lithium-ion batteries to maximize their charge and stability,” Kara explained. “And it just so happened that the Congo is sitting on more cobalt than the rest of the planet combined,” he added. 

As a result, the Congo, a country of roughly 90 million people, became the center of a geopolitical conflict over valuable minerals. “Before anyone knew what was happening, [the] Chinese government [and] Chinese mining companies took control of almost all the big mines and the local population has been displaced,” Kara said. Subsequently, the Congolese are “under duress.”