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Kentucky threatens to divest from 11 banks over ESG policies

ESG Developments This Week

In the states

Kentucky threatens to divest from 11 banks over ESG policies

On January 2, Kentucky State Treasurer Allison Ball (R) issued a statement notifying 11 banks that their ESG policies amounted to energy boycotts that harmed the state’s economy according to definitions passed into law last spring. The statement says the banks have 90 days to stop what Kentucky argues are energy company boycotts or face divestment from the state:

“Kentucky issued an official notice Monday morning listing 11 banks it accused of boycotting energy companies and which would be subject to divestment within months.

Kentucky State Treasurer Allison Ball announced that, after a review of their energy and climate policies, the listed banks — which included BlackRock, the largest asset manager in the world, JPMorgan Chase, Citigroup and HSBC among others — were found to be in an active boycott of fossil fuel companies. The Kentucky state government could begin divesting from the firms if they didn’t reverse their boycotts, according to the notice obtained first by FOX Business.

“Kentucky is a coal, oil, and gas producing state,” Ball told FOX Business. “Our energy sector helps power America. Kentucky refuses to fund the ideological boycotts of our own fossil fuel industry with the hard-earned taxes and pensions of Kentucky citizens.”

Kentucky’s Republican-led legislature passed a bill requiring the state government to identify and divest from banks that are determined to be engaging in a boycott of energy and fossil fuel companies. Democratic Gov. Andy Beshear signed the bill, which was endorsed by both the Kentucky Oil and Gas Association and Kentucky Coal Association, into law on April 8, 2022.

The law directs the state treasurer’s office to publish an annual list of financial firms engaged in energy boycotts. State agencies then must notify the office if they own direct or indirect holdings of the listed companies and send a notice to the relevant companies within 30 days. If the companies don’t halt their boycotts within 90 days of receiving such notice, the state government could divest from their holdings.

“When companies boycott fossil fuels, they intentionally choke off the lifeblood of capital to Kentucky’s signature industries,” Ball said in a statement Monday. “Traditional energy sources fuel our Kentucky economy, provide much needed jobs, and warm our homes. Kentucky must not allow our signature industries to be irreparably damaged based upon the ideological whims of a select few.”…

Arizona, Arkansas, Florida, Louisiana, Missouri, South Carolina, Utah and West Virginia have already announced they will divest hundreds of millions of dollars from banks engaging in energy boycotts. Texas and Oklahoma have taken legislative steps akin to Kentucky’s that will likely soon lead to divestment.”

West Virginia Attorney General threatens to sue SEC if regulator enacts ESG reporting requirements

In 2022, West Virginia Attorney General Patrick Morrisey (R) won the West Virginia v EPA court case, limiting the Environmental Protection Agency’s power to regulate greenhouse gases. Now, Morrisey says he will sue the Securities and Exchange Commission if the regulator enacts rules requiring businesses to report on greenhouse gas emissions or other ESG metrics:

“West Virginia Attorney General Patrick Morrisey is itching for a fight on ESG.

Morrisey has made a name for himself helping net his state hundreds of millions of dollars from cases over the opioid crisis and taking the Environmental Protection Agency all the way to the Supreme Court—and winning.

The Republican also has threatened to sue the Securities and Exchange Commission, if it requires companies to report on greenhouse gas emissions and other environmental, social and governance matters. Morrisey has tried to deflect what he sees as attacks on the state’s coal industry, joining former Vice President Mike Pence, Florida Gov. Ron DeSantis and other Republicans who’ve made ESG investing a frequent target and stoked Democratic ire….

Morrisey and other Republican attorneys general sued Obama’s EPA over its efforts to curb power plants’ greenhouse gas emissions in 2015. The Supreme Court eventually reviewed the power of the agency to regulate emissions, moving to limit agencies’ rulemaking authority in West Virginia v. EPA last year….

Morrisey and other Republicans have cited the Supreme Court ruling in their push to keep the SEC from adopting rules that would require companies to report their greenhouse gas emissions and make other disclosures about how climate change affects their businesses.

