ESG developments this week

In Washington, D.C.

Is the SEC making its move? 

On May 14, FoxBusiness’s Charles Gasparino reported that the new SEC chairman, Gary Gensler, has asked his staff to begin investigating whether corporations are making proper ESG disclosures and, if they are not, to charge them with fraud. Gasparino wrote:

“Wall Street’s top cop Gary Gensler wants to charge companies who aren’t woke enough with securities fraud.

FOX Business has learned that the Securities and Exchange Commission is launching a series of inquiries into whether corporations make proper disclosures involving so-called Environment, Social, Governance issues, known by the short-hand ESG. 

The purpose of the crackdown, initiated at the behest of Gensler, who became SEC chairman last month, is to prod corporate America to adopt policies that improve diversity, and other non-financial issues such as environmental concerns, securities lawyers who represent potential targets tell FOX Business.

These lawyers, who spoke on the condition of anonymity, said the SEC will also look at such issues as “conflict minerals,” or whether companies import raw materials from countries that use the money to finance war and adequately disclose the matter in corporate reports. 

Another area of concern includes whether companies disclose if so-called forced labor is used anywhere in their global supply chains, these lawyers add. The SEC will also be monitoring the racial diversity of corporate boards, and whether companies alert investors about fully meeting environmental standards, these lawyers say.”

Gasparino concluded his report, noting that “It’s unclear if any of the inquiries by the SEC will result in enforcement actions involving civil securities fraud, which are usually settled by targets without admitting or denying wrongdoing.”

In the States

State treasurers for ESG

A group of state treasurers—including those from Massachusetts, Rhode Island, Illinois, and California—will soon be sending a statement to a variety of investment-related constituencies, demanding that they treat climate change as a vital consideration in investment decisions. According to a report by Responsible Investor, these state treasurers argue that, in their view, assessment of and accounting for climate risk will be vital to maintaining healthy investment profiles:

“A group 16 of US State Treasurers managing more than $1.2trn of assets combined will be sending a statement on the urgency of dealing with climate risk to major investment firms, companies, investment consultants and fellow US State Treasurers. 

Speaking to RI, Deborah Goldberg, Massachusetts State Treasurer and a signatory to the statement, said: “It is the role of state treasurers to be forward thinking in terms of the long term impact of the health of their pension funds. However it’s not enough. You’re not going to impact climate risk by individual states setting standards. This needs to be universal.”

The statement, signed by the likes of California State Treasurer Fiona Ma and Rhode Island General Treasurer Seth Magaziner, says climate change will impose systemic, undiversifiable, portfolio-wide risks to long-term and institutional investors and calls for financial institutions to measure, disclose and eliminate their Scope 1,2 and 3 by 2050. 

It also calls on federal regulators to identify climate change as a systemic risk and stress test organisations. It urges the US Securities and Exchange Commission to mandate climate and ESG risk disclosure and asks the US Department of Labor (DOL) to reverse proxy voting rules under the Employee Retirement Income Security Act (ERISA) that undermine ESG integration. The DOL will not enforce the latter rules until the publication of further guidance, but they have not been formally dropped.”

On Wall Street and in the private sector

BlackRock makes personnel moves

BlackRock—the world’s largest asset management firm—recently made several significant ESG-related personnel moves. On May 7, Business Insider reported on the moves:

“BlackRock is continuing to double down on sustainability as it expands its environmental, social, and corporate governance-centric (ESG) leadership.

The world’s largest money manager has hired a climate scientist from the World Wildlife Fund into a top sustainability research position and appointed a new COO for its sustainability-focused division, according to a memo sent to all employees Thursday seen by Insider.

BlackRock Vice Chairman Philipp Hildebrand, who also chairs BlackRock’s sustainability initiatives, and Paul Bodnar, the firm’s recently appointed global head of sustainable investing, said in the memo that Chris Weber has been named as head of climate and sustainability research.

Weber was most recently the global climate and energy lead scientist at conservation organization World Wildlife Fund, the firm said in the memo Insider viewed. He will report to Bodnar in his newly created role and will start later this month….

Beatriz Da Cunha, a longtime BlackRock leader, was named BlackRock Sustainable Investing’s (BSI) first chief operating officer. Her mandate will be to scale the sustainable investing platform. She has been with the firm for 15 years, and has worked on BSI’s ESG integration team, according to the memo. 

