ESG Developments This Week
In the states
Montana governor announces ban on ESG considerations in state investments
The office of Montana Gov. Greg Gianforte (R) released the following statement on January 18 announcing that Montana has joined several other states in prohibiting non-financial considerations, including considerations related to ESG, in the state’s investments:
Governor Greg Gianforte and the Montana Board of Investments today announced the State of Montana has reaffirmed its commitment to maximizing returns on the over $26 billion in investments of the state’s financial assets, not advancing a political agenda through Environmental, Social, and Governance (ESG) investing.
“As the State of Montana invests its financial assets, our priority is and should always be maximizing returns for our shareholders – the people of Montana,” Governor Gianforte said. “On my watch, we won’t undermine taxpayers’ returns on investment in favor of the trend of activist, woke capitalism through ESG investing.”
Late last year, the Board of Investments revoked the ability of the state’s investment managers to vote the state’s proxies which align with ESG investment decisions.
“The Board’s fiduciary duty is to maximize returns independent of political agendas, social pressures or any other non-pecuniary factors,” said Dan Villa, Executive Director of the Board of Investments. “We have and will continue to grow Montana’s wealth without bias and based solely on what is in the best interest of the beneficiaries of the assets we invest.”
State attorneys general continue to oppose ESG
Twenty-one Republican state attorneys general—led by Utah Attorney General Sean Reyes (R)—on January 17 released a letter to proxy advisory firms warning that ESG investment considerations could violate state laws and contracts. Asset managers pay proxy advisory firms to make recommendations about how to vote on questions that appear in corporate proxy statements. Two companies—Institutional Shareholder Services (ISS) and Glass-Lewis—dominate the proxy advisory business. ESG critics regard both companies as left-leaning:
Twenty-one state attorneys general released a letter to proxy advisory firms today taking issue with their use of ESG criteria in advice to state investment vehicles. The letter was written by Utah attorney general Sean Reyes. It provides evidence of possible violations of fiduciary duty and says, “We seek written assurance that you will cease such violations and commit to following the law.”
Proxy advisory firms exist to tell investors how to vote their shares. They are especially important to large institutional investors, such as state pension funds, that own too many stocks to be able to keep track of every question presented to shareholders. Those large institutional investors also control enough shares to swing votes for publicly traded companies….
The attorneys general allege in the letter that by advocating criteria related to climate change and diversity, equity, and inclusion when advising state investment vehicles, ISS and Glass Lewis could be in violation of their contracts with state governments and the law.
On climate issues, the attorneys general say, “Rather than being based on a rational analysis of the effects that expected changes to government policy would have on any given company, your actions appear more like those of an activist forcing companies to comply with rules that governments will not otherwise institute.” This expresses a common criticism of ESG, namely that it is a way to circumvent the democratic process, which has not resulted in the implementation of the sweeping climate policies that environmentalists want.
They also allege a possible conflict of interest, considering that ISS and Glass Lewis — in addition to the advice they offer state investment vehicles — also offer services related to ESG investing. “The value of these services would be undermined if you were to admit in your advisory services that ESG factors are not material to a firm’s financial performance,” the attorneys general wrote. Insofar as climate issues are a material risk to investors, and there are some cases in which they are, companies are already required to disclose them, and proxy advisory firms would already take them into account in the absence of ESG criteria.
On diversity, equity, and inclusion, the attorneys general allege that ISS and Glass Lewis may be in violation of state anti-discrimination laws. “You have pledged to recommend votes against certain directors on boards that you view as having insufficient racial, ethnic, or sex-based diversity under arbitrary quotas that you have announced,” they wrote. They argued that the firms have not adequately considered the legality of their actions and have not demonstrated why such criteria would be relevant to economic performance, which, under the contracts they have with state governments, is supposed to be their goal.
BlackRock agrees to keep ESG out of Florida investments
In Florida, where Gov. Ron DeSantis (R) has opposed ESG investments in pension plans, BlackRock—the largest asset manager in the world and one of the companies states have pushed back against over ESG investing concerns—agreed to keep ESG practices out of its management of Florida state funds:
BlackRock has come to an agreement with the state of Florida after Governor Ron DeSantis (R) declared that asset managers overseeing some of the state’s $220 billion+ in pension funds cannot employ environmental, social and governance (ESG) investment strategies, according to Bloomberg.
DeSantis and other trustees of the state authority running Florida’s pensions formally changed the plans’ policies on Tuesday to say that decisions surrounding investments “must be based only on pecuniary factors” which do not take into account “social, political, or ideological interests.”
“To the extent that BlackRock has complied with the governor’s directives to abandon ESG metrics, we appreciate this and celebrate this win for Floridians,” said DeSantis press secretary Bryan Griffin.
The effort by DeSantis began in August, when he banned state pensions from investing in ESG strategies. In response, Florida’s State Board of Administration began updating contracts with investment managers.
“The SBA continuously evaluates all managers, and they are all held to the same exacting standards in delivering returns and performance,” reads a statement.