He led several Republican attorneys general in writing a July 2022 letter that told the SEC that West Virginia v. EPA shows why the agency’s proposed rules are problematic. The SEC could “save everyone years of strife” if the agency scrapped its climate disclosure proposal, the attorneys general said.”

Texas state senators hold hearings for two of the three biggest ESG asset managers

The Texas Senate recently held hearings on ESG, fossil fuel boycotts, and other related investment and banking matters. The hearings featured, among others, representatives from BlackRock and State Street, two of the three largest passive asset management firms. Kevin Stocklin, a writer at the Epoch Times, penned a news analysis arguing that the memberships of both asset managers in organizations like the Net Zero Asset Managers Initiative require them to use their shares to compel companies towards environmental goals, even though representatives from both companies said in the hearings that they did not participate in such activities:

“Texas state senators struggled for more than six hours last month to get straight answers from BlackRock and State Street, two of the world’s largest asset managers, regarding what the Wall Street firms are doing to compel companies whose shares they own to get in line with the environmental, social and governance (ESG) movement.

Despite having joined global ESG clubs such as Climate Action 100+ and the Net Zero Asset Managers (NZAM) initiative and signed pledges to leverage their voting power as the largest shareholders in 90 percent of S&P 500 companies to “reach net-zero emissions by 2050 or sooner across all assets under management,” the asset managers testified that, in reality, they’re doing no such thing.

When asked by state Sen. Bryan Hughes, chairman of the state Senate Committee on State Affairs, to clarify BlackRock’s pledge to Climate Action 100+ “to secure commitments from companies to reduce greenhouse gas emissions consistent with the Paris Agreement,” Dalia Blass, BlackRock’s head of external affairs, responded that the firm merely talks to companies whose shares they own to learn about their “material risks and opportunities.”

“We participate in Climate Action 100 to engage in dialogue with other participants, market participants, governments so that we understand issues that are relevant to our clients,” said Blass, who recently joined BlackRock from the Biden administration, where she worked at the Securities and Exchange Commission (SEC).

The motto of Climate Action 100+ is “Global investors driving business transition.”…

According to clubs such as Climate Action 100+ and GFANZ, the role of asset managers who join these clubs is to compel companies whose shares they own into compliance….

The senators asked how BlackRock would respond to a letter from New York City Comptroller Brad Lander asserting that BlackRock failed to honor its commitments to NZAM. Lander’s letter was written in response to a letter that BlackRock wrote to 19 state attorneys general in red states, who accused BlackRock of putting ideology above its fiduciary duty to investors. In the letter, BlackRock rejected that it was using its power as the world’s largest asset manager to compel corporations into compliance with net-zero goals.

Lander took the opposite tack from red state AGs.

“BlackRock now abdicates responsibility for driving net-zero alignment in its own portfolio by saying that it does not ask companies to set specific emissions targets, and that its participation in NZAM does not mean BlackRock is setting or meeting any net-zero targets,” he wrote.

Lander said he would be “reassessing our business relationships with all of our asset managers, including BlackRock, through the lens of our climate responsibilities.”

Blass declined to answer questions about what her firm would do in light of New York’s action.”

On Wall Street and in the private sector

ESG and pro-China investment strategies are at odds, according to Financial Times article

Last week, The Financial Times published a piece echoing what some opponents of ESG have argued: ESG, in their view, is not compatible with investment in Chinese companies, and investors who say they are pro-ESG and pro-China-investment are serving two ends at odds with each other:

“Foreign investors in Chinese equities have a problem. China’s growth offers the hope of big returns over the coming decade, but on environmental, social and governance ratings, its companies rank lower not only than western nations, but also below most emerging markets.

The combination of the world’s biggest consumer market with fast-growing technology and services sectors has attracted global investors willing to look the other way on censorship, surveillance, environmental, labour and other human rights abuses.

However, there are signs an ESG reckoning is looming for Chinese companies and those investing in them. ESG ratings are increasingly important for international investors, but the sustainability rules and standards common in western jurisdictions are at odds with realities on the ground in China.

