ESG Developments This Week
In the states
Kentucky threatens to divest from 11 banks over ESG policies
On January 2, Kentucky State Treasurer Allison Ball (R) issued a statement notifying 11 banks that their ESG policies amounted to energy boycotts that harmed the state’s economy according to definitions passed into law last spring. The statement says the banks have 90 days to stop what Kentucky argues are energy company boycotts or face divestment from the state:
“Kentucky issued an official notice Monday morning listing 11 banks it accused of boycotting energy companies and which would be subject to divestment within months.
Kentucky State Treasurer Allison Ball announced that, after a review of their energy and climate policies, the listed banks — which included BlackRock, the largest asset manager in the world, JPMorgan Chase, Citigroup and HSBC among others — were found to be in an active boycott of fossil fuel companies. The Kentucky state government could begin divesting from the firms if they didn’t reverse their boycotts, according to the notice obtained first by FOX Business.
“Kentucky is a coal, oil, and gas producing state,” Ball told FOX Business. “Our energy sector helps power America. Kentucky refuses to fund the ideological boycotts of our own fossil fuel industry with the hard-earned taxes and pensions of Kentucky citizens.”
Kentucky’s Republican-led legislature passed a bill requiring the state government to identify and divest from banks that are determined to be engaging in a boycott of energy and fossil fuel companies. Democratic Gov. Andy Beshear signed the bill, which was endorsed by both the Kentucky Oil and Gas Association and Kentucky Coal Association, into law on April 8, 2022.
The law directs the state treasurer’s office to publish an annual list of financial firms engaged in energy boycotts. State agencies then must notify the office if they own direct or indirect holdings of the listed companies and send a notice to the relevant companies within 30 days. If the companies don’t halt their boycotts within 90 days of receiving such notice, the state government could divest from their holdings.
“When companies boycott fossil fuels, they intentionally choke off the lifeblood of capital to Kentucky’s signature industries,” Ball said in a statement Monday. “Traditional energy sources fuel our Kentucky economy, provide much needed jobs, and warm our homes. Kentucky must not allow our signature industries to be irreparably damaged based upon the ideological whims of a select few.”…
Arizona, Arkansas, Florida, Louisiana, Missouri, South Carolina, Utah and West Virginia have already announced they will divest hundreds of millions of dollars from banks engaging in energy boycotts. Texas and Oklahoma have taken legislative steps akin to Kentucky’s that will likely soon lead to divestment.”
West Virginia Attorney General threatens to sue SEC if regulator enacts ESG reporting requirements
In 2022, West Virginia Attorney General Patrick Morrisey (R) won the West Virginia v EPA court case, limiting the Environmental Protection Agency’s power to regulate greenhouse gases. Now, Morrisey says he will sue the Securities and Exchange Commission if the regulator enacts rules requiring businesses to report on greenhouse gas emissions or other ESG metrics:
“West Virginia Attorney General Patrick Morrisey is itching for a fight on ESG.
Morrisey has made a name for himself helping net his state hundreds of millions of dollars from cases over the opioid crisis and taking the Environmental Protection Agency all the way to the Supreme Court—and winning.
The Republican also has threatened to sue the Securities and Exchange Commission, if it requires companies to report on greenhouse gas emissions and other environmental, social and governance matters. Morrisey has tried to deflect what he sees as attacks on the state’s coal industry, joining former Vice President Mike Pence, Florida Gov. Ron DeSantis and other Republicans who’ve made ESG investing a frequent target and stoked Democratic ire….
Morrisey and other Republican attorneys general sued Obama’s EPA over its efforts to curb power plants’ greenhouse gas emissions in 2015. The Supreme Court eventually reviewed the power of the agency to regulate emissions, moving to limit agencies’ rulemaking authority in West Virginia v. EPA last year….
Morrisey and other Republicans have cited the Supreme Court ruling in their push to keep the SEC from adopting rules that would require companies to report their greenhouse gas emissions and make other disclosures about how climate change affects their businesses.
He led several Republican attorneys general in writing a July 2022 letter that told the SEC that West Virginia v. EPA shows why the agency’s proposed rules are problematic. The SEC could “save everyone years of strife” if the agency scrapped its climate disclosure proposal, the attorneys general said.”
Texas state senators hold hearings for two of the three biggest ESG asset managers
The Texas Senate recently held hearings on ESG, fossil fuel boycotts, and other related investment and banking matters. The hearings featured, among others, representatives from BlackRock and State Street, two of the three largest passive asset management firms. Kevin Stocklin, a writer at the Epoch Times, penned a news analysis arguing that the memberships of both asset managers in organizations like the Net Zero Asset Managers Initiative require them to use their shares to compel companies towards environmental goals, even though representatives from both companies said in the hearings that they did not participate in such activities:
“Texas state senators struggled for more than six hours last month to get straight answers from BlackRock and State Street, two of the world’s largest asset managers, regarding what the Wall Street firms are doing to compel companies whose shares they own to get in line with the environmental, social and governance (ESG) movement.
Despite having joined global ESG clubs such as Climate Action 100+ and the Net Zero Asset Managers (NZAM) initiative and signed pledges to leverage their voting power as the largest shareholders in 90 percent of S&P 500 companies to “reach net-zero emissions by 2050 or sooner across all assets under management,” the asset managers testified that, in reality, they’re doing no such thing.
When asked by state Sen. Bryan Hughes, chairman of the state Senate Committee on State Affairs, to clarify BlackRock’s pledge to Climate Action 100+ “to secure commitments from companies to reduce greenhouse gas emissions consistent with the Paris Agreement,” Dalia Blass, BlackRock’s head of external affairs, responded that the firm merely talks to companies whose shares they own to learn about their “material risks and opportunities.”
