Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG Developments This Week

Lawsuit challenges California’s board diversity mandate  

On November 29, the Free Enterprise Project, a program of the National Center for Public Policy Research that aims to keep politics out of capital markets, announced that it had joined a federal lawsuit filed against the state of California over the state’s new business diversity rules. A 2020 California law requires corporate boards of publicly held companies based in the state to have a minimum number of members from what it calls underrepresented communities. The National Center, which is represented in this case by the Pacific Legal Foundation, is suing to have the law struck down as unconstitutional. According to a press release from FEP: 

“All racism is racism. All discrimination is discrimination. Each American should be judged according to his unique merits and the content of his character,” said Scott Shepard, director of the National Center’s Free Enterprise Project (FEP). “Doing anything else is unconstitutional, immoral and divisive. Californians deserve better than legally-mandated New Racism, especially if it is promoted under the Orwellian guise of ‘antiracism.’” 

The lawsuit, National Center for Public Policy Research v. Weber, was filed in the U.S. District Court for the Eastern District of California on November 22. It seeks to overturn a state law passed in 2020 (AB 979) that amended California’s Corporations Code. The law requires that corporate boards of publicly held companies based in the state have a minimum number of members from “underrepresented communities,” defined as people of certain favored races or sexual orientations. It follows legislation passed in 2018 (SB 826) similarly requiring boards to have a minimum number of women.

“California’s quota doesn’t remedy discrimination, it perpetuates it,” said Anastasia Boden, senior attorney at Pacific Legal Foundation. “This law forces shareholders to cast votes based on immutable characteristics that people were born into and cannot change. The government should treat people as individuals, not based on immutable characteristics.”… 

“California’s political class has proven inept at running the state. Now they are heaping their unconstitutional ineptitude on the business community,” added National Center Executive Vice President Justin Danhof, Esq. “It may seem like a novel concept in 2021, but board members ought to be appointed for business purposes to help companies thrive. Selecting boards based on what someone looks like and who they prefer as sexual partners is not in the best interest of the shareholders of any company.” 

This suit follows a similar one brought recently against Nasdaq, which threatened corporations with de-listing from the exchange if they fail to meet certain board diversity demands. The National Center and its Free Enterprise Project are also involved in that effort, having filed suit against the SEC this past October: 

“In a similar ongoing case, FEP is seeking to strike down a quota rule recently implemented by the Nasdaq corporation and approved by the U.S. Securities and Exchange Commission (SEC). Nasdaq now requires companies listed on its stock exchange to either establish board quotas on the basis of race, sex and sexual orientation or explain why they have not done so. In the suit, FEP – represented by the New Civil Liberties Alliance – argues that the SEC lacks authority to approve the rule, and that Nasdaq lacks the authority to promulgate it.”

Congressman pushes for mandatory disclosures

On December 9, Congressman Juan Vargas (D-Calif.) participated in an online ESG forum hosted by The Hill. Among other things, Vargas reiterated his desire to see the passage of legislation designed to force companies to disclose ESG-related information as part of their annual disclosure process. While the SEC has signaled its interest in creating and implementing mandatory disclosure standards, opponents have questioned whether the agency has the authority to do so. Legislation such as that proposed by Vargas would remove one roadblock from the SEC’s plans: “Vargas said the SEC would determine the exact metrics to track under the bill.” The Hill has the full story:

“Vargas, speaking at The Hill’s The ESG Ecosystem event, said most large companies are reporting some of such metrics, but he expressed concern that the disclosures are selective without industry-wide reporting requirements.

“Let’s do it in an objective way, let’s look at everything,” Vargas told The Hill’s Steve Clemons. “The good, the bad, and the ugly.”

Vargas introduced the ESG Disclosure Simplification Act in February to mandate companies report ESG information to the Securities and Exchange Commission (SEC).

The bill passed the House with razor-thin margins in June, with all Republicans and four Democrats voting against the measure. 

“There’s a lot of Senate allies looking at this, and ultimately, I don’t know,” Vargas said of the bill’s fate.”

Exxon-Mobil faces new wave of ESG activism 

Last spring, Engine No. 1, a small hedge fund, challenged the managers and directors of Exxon-Mobil claiming that the company’s leaders were not doing enough to battle climate change. The hedge fund sought to replace three of Exxon’s directors with its own, more environmentally friendly candidates. With the support of the Big Three passive asset management firms—BlackRock, Vanguard, and State Street—Engine No. 1’s challenge was successful, and all three of its candidates were elected to the Exxon board.

And yet, the company is still not environmentally friendly enough for green and ESG activists, at least according to David Blackmon, writing at Forbes:

“Providing further proof – as if any were needed – that ESG investor groups can never be satisfied, ExxonMobil finds itself under renewed attack from activists for not doing enough even though it is on target to meet the 2025 goals it was previously pressured by the same activists to adopt.