In a move signalling the challenge ahead, Sustainalytics, a sustainable rating agency owned by research house Morningstar, in October downgraded three Chinese tech darlings on its watchlist — Tencent, Weibo and Baidu — to the category of “non-compliant with UN principles”….

Liqian Ren, who manages China investments at WisdomTree Asset Management, a US-based fund, said she was among those obliged to drop the companies, a move that resulted in a turnover of more than a quarter of its main China index.

“[If the companies] become non-compliant, by our process we have to sell — unless we just don’t claim this fund as ESG,” she said. “It’s a big part of the portfolio. But on the other hand, this is indeed an area that people do care about . . . and the whole point of ESG is people taking a stance on some issues.”

Such experiences may become more common for investors in an increasingly authoritarian China as Xi Jinping, the country’s most powerful leader since Mao Zedong, embarks on an unprecedented third term in power. Some have already been debating whether China is too risky given the unpredictability of Xi’s administration in recent years….

Hong Kong Watch, a UK-based group that researches investment and human rights issues in China, said in a report in November that many of the biggest asset management, state pension and sovereign wealth funds were passively invested in companies allegedly involved in the repression of Uyghur Muslims in north-west China’s Xinjiang region.

The report found three major stock indices provided by index publisher MSCI include at least 13 companies that have allegedly used forced labour or have profited from China’s construction of internment camps and surveillance apparatus in Xinjiang.

MSCI said the only filters for inclusion in its global indices were “accessibility and investability” and that it had other ESG-focused indices.

Foxconn, which makes iPhones and other devices for Apple, was among the companies Hong Kong Watch said allegedly used Uyghur workers obtained through state-sponsored transfers….

Chinese companies are also less likely to engage on ESG issues than western counterparts, researchers and investors said. About 60 per cent of the companies Sustainalytics rates respond to its queries, but in China, the number is “quite a bit lower”, MacMahon said.”

In the spotlight

ESG at Wharton

On January 5, RealClear Investigations published two separate but related pieces by Ben Weingarten on the University of Pennsylvania’s Wharton School of Business and its decision to offer new majors in ESG and DEI (Diversity, Equity, and Inclusion). According to Weingarten, the decision has stirred up opposition, especially among Wharton alumni:

“Skeptics, including former faculty and alumni of the school, many of whom spoke on condition of anonymity for fear of recriminations, fear the MBA program could serve as progressivism in business sheepskin clothing. One recent graduate warned against a one-sided presentation of left-wing politics used “to justify increasing the power of the state in markets and firms while demonizing capitalism.”

Observers suggested the school’s embrace of ESG could not only presage similar curriculum changes at business schools nationwide, but also change the character of the corporate C-suites that the school’s graduates tend to populate. The thinking is that ESG-focused students will matriculate to ESG-focused executive positions in an already socially conscious corporate America, creating a feedback loop that could have an indelible impact not just on U.S.-style capitalism, but on America itself. 

“By creating a major [in ESG] at Wharton you are helping to legitimize it,” said another graduate….

At least 9% of the 877 students in Wharton’s 2024 class will major in ESGB based on the number of currently declared majors in Business, Energy, Environment and Sustainability, which will become a specialization under the ESGB major when formally introduced next fall, according to figures provided by Henisz.

Some required classes will include – on the “environmental” side of ESG – “Climate and Financial Markets” and “The Business & Governance of Water.” In the “social” and “governance” realms, courses include “Social Impact and Responsibility” and “Reforming Mass Incarceration and the Role of Business.””

Federal opposition to ESG in 2023

ESG Developments This Week

In Washington, D.C.

Congress makes plans to lead federal opposition to ESG in 2023

From state treasurers divesting pension and operating funds from BlackRock and other ESG providers to state attorneys general investigating the same providers over the impact of ESG on assorted policy matters, state officials led the pushback against environmental, social, and corporate governance investing in 2022.

While the states are expected to continue pushing back against ESG in the new year, the shift in control of the House of Representatives has Republican elected officials making plans to increase their visibility and activity opposing ESG at the federal level as well:

Republicans are planning to use their control of the House of Representatives in 2023 to intensify attacks on companies that account for climate-related risks when they’re making investment decisions….

