Critics blame ESG for Silicon Valley Bank failure



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

On Wall Street and in the private sector

Critics blame ESG for Silicon Valley Bank failure

California regulators shut down Silicon Valley Bank (SVB) on March 10, making it the second-largest bank failure in American history. In the wake of the collapse and the fear of contagion, some in politics and the media have criticized the bank’s loans to ESG-related companies and its in-house ESG policies. For example, Congressman James Comer (R-Ky.), the chairman of the House Oversight Committee, said SVB was “one of the most woke banks” in America:

GOP Rep. James Comer, the chairman of the House Oversight Committee, slammed Silicon Valley Bank, or SVB, as “one of the most woke banks” in the US.

“We see now coming out they were one of the most woke banks in their quest for the ESG-type policy and investing,” Comer said, referring to environmental, social, and governance policies.

“This could be a trend and there are consequences for bad Democrat policy,” the Kentucky congressman continued on Sunday’s episode of Fox News’ “Sunday Morning Futures.”

Comer did not explain which environmental sustainability-linked investments would have caused SVB’s failure, or how they would have done so.

The New York Post ran a piece on March 11 detailing some of the ESG programs in which the bank participated:

A head of risk management at Silicon Valley Bank spent considerable time spearheading multiple “woke” LGBTQ+ programs, including a “safe space” for coming-out stories, as the firm raced toward collapse.

Jay Ersapah, the boss of financial risk management at SVB’s UK branch, launched initiatives such as the company’s first month-long Pride campaign and a new blog emphasizing mental health awareness for LGBTQ+ youth.

“The phrase ‘You can’t be what you can’t see’ resonates with me,’” Ersapah was quoted as saying on the company website. …

In addition to instituting SVB’s first “safe space catch-up” — which encouraged employees to share their coming-out stories — and serving on LGBTQ+ panels around the world, Ersapah spent time over the last year serving as a director for diversity role models and volunteering as a mentor for migrant leaders. …

On Saturday, Home Depot co-founder Bernie Marcus insinuated that “woke” policies like the ones launched by Ersapah could have led to SVB’s dramatic failure. …

“These banks are badly run because everybody is focused on diversity and all of the woke issues and not concentrating on the one thing they should, which is, shareholder returns,” Marcus said.

“Instead of protecting the shareholders and their employees, they are more concerned about the social policies. And I think it’s probably a badly run bank.

“They’ve been there for a lot of years. It’s pathetic that so many people lost money that won’t get it back.”


Strive Asset Management CIO questions the role of ESG in SVB’s failure

Matt Cole, the chief investment officer and global head of fixed income at the post-ESG investment firm Strive Asset Management, pushed back against those who blamed ESG for SVB’s collapse. Cole wrote that “[t]here probably isn’t an investor with a more defined bearish view on the cost of Stakeholder Capitalism/ESG on equity returns than myself,” but he questioned the claims that ESG caused the bank’s failure:

The SVB failure had about as much to do with ESG/Stakeholder Capitalism as ESG/Stakeholder Capitalism has to do with making money – nothing….

SVB was caught up in the ESG game, but were about average with respect to the banking sector as a whole based on ESG ratings. The too big to fail banks are all significantly worse with respects to ESG. SVB stood out in taking stupid investment risks, period.


Companies that support ESG underperform, according to WSJ op-ed

The Wall Street Journal ran an op-ed by Mike Edelson and Andy Puzder on March 10 arguing that “corporations that remain neutral on social and political issues outperform companies that lean left.” The two argued the following:

Woke capitalism makes its way into financial markets through an ill-defined concept known as environmental, social and governance investing. Huge investment managers use their ownership of shares to pressure companies to jump on the ESG train. But while individual investors are free to support whatever causes they wish with their dollars, those who invest other peoples’ money have a fiduciary duty to focus solely on clients’ financial interests. Thus it’s important to know whether politically focused companies actually do produce superior financial results.

To answer this question, we used research from 2ndVote Analytics Inc., a company that scores U.S. large-cap and midcap companies on their social and political engagement on five-point scale. Analytics evaluates company data on six social/political issues—the environment, education, abortion, Second Amendment rights, other basic constitutional freedoms and support for a safe civil society—and also generates a composite score. Company scores, updated quarterly, range from 1 (most liberal) to 5 (most conservative), with 3 meaning neutral or unengaged.

On average, roughly a quarter (or 221) of the S&P 900 large/mid-cap companies studied scored 3—taking no political or social stance on any of these six issues—during the period from June 30, 2021 (when the data was first available), through Jan. 31, 2023. Of the remaining companies, the political tilt was strongly to the left. More than 59% scored liberal, and under 15% conservative (with only one company higher than 4).

We used a neutral score of 3 as a proxy for companies that focus on investors’ returns rather than activism. We then compared the performance of those neutral companies with the market (represented by the S&P 500 and Russell 1000) as well as major ESG-registered funds. The point is to demonstrate how well a portfolio of business-focused politically neutral companies performs compared with those potentially distracted by political issues.