Besides BlackRock, the world’s biggest asset manager, dozens of other firms manage Florida’s pensions, including Morgan Stanley, Schroders Plc and Artisan Partners, according to filings.
BlackRock, which managed about $13 billion in Florida pension funds as of December, said it’s “committed to the SBA’s mandate of prioritizing financial performance consistent with their investment objectives,” according to a statement. -Bloomberg
The agreement between BlackRock and Florida also follows an announced move last year by state CFO Jimmy Patronis, who said he was pulling $2 billion in state funds out of the money manager – which he accused of using Florida’s pensions to fund a “social-engineering project.” He advised the SBA to remove the firm as one of its asset managers as well.
BlackRock has roughly $8 trillion in assets under management, $475 billion (6%) of which are dedicated to ESG strategies. Given that percentage, some critics have questioned whether any concession was made by BlackRock to the state of Florida or if the announcement was primarily a public relations maneuver.
On Wall Street and in the private sector
BlackRock CEO speaks at World Economic Forum meeting
Appearing at the World Economic Forum’s annual meeting at Davos last week, BlackRock CEO Larry Fink argued that the pushback against ESG (not ESG investing itself) created what he views as an inaccurate narrative surrounding the term and produced what he considers to be animosity and polarization:
“We are trying to address the misconceptions [of ESG investing]. It’s hard because it’s not business any more, they’re doing it in a personal way. And for the first time in my professional career, attacks are now personal. They’re trying to demonize the issues.”
That’s fund giant BlackRock Inc.’s BLK, 0.87% Chief Executive Larry Fink’s answer when asked this week at the glitzy Switzerland gathering of executives, economists and politicians about the ‘anti-woke’ pushback against Wall Streeters who see investment opportunity in fighting climate change.
Fink said the contrarian narrative around environmental, social and governance (ESG) investing has become ugly and is creating “huge polarization.” ESG can span issues like gender diversity on boards or executive compensation, but tends to be readily swapped for climate-focused and alternative-energy investing themes, especially as more companies are pressured to report fossil-fuel emissions or consider increasingly popular fuels like solar ICLN, 1.82% or hydrogen instead of oil CL00, -0.05% and gas.
Attention on the topic has also gained detractors who suggest any ESG focus dilutes a “neutral” fiduciary obligation that favors returns over other considerations by fund managers and other stakeholders.
“Let’s be clear, the narrative is ugly, the narrative is creating this huge polarization. If you really read the CEO letters that I’ve written in the past I talk about a transition to new forms of energy or addressing fresh demand from younger investors who care about social issues,” Fink said in an interview with Bloomberg TV at the World Economic Forum in Davos.
Fink famously dedicated a “materially different” 2020 annual letter to shareholders and executives on sustainable investments, which he called the ‘investment opportunity’ of his lifetime and one that will deliver better returns over time.
But this narrative path has not been without its pitfalls….
Fink, meanwhile, has also been called out by environmental groups for not dumping traditional energy fast enough.
“We are doing everything we can to change the narrative,” Fink told Bloomberg in the Davos interview, adding that he plans to write a letter to business leaders this quarter that will focus on the “concept of hope.”
“BlackRock is a firm that tries to sell hope because why would anybody put something into a 30-year obligation unless you believe something is better in 30 years?’”
Bank of America CEO argues in favor of ESG
Larry Fink was not the only ESG-advocating CEO to appear at Davos last week. Bank of America’s Brian Moynihan was also there and had much to say about his views on ESG and capitalism:
Bank of America Chief Executive Brian Moynihan said Wednesday that current efforts to produce a set of official global standards on ESG issues were vital to “align capitalism with what society wants from it.”
Asked by CNBC’s Karen Tso at the World Economic Forum in Davos whether stakeholder capitalism needed a reboot through the creation of common standards for corporate disclosures, Moynihan said he was converted to the idea after seeing hundreds of companies sign up to the U.N.’s Sustainable Development Goals in 2017, followed by ongoing debate over what concepts like sustainability actually mean, and accusations of greenwashing.
“Without that definition, without that convergence, what you had is everybody defined it their own way. Somebody would think this issue’s important or this way to talk about it is important,” he said….
In 2020, Moynihan — who is also chair of WEF’s International Business Council — and WEF founder and chair Klaus Schwab worked with the big four accountants to create a set of common stakeholder metrics for companies to follow.
He said it was now important to “go to the official side” and was supporting the new International Sustainability Standards Board set up by non-profit the IFRS….
Moynihan also said it was crucial that sustainability and ethical standards became official and global.
He said informal standards-setting meant companies could hide poor sustainability practices “further down the stream” of their supply chains or divest certain assets, or else claim they are too small to carry out checks.
But with standardized, cross-jurisdiction rules that are part of companies’ annual reports and audited, he continued, “then frankly, an investment manager, a consumer, society, others can sit there and say, here’s a line that is acceptable and you’re either above it or below it.”
“If you’re below it we shouldn’t do business with you, and if you’re above it, tell us how you’re making progress along these important things.”
“Which, at the end of the day, will align capitalism with what society wants from it and get us going faster.’”