Republicans say they’re fighting a coordinated effort by big investors to impose progressive policies that threaten capitalism itself.

Rep. Andy Barr, a Republican from Kentucky and a senior member of the House Financial Services Committee, says ESG investing is aimed at “politicizing capital allocation and actively discriminating against fossil energy.”

ESG is “a cancer in our capital markets that must be eradicated,” Barr said in a statement to NPR….

A December hearing that Texas lawmakers held on ESG investing could be a preview of things to come in Congress. Texas lawmakers said the practice of analyzing climate risks to make investment decisions is threatening fossil fuel companies in the state and the entire American economy.

Under questioning in Texas, Dalia Blass, BlackRock’s head of external affairs, said the firm considers ESG issues that pose financial risks and opportunities for clients in order to deliver “the best risk-adjusted returns we can for them.”…

Rep. Patrick McHenry, a Republican from North Carolina and the incoming chairman of the House Financial Services Committee, said in a statement to NPR that GOP lawmakers will “conduct appropriate oversight of activist regulators and market participants who have an outsized impact.”

On Wall Street and in the private sector

ESG funds underperformed broader markets in 2022

Equities markets had a rough 2022, but ESG investments had it even worse, generally underperforming the broader markets by a significant margin:

Funds linked to environmental, social and governance principles are by definition supposed to minimize risks tied to those three factors. In 2022, the approach did little to help protect investors from the brutal slide in the financial markets.

The 10 largest ESG funds by assets have all posted double-digit losses, with eight of them falling even more than the S&P 500’s 14.8% decline. The laggards include BlackRock Inc.’s $20.7 billion iShares ESG Aware MSCI USA exchange-traded fund (ESGU) and Vanguard Group’s $5.9 billion ESG US Stock ETF (ESGV).

The $6 billion Brown Advisory Sustainable Growth Fund (BAFWX) was the worst performer of the bunch, having slumped 28.1% this year as of the close of business on Dec. 5….

The performance of the 10 largest funds compares with the average 12% decline of ESG-labeled stock funds with more than $500 million of assets so far in 2022, according to data compiled by Bloomberg.

Despite the losses, a paper released this month by the National Bureau of Economic Research said that investors are willing to be charged “higher fees for ESG-oriented index funds in exchange for their financial and non-financial benefits.”

Rupert Darwall of the RealClear Foundation argues that this underperformance is the natural progression of the ESG investment story. As a result, Darwall says ESG as an investment strategy is losing or has lost much of its credibility:

The year 2022 brings an end to an era of illusions: a year that saw the end of the post–Cold War era and the return of geopolitics; the first energy crisis of the enforced energy transition to net zero; and the year that brought environmental, social, and governance (ESG) investing down to earth with a thump—for the year to date, BlackRock’s ESG Screened S&P 500 ETF lost 22.2% of its value, and the S&P 500 Energy Sector Index rose 54.0%. The three are linked. By restricting investment in production of oil and gas by Western producers, ESG increases the market power of non-Western producers, thereby enabling Putin’s weaponization of energy supplies. Net zero—the holy grail of ESG—has turned out to be Russia’s most potent ally.

It wasn’t only a bad year for ESG on the stock market. Earlier this month, Vanguard announced that it was quitting Glasgow Financial Alliance for Net Zero (NZAM), set up by former governor of the Bank of England Mark Carney a little over a year ago. “We have decided to withdraw from NZAM so that we can provide the clarity our investors desire about the role of index funds and about how we think about material risks, including climate-related risks,” the world’s second-largest asset manager said. 

Two months ago, Alex Edmans, coauthor of the latest edition of the standard textbook on the principles of corporate finance and professor of finance at the London Business School, published a paper titled “The End of ESG”—without a question mark. Edmans criticizes what has become the primary justification for ESG: the claim that business can generate higher returns for investors by tackling climate change. Since governments are democratically elected by a country’s citizens, they are best placed to address externalities, whereas investors disproportionately represent the elites. “If ESG is pursued for its externalities, companies and investors should be very clear that it may be at the expense of value,” Edmans says.

