ESG Developments This Week
In Washington, D.C.
Documenting ESG pushback
On May 19, The Wall Street Journal carried an op-ed by Jonathan Berry, a Trump administration Labor Department official, and Boyden Gray, former White House Counsel to President George H. W. Bush. The piece focuses on index funds/ETFs, highlighting efforts made in the states in opposition to ESG, and suggesting that there may, in the near future, be federal efforts following the same tack. The two wrote the following:
“Passive investing through index funds lets ordinary Americans own the market. Those funds and similar vehicles spread risk and keep fees low. The resulting rates of return have triggered seismic shifts from active to passive funds.
The problem is that there’s been an equally seismic power shift to those passive funds’ investment managers. They’re trying to remake corporate America to suit their personal politics.
In truth, it’s the Big Three investment managers who now own the market. BlackRock, Vanguard and State Street control more than $20 trillion in assets. In 90% of public companies, one of the Big Three is the largest shareholder. More money means more votes: At S&P 500 companies, the Big Three cast about 20% to 25% of all shareholder votes. And that vote bloc will only grow as more Americans move their savings into passive funds.
That concentration of voting power in three like-minded investment companies, given the diversity of all other voting interests, means the Big Three can often direct the outcome of board elections and shareholder proposals….
Fortunately, it looks as if more of our elected representatives are waking up. West Virginia’s state treasurer recently fired BlackRock from a state investment board over its China ties and hostility to fossil fuels. Florida’s top officials have moved to claw back proxy voting power from outside fund managers over Chinese entanglements and politicized investment decisions. Texas (with other states to follow) has gone so far as to demand fair treatment in financing for industries that don’t fit the politics of Mr. Fink et al.—think fracking, guns and oil.
Congress is joining the conversation. This week, the Senate took up a major bill, the Investor Democracy is Expected Act. The Index Act requires passive investment managers to cast funds’ most important votes in accord with the wishes of actual investors. This kind of reform dissipates the political power amassed by the Big Three as an incident to the rise of passive investing. It would push America’s public companies to respond to the desires of ultimate investors—i.e., regular people.
Happily, the writing is already on the wall. Facing pushback, Mr. Fink has lately muted the imperious tone from his annual letter to CEOs, and BlackRock has started extending “proxy voting choice” to larger clients, representing 40% of index equity assets under management. So why not finish the job and send the rest of the power back?
American corporations are supposed to work for their shareholders. An ideal, yes, but requiring asset managers to pass voting power back to investors would bring it closer to reality.”
On Wall Street and in the private sector
Documenting the pushback against the pushback to ESG
Throughout May, numerous defenses against efforts in opposition to the ESG investment movement have appeared. Bloomberg ran two columns (one reprinted at The Washington Post) which argued that, in the view of the pieces, pushback efforts in opposition to ESG are somewhat less than they are cracked up to be. The first of these, by Liam Denning, ran May 19:
“Recently, it may feel as if your 401K is just a mathematical distillation of every wrong decision you’ve ever made. Even worse, though, what if your investments are nothing less than the means by which a shallow and divisive agenda is foisted on millions of unsuspecting Americans by an “ideological cartel”?
That choice phrase comes from Vivek Ramaswamy, a former biotech executive, author and now cofounder of a new investment firm seeded by, among others, the billionaire Peter Thiel. Strive Asset Management seeks to take on the Big Three — BlackRock Inc., State Street Corp. and Vanguard Group Inc. — accusing them of coordinating a campaign to push political objectives that are at odds with their clients’ best interests. In essence, BlackRock CEO Larry Fink et al. decide that they want to prioritize tackling climate change or systemic racism or whatnot and then use the trillions of passive dollars they invest to force companies to prioritize that, too. Strive will do the opposite, pushing instead “excellence capitalism” — that is, nudging companies to ditch the political stuff and focus on delivering good products and services….
Ramaswamy’s core argument is a warning about the growing power of passive money managers. This has merit. The Big Three own, on their clients’ behalf, about one-fifth of each S&P 500 member, on average, with potentially negative implications for governance and competition. There is already lively debate and a body of academic literature about this.
Still, it remains a leap to conclude that there now exists a cartel — a loaded term — that effectively forces certain political stances on US companies and Americans in general. It is far from clear that corporations set the pace on social issues rather than take their cues from below. For example, plenty of people — indeed, a majority in the US — are concerned about climate change, and that didn’t require the imprimatur of any corporate executive….
Google articles about Strive and you will find terms like “ESG,” “SRI” — socially responsible investing — and stakeholder capitalism used interchangeably. Similarly, Ramaswamy’s book uses the catch-all term “woke”:
Basically, being woke means obsessing about race, gender, and sexual orientation. Maybe climate change too. That’s the best definition I can give.
If you say so. Dismissing climate change as just another activist obsession speaks to the logical disconnect of exhorting Exxon to focus on delivering a high-quality product without acknowledging that said product carries an inherent, climate-related flaw that requires a strategic response. One person’s liberal hobby horse is another’s systemic risk….
Strive’s timing is impeccable, effectively taking the opposite side of what has become a crowded trade.
That timing also makes it suspect. Strive launches amid a gathering Republican campaign against companies taking positions that oppose the party line on wedge issues. The day after Strive’s announcement, former Vice President Mike Pence gave a speech in Texas attacking ESG and socially minded investing, making a wild claim that Exxon’s new directors were “now working to undermine the company from the inside.” As much as Strive touts itself as “depoliticizing corporate America,” I’m afraid you don’t get to do that credibly while also boasting about seed money from Thiel.”