The firm also created two new roles to boost the BSI unit in Asia.”

Fossil fuel analyst sees ESG bubble burst

On May 7, Oilprice.com published a piece by Alex Kimani, identified as a veteran finance writer, celebrating what he believes is the end of alternative energy stocks’ domination of the market. In a piece, titled “The ESG Bubble has Finally Burst,” Kimani wrote:

“Back in January, we warned that the green energy sector was in danger of overheating after massive runups by clean energy stocks in 2020. The momentum remained strong early in the year after Joe Biden ascended into the Oval Office in hopes that his ambitious clean energy plan would be a tailwind for investors in the so-called sustainable or ESG funds.

It was not long, however, before cracks began to appear in the clean energy bull camp.

After emerging as the hottest corner in the clean energy universe in 2020, solar stocks began to let off steam in January, with leading solar names such as First Solar Inc. (NASDAQ:FSLR), SolarEdge Technologies (NASDAQ:SEDG), Enphase Energy Inc. (NASDAQ:ENPH), SunPower Corp. (NASDAQ:SPWR), and Canadian Solar Inc. (NASDAQ:CSIQ) selling off in double-digits.

And now everything has finally come unstuck.

Clean energy has so far been the worst-performing sector, with investors yanking cash from the sector at the fastest pace in a year….

But the biggest reason why clean energy stocks are selling off is simple: They are too expensive.

“As money rotates away from those emerging growth themes and into the more economically sensitive areas of the market, clean tech has become a source of funds,” Dan Russo, portfolio manager at Potomac Fund Management, has told Bloomberg.

With their heavy-tech exposures, clean-energy funds could come under even more pressure.

Last week, JPMorgan Chase & Co. strategist Marko Kolanovic warned that big allocations into growth and ESG strategies may leave money managers vulnerable to inflation, and many might be forced to shift from low-volatility plays to value stocks….”

In the spotlight

RealClear Foundation releases report critical of ESG

On May 13, RealClear Foundation released a report by Rupert Darwall, a senior fellow at the Foundation, in which he argued that ESG, in his view, is deceptive in its promises, dangerous in its implementation, and distracting in the way in which it removes large, societal problems from governments’ agendas and attempts to solve them with a mechanism poorly suited to the task. In his report, “Capitalism, Socialism and ESG,” Darwall argues the following:

 “– In contrast to the older ethical investment movement, which accepted that morally constrained investment strategies incur costs, ESG proponents claim that investors following ESG precepts earn higher risk-adjusted returns because companies with high ESG scores are lower-risk. Thus, their stock price will outperform, whereas those firms with low ESG scores are higher-risk, leading them to underperform.

— This supposition conflicts with finance theory. Once lower risk is incorporated into a higher stock price, the stock will be more highly valued, but investors will have to be satisfied with lower expected returns. Unsurprisingly, claims of ESG outperformance are contradicted by studies.

— Claims that ESG-favored stocks outperformed during the Covid-19 market meltdown disappear once other determinants of stock performance are controlled for. ESG factors were negatively associated with stock performance during the market recovery phase in the second quarter of 2020.

— The corollary of the ESG thesis—that low-ESG-rated “sin stocks” are condemned to underperform the stock market—is decisively refuted by the data. When institutional investors “went underweight” by selling down their holdings in tobacco stocks, it made them cheaper for other investors to buy and make money, especially when they subsequently outperformed the market.

— The weaponization of finance by billionaire climate activists, foundations, and NGOs threatens to end capitalism as we know it by degrading its ability to function as an economic system that generates higher living standards. This usurpation of the political prerogatives of democratic government invites a populist backlash.”

Notable quotes

“When fund managers like BlackRock say that they “anticipate more engagement and voting” on whether companies are addressing issues such as climate change, keep in mind that the economic burden of that agenda can fall on ordinary folks who want to enjoy a comfortable retirement. If ESG investing truly maximized returns, fund managers wouldn’t fake a commitment to it while quietly doing their job—investing in companies that focus on shareholder returns and profits.”

Andy Puzder and Diane Black, “Who Really Pays for ESG Investing?” The Wall Street Journal, May 12, 2021