October also saw the publication of Terrence Keeley’s Sustainable, where the former BlackRock senior executive penned what amounts to a requiem for ESG. Rather than “doing well by doing good,” the logic of Keeley’s case, as I reviewed for RealClear Books, is that investors in conventional ESG investment products are likely to end up not doing very well and leave investors feeling good, not doing good….

According to ESG doctrine, there are two types of climate financial risk—physical risk and transition risk—and it’s straightforward to demonstrate that both are spurious….

Although the disintegration of ESG as an investment strategy became unmistakable in 2022, its existence as a political doctrine will continue until it is challenged and defeated politically.

The largest bank in Europe is doubling down on net-zero commitments

HSBC, the Britain-based largest bank (by assets) in Europe, announced recently that it is doubling down on its net-zero commitments, promising to stop funding oil and gas projects and to demand greater disclosure from its existing energy clients:

HSBC (HSBA.L) will stop funding new oil and gas fields and expect more information from energy clients over their plans to cut carbon emissions, the banking giant said on Wednesday, as part of a wider update of its sector policy.

Activist groups that have been critical of HSBC in recent years mostly hailed the move by one of the biggest lenders to energy companies in the world as a keenly awaited update that will drive companies towards a cleaner future.

“HSBC’s announcement sets a new minimum level of ambition for all banks committed to net-zero,” said Jeanne Martin, a campaigner at Share Action.

HSBC is among the biggest banks to confirm it would not support oil and gas projects that received final approval after the end of 2021, a move the International Energy Agency has said is needed for the world to reach net-zero emissions by 2050….

HSBC said it would continue to finance energy companies at the corporate level to help them overhaul their businesses and drive development of cleaner energy sources, and would assess their strategic plans annually.

Covering everything from biomass projects to hydrogen, nuclear and thermal coal, the policy was aimed at driving progress across regions with different energy systems, Celine Herweijer, HSBC’s Chief Sustainability Officer, told Reuters….

Also on Wednesday, Barclays (BARC.L) said it had increased its sustainable and transition finance target to $1 trillion by 2030 and would pump more of its own money into energy startups.

In the spotlight

How clean is clean energy?

Cobalt is an indispensable component of the batteries that power electric vehicles. And its extraction and production, some have argued, is not clean, as Siddharth Kara, the author of Cobalt Red: How The Blood of The Congo Powers Our Lives, recently told podcaster Joe Rogan:

A Harvard visiting professor and modern slavery activist exposed the “appalling” cobalt mining industry in the Congo on a recent episode of “The Joe Rogan Experience” that went viral. The video has already racked up over 1 million views….

Kara told Rogan that the level of “suffering” of the Congolese people working in cobalt mines was astounding. 

When asked by Rogan if there was any cobalt mine in the Congo that did not rely on “child labor” or “slavery,” the Harvard visiting professor told him there were none. 

“I’ve never seen one and I’ve been to almost all the major industrial cobalt mines” in the country, Kara said. 

One reason for that is that the demand for cobalt is exceptionally high: “Cobalt is in every single lithium, rechargeable battery manufactured in the world today,” he explained.

As a result, it’s difficult to think of a piece of technology that does not rely on cobalt to function, Kara said. “Every smartphone, every tablet, every laptop and crucially, every electric vehicle” needs the mineral.

“We can’t function on a day-to-day basis without cobalt, and three-fourths of the supply is coming out of the Congo,” he added. “And it’s being mined in appalling, heart-wrenching, dangerous conditions.” 

The Biden administration recently entered into an agreement with the Democratic Republic of the Congo and Zambia to bolster the green energy supply chain, despite the DRC’s documented issues with child labor. 

Cobalt initially “took off because it was used in lithium-ion batteries to maximize their charge and stability,” Kara explained. “And it just so happened that the Congo is sitting on more cobalt than the rest of the planet combined,” he added. 

As a result, the Congo, a country of roughly 90 million people, became the center of a geopolitical conflict over valuable minerals. “Before anyone knew what was happening, [the] Chinese government [and] Chinese mining companies took control of almost all the big mines and the local population has been displaced,” Kara said. Subsequently, the Congolese are “under duress.”