A group calling itself the Coalition for a Responsible Exxon, or “CURE” (no idea where the “U” is derived) is angry that Exxon, while doing what it needs to do to meet its overall goals, including $15 billion in planned investments in green energy initiatives, failed this year to to set “segment-specific reduction targets for Exxon’s midstream and downstream businesses.” For that ostensible “failure,” CURE awards the company’s new board of directors – which includes activist members sponsored by fellow ESG activist group Engine No. 1 – a grade of D-minus for the year, and calls for the firing of CEO Darren Woods despite the company’s stellar financial performance in 2021….

CURE’s announcement came days after Exxon itself announced that its Esso Petroleum Company subsidiary had entered into a memo of understanding (MOU) with SGN and Macquarie’s Green Investment Group (GIG) to “to explore the use of hydrogen and carbon capture to help reduce emissions in the Southampton industrial cluster.” A release by the three prospective partners estimates that the potential annual demand for hydrogen from the cluster could be as much as 37 TWh by 2050, enough to meet the heating demand of 800,000 homes in Southern England. The Southampton cluster is home to Exxon’s Fawley Complex, the largest refining/petrochemical complex in the UK.

Joe Blommaert, president of ExxonMobil Low Carbon Solutions said: “Hydrogen has the potential to help provide customers with access to affordable, reliable energy while minimizing emissions. We are pleased to be part of this collaboration that includes a technical study to assess the potential for the Fawley facility to play a key role in both hydrogen production and carbon capture and storage solutions. With well-designed policy and regulations, hydrogen can help reduce the emissions of the Southampton industrial area that provides vital products for modern life.””

Blackmon continues, noting Exxon’s recent history of activism to fight climate change through various programs—mostly carbon capture efforts—before finally concluding that, in his view, it might never be enough for the activists:

“Exxon is already the largest capturer of carbon dioxide in earth, but the one thing we know beyond any doubt is that, no matter how many future projects it announces and executes, and no matter how many annual or decadal goals for emissions targets it meets, it will never be enough for activist groups like CURE. These announcements and achievements will always be met with new and expanded demands, bad grades for the board of directors and renewed calls for the firing of whomever happens to be serving as CEO at any given time.

It has all become so very tiresome and predictable.”

ESG: no better, but no worse?

A study recently conducted by researchers at Arizona State University purports to show that ESG investing doesn’t cost investors anything—or at least not very much. This marks a shift in the debate over ESG’s impact on investors. For years, ESG advocates have insisted that ESG can and will produce greater returns than other investment schemes. This report challenges that assumption and flips it on its head, making the case, instead, that ESG doesn’t cost investors very much. According to Institutional Investor magazine:

“Environmental, social, and governance investing poses little cost to investors, according to a study from researchers at Arizona State University.

In a paper titled “The Cost of ESG Investing,” ASU finance professors Laura Lindsey, Seth Pruitt, and Christoph Schiller found that even as interest in ESG mandates grows, ESG strategies have little to no impact on investment returns. 

In the paper’s main analysis, the trio constructed a portfolio that generated an annualized average return of 14.6 percent. When they implemented an ESG screen, meaning they removed stocks with “bad” (or lower than median) ESG scores and created an ESG-tilted portfolio, the annualized average rate of return fell to 12.5 percent. 

“It’s not statistically significant,” Pruitt told Institutional Investor. 

ESG screening also had little effect on the sample portfolio’s Sharpe ratio, a metric that helps investors understand an investment’s return relative to its risk. Before the ESG screening, the portfolio’s annualized Sharpe ratio was 1.46. After bad ESG stocks are removed in the screening process, the Sharpe ratio landed at 1.52. 

“The ESG-tilted portfolio is not doing significantly worse than the original portfolio, and that tells us that the cost of ESG investing is small,” Pruitt said. In this case, Pruitt said, cost means investors’ sacrifice of returns or Sharpe ratio in favor of ESG investing. 

“You don’t lose by implementing ESG,” he said.”

In the spotlight

Best Books of 2021

In its end-of-the-year roundup of the “Best Books of 2021,” The Wall Street Journal identified The Dictatorship of Woke Capital, an explicitly anti-ESG analysis by Stephen R. Soukup, as one of its Top-5 books in politics. In his summary of the book, the Journal’s Barton Swaim wrote the following:

“A great many Americans over the past several years have realized to their horror that American corporations are no longer, if they ever were, the broadly conservative and patriotic institutions of midcentury yore. Their managers are terrified of criticism by activist investors, and they often appear more solicitous of transnational NGOs than of their own investors. How did it happen? Stephen R. Soukup answers the question in “The Dictatorship of Woke Capital.” The book is a touch overwritten—Mr. Soukup makes no attempt to hide his dislike for the objects of his criticism—but it is an exceptionally useful presentation of the intellectual origins and present-day lunacies of woke capitalism. The most enlightening parts of the book deal with multibillion-dollar asset-management companies such as BlackRock and State Street. The leaders of these firms embrace a variety of radical ideologies—broadly known as “sustainability” and ESG (environmental, social, and corporate governance)—and routinely use their massive financial leverage to push publicly traded companies to alter their policies according to progressive political ideals. These same companies, meanwhile, are happy to invest in Chinese corporations under the control of a communist government that spurns all those progressive ideals. Which raises the question: Who’s dictating to whom?”