“We participate in Climate Action 100 to engage in dialogue with other participants, market participants, governments so that we understand issues that are relevant to our clients,” said Blass, who recently joined BlackRock from the Biden administration, where she worked at the Securities and Exchange Commission (SEC).
The motto of Climate Action 100+ is “Global investors driving business transition.”…
According to clubs such as Climate Action 100+ and GFANZ, the role of asset managers who join these clubs is to compel companies whose shares they own into compliance….
The senators asked how BlackRock would respond to a letter from New York City Comptroller Brad Lander asserting that BlackRock failed to honor its commitments to NZAM. Lander’s letter was written in response to a letter that BlackRock wrote to 19 state attorneys general in red states, who accused BlackRock of putting ideology above its fiduciary duty to investors. In the letter, BlackRock rejected that it was using its power as the world’s largest asset manager to compel corporations into compliance with net-zero goals.
Lander took the opposite tack from red state AGs.
“BlackRock now abdicates responsibility for driving net-zero alignment in its own portfolio by saying that it does not ask companies to set specific emissions targets, and that its participation in NZAM does not mean BlackRock is setting or meeting any net-zero targets,” he wrote.
Lander said he would be “reassessing our business relationships with all of our asset managers, including BlackRock, through the lens of our climate responsibilities.”
Blass declined to answer questions about what her firm would do in light of New York’s action.”
On Wall Street and in the private sector
ESG and pro-China investment strategies are at odds, according to Financial Times article
Last week, The Financial Times published a piece echoing what some opponents of ESG have argued: ESG, in their view, is not compatible with investment in Chinese companies, and investors who say they are pro-ESG and pro-China-investment are serving two ends at odds with each other:
“Foreign investors in Chinese equities have a problem. China’s growth offers the hope of big returns over the coming decade, but on environmental, social and governance ratings, its companies rank lower not only than western nations, but also below most emerging markets.
The combination of the world’s biggest consumer market with fast-growing technology and services sectors has attracted global investors willing to look the other way on censorship, surveillance, environmental, labour and other human rights abuses.
However, there are signs an ESG reckoning is looming for Chinese companies and those investing in them. ESG ratings are increasingly important for international investors, but the sustainability rules and standards common in western jurisdictions are at odds with realities on the ground in China.
In a move signalling the challenge ahead, Sustainalytics, a sustainable rating agency owned by research house Morningstar, in October downgraded three Chinese tech darlings on its watchlist — Tencent, Weibo and Baidu — to the category of “non-compliant with UN principles”….
Liqian Ren, who manages China investments at WisdomTree Asset Management, a US-based fund, said she was among those obliged to drop the companies, a move that resulted in a turnover of more than a quarter of its main China index.
“[If the companies] become non-compliant, by our process we have to sell — unless we just don’t claim this fund as ESG,” she said. “It’s a big part of the portfolio. But on the other hand, this is indeed an area that people do care about . . . and the whole point of ESG is people taking a stance on some issues.”
Such experiences may become more common for investors in an increasingly authoritarian China as Xi Jinping, the country’s most powerful leader since Mao Zedong, embarks on an unprecedented third term in power. Some have already been debating whether China is too risky given the unpredictability of Xi’s administration in recent years….
Hong Kong Watch, a UK-based group that researches investment and human rights issues in China, said in a report in November that many of the biggest asset management, state pension and sovereign wealth funds were passively invested in companies allegedly involved in the repression of Uyghur Muslims in north-west China’s Xinjiang region.
The report found three major stock indices provided by index publisher MSCI include at least 13 companies that have allegedly used forced labour or have profited from China’s construction of internment camps and surveillance apparatus in Xinjiang.
MSCI said the only filters for inclusion in its global indices were “accessibility and investability” and that it had other ESG-focused indices.
Foxconn, which makes iPhones and other devices for Apple, was among the companies Hong Kong Watch said allegedly used Uyghur workers obtained through state-sponsored transfers….
Chinese companies are also less likely to engage on ESG issues than western counterparts, researchers and investors said. About 60 per cent of the companies Sustainalytics rates respond to its queries, but in China, the number is “quite a bit lower”, MacMahon said.”
In the spotlight
ESG at Wharton
On January 5, RealClear Investigations published two separate but related pieces by Ben Weingarten on the University of Pennsylvania’s Wharton School of Business and its decision to offer new majors in ESG and DEI (Diversity, Equity, and Inclusion). According to Weingarten, the decision has stirred up opposition, especially among Wharton alumni:
“Skeptics, including former faculty and alumni of the school, many of whom spoke on condition of anonymity for fear of recriminations, fear the MBA program could serve as progressivism in business sheepskin clothing. One recent graduate warned against a one-sided presentation of left-wing politics used “to justify increasing the power of the state in markets and firms while demonizing capitalism.”
Observers suggested the school’s embrace of ESG could not only presage similar curriculum changes at business schools nationwide, but also change the character of the corporate C-suites that the school’s graduates tend to populate. The thinking is that ESG-focused students will matriculate to ESG-focused executive positions in an already socially conscious corporate America, creating a feedback loop that could have an indelible impact not just on U.S.-style capitalism, but on America itself.
“By creating a major [in ESG] at Wharton you are helping to legitimize it,” said another graduate….
At least 9% of the 877 students in Wharton’s 2024 class will major in ESGB based on the number of currently declared majors in Business, Energy, Environment and Sustainability, which will become a specialization under the ESGB major when formally introduced next fall, according to figures provided by Henisz.
Some required classes will include – on the “environmental” side of ESG – “Climate and Financial Markets” and “The Business & Governance of Water.” In the “social” and “governance” realms, courses include “Social Impact and Responsibility” and “Reforming Mass Incarceration and the Role of Business.””