Republicans map out their agenda on ESG and antitrust

ESG Developments This Week

In Washington, D.C.

Republicans map out their agenda on ESG and antitrust

The Republican Party’s majority in the House of Representatives will take office in January, and some members and committees have already started laying out their ESG agendas for the new Congress. Among those are members of the Judiciary Committee, who have indicated that they would like to understand better how ESG and ESG-related organizations fit into the existing body of antitrust legislation and regulation:

“Six Republicans on the House Judiciary Committee have launched an investigation looking into whether major climate groups are violating federal antitrust laws in their effort to push the “environmental, social, and governance” (ESG) agenda.

Their concerns were raised in a letter dated Dec. 6 to two executives on the steering committee for investor group Climate Action 100+ in which the Republicans argued that ESG, at its core, was “merely partisan politics masquerading as responsible corporate governance.”

The ESG agenda has now included “stifling investment in oil and gas,” gun control, abortion access, and “fake news dissemination,” according to the letter.

The lawmakers likened the climate action investor group to a “cartel,” whose job is to “ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change,” quoting from the group’s website….

The letter was signed by Reps. Jim Jordan (R-Ohio), Dan Bishop (R-N.C.), Matt Gaetz (R-Fla.), Tom McClintock (R-Calif.), Scott Fitzgerald (R-Wis.), and Cliff Bentz (R-Ore.). Jordan, currently the ranking Republican member of the House Judiciary Committee, will be the committee’s chairperson in the Republican-led House in January.

“Corporate America’s collusion in pursuit of ESG goals may violate federal or state antitrust laws,” the lawmakers wrote, pointing out how antitrust law is usually “skeptical of cooperation among competitors.”

“When enterprises like Climate Action 100+ or Ceres invite or facilitate collusion to achieve progressive policy goals, that activity can aid anticompetitive and unlawful agreements and behavior.”

Ceres is a nonprofit organization and a co-founder of Climate Action 100+….

The letter was addressed to Mindy Lubber, CEO of Ceres, and Simiso Nzima, managing investment director of global equity at the California Public Employees’ Retirement System.

The Republicans want the two executives to turn over all documents from Dec. 1, 2016, to the present showing how the organization has played its role in “facilitating and coordinating companies’ efforts to achieve ESG-related goals.””

House Financial Services Committee members plan legislation on ESG and ERISA-governed pension plans

Over at the House Financial Services Committee, congressmen Andy Barr (R-Ky.) and Mike Braun (R-Ind.) have already launched an effort to address one of the issues at the heart of the intersection of the federal government with ESG-world, namely the question of ESG usage in ERISA (the Employee Retirement Income Security Act of 1974)-governed retirement plans. 

In 2020, the Trump Administration’s Department of Labor issued a rule limiting the use of ESG factors in ERISA-governed plans and only allowed such considerations if investment managers needed to decide between otherwise equally financially sound investments. Early in the Biden presidency, that rule was overturned and replaced by an ESG-friendly rule. Barr and Braun have introduced legislation to oppose the Biden Labor Department’s rule:

“Driving the news: Sen. Mike Braun (R-Ind.) and Rep. Andy Barr (R-Ky.) are attempting to dismantle a recent Department of Labor rule allowing retirement plan fiduciaries to consider climate change and other environmental, social and governance (ESG) factors in their investment actions.

That DOL rule, issued on Nov. 22, followed an executive order signed by President Biden in May 2021 that directed federal agencies to consider ESG policies.

Braun and Barr are introducing a joint Congressional Review Act measure that would nullify the DOL rule and prevent future, similar rules from taking effect.

Be smart: The CRA legislation won’t pass in a divided Congress, or with President Biden in office, but is designed to raise the issue’s profile and force lawmakers to go on the record about where they stand.

“By finalizing rule-making allowing plan fiduciaries to consider ESG factors, Biden’s Department of Labor is steering capital away from the American energy sector, discriminating against oil and gas producers, driving up prices at the pump, and preventing investors from reaping returns from high-performing energy stocks,” Barr told Axios.

What they’re saying: The move is already gaining support from conservative groups eager to sink their teeth into the ESG fight.