In making this comparison, we used a third-party index-calculation agent and market-value weighting in a manner similar to the S&P 500 and Russell 1000 benchmarks (total returns). The ESG products’ returns include the effect of fees; the neutral-universe and benchmark indexes don’t. The analysis covers the full period for which company scores were available, including the market runup in the last half of 2021, the 2022 bear market and the early-2023 rebound.

The results are compelling. The market was down overall, by 1.8% for the S&P 500 and 3.2% for the Russell 1000. ESG funds performed worse, with most losing 2.5% to 6.3%. A simple index composed of only neutral companies gained 2.9%, significantly outperforming both broad-market and ESG indexes in up and down markets. Notably, the benchmarks include the outperforming neutral companies—indicating that the politically active companies further underperformed. …

For a longer view, we compared the performance of the more than 200 companies that remained neutral over our data period with the benchmarks over the past 10 years. The neutral portfolio’s cumulative return (334%) outgained the market (230%); the results were substantially more compelling using equal-weighted returns as an alternative method.

One interesting result is the point at which performance notably begins deviating—2017-18, around the time companies (and perhaps their profits and returns) began feeling pressure from the power and influence of supposedly passive asset managers such as BlackRock, State Street and Vanguard, as those behemoths’ push into ESG intensified.


In the states

Harvard Law summarizes the last year of state-level ESG engagement 

The Harvard Law School Forum on Corporate Governance published a summary article on March 11 detailing the rise in state-level support for and opposition against ESG over the last year:

When it comes to ESG in the United States, among the most dramatic developments is an ideological battle unfolding at the state level, pitting liberal-leaning state governments that have embraced ESG-focused investing against conservative-led states that would seek to exclude it. …

[O] the past year, the picture has shifted. States have stepped up their lawmaking, defining the future of the ESG-related regulatory environment with widely divergent approaches.

These measures focus primarily on the investment of state-level public retirement system assets. New varietals of these and other ESG-focused laws are becoming regular events. Individually and collectively, the developments are further fracturing an already complicated landscape for financial services companies, including private investment managers that invest money on behalf of state pensions. Meanwhile multistate initiatives are taking aim at individual asset managers, banks and proxy advisory services perceived to be driving ESG growth.  In at least one state, banks are fighting back.

Much attention has focused on so-called “anti-ESG measures”—those prohibiting the consideration of ESG factors when investing state retirement funds or targeting companies that “boycott” industries such as fossil fuel or firearms companies—and the organizations behind them. A smaller but significant number of “pro-ESG” measures seek different outcomes and are gaining traction.  Other measures perhaps best described as “ESG-neutral” have led to or appear to be leading to pro- or anti-ESG legislative outcomes. …

More extreme measures on both sides, anti- and pro-ESG, have prompted some observers to sound the alarm that the United States may be straying from the fundamental purpose of ESG factors—as a valuation metric to gauge corporate success.

Whether, how long and to what extent the shift in ESG regulatory power remains with the states is yet to be seen. For now, in the United States, the term “ESG” is remarkable in its political divide.


Around the world

Sweden requires ESG investing for pension funds

Bloomberg reported on March 13 that Sweden is allocating over one-tenth of its pension funds to ESG investments:

Sweden is inviting international asset managers to help allocate 1 trillion kronor ($90 billion) of pension savings, but says it won’t accept applications from firms that don’t incorporate ESG into their strategies.

The new framework will replace a system tainted by an embezzlement scandal that infuriated Swedish taxpayers and triggered calls for a more robust setup. The upshot is that only investment firms that integrate environmental, social and governance goals into their work need apply, according to the Office of the Swedish Fund Selection Agency, which is overseeing the process.

“Unlike in the current system, there will be a requirement that the manager systematically integrates sustainability aspects into its operations,” Erik Fransson, executive director of the office, said in an interview. 

The move underscores the wildly divergent approaches different jurisdictions are taking as they figure out how big a role ESG should play in mainstream investing. In Europe, ESG is currently being hardwired into financial regulations. In the US, lawmakers just voted to block the pension industry from taking ESG risks into account. …

Sweden is now enshrining its ESG requirements for pension managers into law, under which investment firms must show an “exemplary approach to sustainability through responsible investment and responsible ownership.”

International investment firms interested in applying for the pool of pension savings, which represents just over 10% of Sweden’s total public retirement assets, need to be able to document their ESG claims. That includes showing they have processes in place to prevent portfolio funds being linked to violations of the United Nations’ Global Compact, the OECD’s guidelines for multinational corporations, or the UN’s guiding principles for human rights, according to a draft provided by the Office of the Swedish Fund Selection Agency.

And firms will only be allowed to offer investment products that are registered as ESG fund classes under Europe’s Sustainable Finance Disclosure Regulation, namely Articles 8 and 9, the draft shows. The first selection process is set to take place in the second quarter, and Sweden expects to choose a total of 150 funds.