The argument that pushback against ESG is politically tinged is an argument reiterated in the second Bloomberg piece—by Jeff Green and Saijel Kishan—published the following day, May 20:
“Heading into the hotly contested midterm elections, the American political right has a new rallying cry: Down with ESG.
Conservatives have identified the popular investing strategy, which accounts for environmental, social and governance risks, as part of a broader narrative about left-wing overreach and “ wokeness” run amok. Utah Treasurer Marlo Oaks calls it “corporate cancel culture.” Behind the rhetoric lie policies designed to sap the momentum of one of Wall Street’s most successful initiatives in recent years, now worth $35 trillion globally. If it works, it will firmly ensconce ESG in the culture wars, galvanize voters and weaken the resolve of big asset managers to act on climate change and other big, societal issues.
West Virginians are already all too familiar with ESG, according to state treasurer Riley Moore. He’s preparing a list of banks that, he says, will lose the state’s business unless they declare they aren’t boycotting the coal industry and other fossil fuels. “Certainly ‘woke capitalism’ is something they are very familiar with,” he said. “We’re facing threats from that in my state, right now.”
The attacks on ESG escalated last week when former Vice President Mike Pence made the strategy a key theme in an energy-policy speech in Houston. A potential candidate for the 2024 Republican presidential nomination, Pence said large investment firms are pushing a “radical ESG agenda” and took aim at BlackRock Inc., whose Chief Executive Officer Larry Fink is a champion of sustainable investing, and others who have pressed for progress on climate change….
With gas prices rising and energy a key factor in Russia’s invasion of Ukraine, it’s becoming easier for Republicans to tie ESG to pocketbook issues of their constituents. Just as Critical Race Theory grew from a catchall for parents unhappy or worried about what their children were learning in public schools to successful efforts to seize control of local school boards, ESG opponents see an opportunity to aim voters’ fears of inflation at the finance industry’s efforts to combat global warming and other social ills.
It’s also a new front in a longstanding battle against further restrictions on fossil-fuel industries, which give generously to Republican party candidates, and more corporate accountability. At the state level, Republican governors and other officials are finding new ways to block major Wall Street firms from state business, including managing pension funds and bond issues, if they apply ESG principles to other parts of their portfolios.
Nationally, the broadsides against ESG bolster calls to abandon, or at least relax, environmental standards in favor of “energy independence.” It’s also a partisan issue at the US Securities and Exchange Commission, which is trying to require companies to report on their greenhouse gas emissions. In a virtual meeting on the plan in March, the agency’s only Republican commissioner, Hester Peirce, turned off her camera in protest, saying that she was trying to reduce her carbon footprint.
Republicans are increasingly using banks and “woke” companies as cudgels for their base voters, said Reed Galen, a co-founder of the anti-Trump group, The Lincoln Project. “If you’re taking on a company who has environmental and social justice goals, you don’t have to explain ESG to the voters. All you have to do is say ‘woke corporation.’”…
Few expect the Republican attacks on ESG to vaporize the industry. As of now, roughly $3.4 trillion of public retirement money is invested in line with ESG strategies of some sort, according to the sustainable-investing industry group US SIF. Some of the bigger, more liberal states like California and New York are pushing for more restrictive ESG screens for state funds, not less. What’s more, many of the world’s biggest financial institutions have their own goals to cut emissions, which include reducing the amount of business they do with heavy polluters — whether they bill it as ESG or not. Many also have set targets for workforce diversity and elevating women in management, neither of which are politically popular among the right.
Still, the political pressure seems to be taking a toll. BlackRock sent a letter this week to the Texas state comptroller, rebutting the assertion that the firm boycotts the oil and gas industries, and Fink has made it clear he opposes divesting from fossil-fuel companies. The firm also said this year that it won’t back as many shareholder efforts to push companies to reduce their emissions compared with 2021. JPMorgan Chase & Co. is also taking steps to re-establish itself in Texas’s muni-bond market, about eight months after a new law forced that bank out of most deals because of its policies on guns and fossil fuels.”
In the spotlight
Tesla dumped from S&P ESG Index; CEO Elon Musk calls ESG a scam
Over the last several months, this space has documented the paradoxical but serious battle between the ESG gatekeepers and Tesla, the world’s best-known and most valuable maker of automobiles without greenhouse-gas-producing internal combustion engines. Over the last several weeks, a war of words between ESG advocates and Tesla, a maker of automobiles without greenhouse-gas-producing internal combustion engines, has heated up.
“This week, S&P Global SPGI +2.51% ’s (SPGI) S&P Dow Jones Indices division said that Tesla (TSLA), which CEO Elon Musk says he founded to put the world on a path to a sustainable-energy future, doesn’t have a comprehensive low-carbon strategy and no longer qualifies for inclusion in the S&P 500 ESG Index (SPXESUP).
Tesla was “ineligible for index inclusion due to its low S&P DJI ESG Score,” Margaret Dorn, head of ESG Indices, North America, at S&P Dow Jones Indices, wrote in a blog post explaining the decision. “So, while Tesla’s S&P DJI ESG Score has remained fairly stable year-over-year, it was pushed further down the ranks relative to its global industry group peers.””
After that, its CEO Elon Musk called ESG a scam:
“This week, a major move to cut Tesla from a closely followed environmental, social and governance (ESG) index brought anger and relief in nearly equal measure.
Defiance was on display from Standard & Poor’s, which rejected Tesla from its ESG index; annoyance emerged from Tesla TSLA, 1.20% investors, including well-known asset manager and Tesla bull Cathie Wood. There was also a seething snapback from Elon Musk….
“ESG is a scam. It has been weaponized by phony social justice warriors,” tweeted Musk, lamenting that ExxonMobil topped Tesla.
“Ridiculous,” was Wood’s terse response to Tesla’s removal.”