“Taking on Biden for attempting to make it easier for companies like BlackRock to put politics ahead of profits is only the beginning of what will be an ongoing effort to bring to light and take action against ESG, the biggest racket happening in America today,” Will Hild, executive director of the conservative Consumers’ Research Group, told Axios.

Between the lines: In a wide-ranging interview on Thursday, Barr — who will be a senior member of the House Financial Services committee in the new House GOP majority next year — dove into some of Republicans’ anti-ESG plans.

“We’re going to have a very fulsome agenda combatting ESG, highlighting ESG for the fraud that it is,” Barr said, calling the climate-focused approach “a cancer within our capital markets.”

Barr said there will be two phases of oversight — one focused on regulators, including bank regulators, the Federal Reserve and the Securities and Exchange Commission; and the second targeting the private sector, including banks and asset managers — paired with a legislative agenda.

Barr explained his philosophy is that these ESG policies are not a market-driven phenomenon, which is the opposite of how firms like BlackRock and Vanguard describe them.”

Senators send Biden letter over ESG regulations

In the Senate, 12 Republican members sent a letter to President Biden asking him to consider what they deem the negative effects of his administration’s approach to ESG:

“President Biden’s push to impose environmental, social and governance standards (ESG) on companies is imposing significant costs on companies and hurting families, Sen. John Thune warned Biden in a letter on Wednesday.

“While businesses may elect to pursue their own ESG agendas as part of a free-market society, the heavy-handed imposition from the federal government will have (and in some cases, already has had) negative real-world impacts on our economy and American families, especially by deepening the ongoing energy and inflation crises,” wrote Thune, R-S.D., in a letter reviewed exclusively by Fox News Digital.

“These efforts, though sold by administration officials as steps necessary to mitigate climate risks, are solely an attempt to strong-arm financial institutions and other firms into choking off capital to industries that are foundational to our nation’s economy, yet are continually villainized by the far left,” he wrote.

Thune said one example of overreach is the Securities and Exchange Commission’s proposed climate-disclosure rule that would not only require registrants to disclose information about their own greenhouse gas emissions, but, in many cases, report indirect emissions “from upstream and downstream activities (i.e., their suppliers and customers)” in their value chain – known as scope 3 emissions….

Thune said the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Federal Reserve have all published draft principles for climate-related financial risk management for large banks. The Department of Labor just finalized a rule that would require pension fiduciaries to consider climate change and ESG factors in making investment decisions, regardless of their financial relevance.

“And last, but certainly not least, the National Credit Union Administration published a since-rescinded strategic plan that seemed to recommend credit unions need to alter their field of membership and loan offerings in farming communities,” Thune said.

Thune warned Biden that while his ESG push is generally aimed at big banks on Wall Street, the president needs to recognize the “trickledown effect” those policies have on local community banks and credit unions which are “feeling the pressure from Washington” to comply.

Thune says that those community financial entities are worried about how the Biden administration’s environmental agenda “could impede their ability to lend to their clients and foster the growth necessary to steer our economy away from a recession.””

On Wall Street and in the private sector

American assets in sustainable investments down 51% from 2020

The U.S. SIF (formerly the Social Investment Forum), a trade group that monitors sustainable investment in the United States, released a report last week showing that American sustainable investments contracted this year – although much of the decline can be attributed to re-classification matters:

“Assets in U.S. sustainable investments plummeted to $8.4 trillion at the beginning of 2022, down 51% from $17.1 trillion at the start of 2020, a trade group for the sustainable investment industry reported.

The number represents 12.6% of the $66.6 trillion in U.S. assets under management, says US SIF.

The figures are part of a widely watched survey measuring sustainable investing that the group releases biannually. US SIF said the sharp fall in AUM was because of two factors: a change in methodology and new proposals from the Securities and Exchange Commission that are designed to crack down on greenwashing, or misleading claims about environmental credentials….

US SIF said that of the investments in its report, $7.6 trillion were held by institutions that practice so-called ESG incorporation, or applying various environmental, social and governance, or ESG, criteria in their investment analysis. Another $3 trillion in assets were held by investors who filed shareholder resolutions on ESG issues. The $8.4 trillion figure accounts for eliminating double counting assets involved in both ESG incorporation and filing ESG shareholder resolutions.

The group said money managers and institutional asset owners reported that climate change and carbon emissions was the top issue to address. Exchange-traded funds, or ETFs, represented the biggest share of ESG assets.”

In Europe, oil and gas are becoming ESG friendly

With climate change driving much of the ESG discussion among investors, it would seem unlikely that ESG advocates would consider owning oil and gas companies. Nevertheless, as The Financial Times reports, the realities of the Russia-Ukraine war have changed some ESG calculations:

“Russia’s invasion of Ukraine has made the immense task of reducing the global economy’s addiction to fossil fuels even more daunting. Existing pledges to cut carbon emissions to net zero by 2050 were already challenging enough. Now, governments and companies are scrambling to balance their green ambitions with the new imperatives of energy security.

Just as the Ukraine war has sparked intense debate over whether defence companies should be considered suitable for sustainable investment strategies, the conflict has also prompted discussion about the role of oil and gas producers in investors’ portfolios….

European funds that employ environmental, social and governance (ESG) metrics as a group are heavily “underweight” in oil and gas stocks but some tentative signs of a shift in positioning have appeared.

Six per cent of European ESG funds now own Shell, compared to zero per cent at the end of last year, according to Bank of America. Holdings have also risen modestly this year in other energy companies, including Galp Energy, Repsol, Aker BP and Neste, across the 1,200 European ESG active and passive funds monitored by BofA.

“We believe [some] ESG funds are revisiting the cost of exclusion [of energy companies] given their underperformance in the first half of 2022 or waiting for regulations to be finalised amid greenwashing fears,” says Menka Bajaj, an ESG strategist at BofA.”

A new law designating gas and nuclear energy as sustainable was approved this month by the European parliament, following months of debate.

Sixth Circuit finds constitutional flaw in ARPA Tax Cut Ban

The Checks and Balances Letter delivers news and information from Ballotpedia’s Administrative State Project, including pivotal actions at the federal and state levels related to the separation of powers, due process, and the rule of law.

This edition: 

In this month’s edition of Checks and Balances, we review a decision from the U.S. Court of Appeals for the Sixth Circuit that prevents certain enforcement of a tax-related provision of the American Rescue Plan and Recovery Act of 2021 (ARPA); a Congressional Review Act resolution aimed at rescinding the Department of Labor’s new rule on the use of environmental, social, and corporate governance (ESG) principles in investment-related decisions; new guidance from the Federal Trade Commission that aims to broaden the scope of the agency’s enforcement authority; and the U.S. Senate’s unanimous support of proposed updates to plain language requirements in federal agency communications.

At the state level, we take a look at a lawsuit alleging that Massachusetts’ public health agency unconstitutionally installed a COVID-19 tracking app on mobile devices in the state.

We also highlight new scholarship that questions whether federal agency coordination with state attorneys general should constitute a fourth dimension of agency action. As always, we wrap up with our Regulatory Tally, which features information about the 164 proposed rules and 263 final rules added to the Federal Register in November and OIRA’s regulatory review activity.

In Washington

Sixth Circuit finds constitutional flaw in ARPA Tax Cut Ban

What’s the story?

A three-judge panel of the United States Court of Appeals for the Sixth Circuit on November 18, 2022, affirmed a lower court decision that prevents the Secretary of the Treasury from enforcing a provision of the American Rescue Plan and Recovery Act of 2021 (ARPA) known as the Tax Cut Ban against the state of Tennessee. The court found the provision to be “impermissibly vague under the Spending Clause.”

The Tax Cut Ban prevents states from applying ARPA funds to “either directly or indirectly offset a reduction in the net tax revenue,” thus preventing states from redirecting ARPA funds to reduce state taxes. In Commonwealth of Kentucky and State of Tennessee v. Janet Yellen et al., the plaintiff states argue that the Tax Cut Ban infringes on state sovereignty by enabling Congress to unconstitutionally seize state taxing authority. Based on the argument that the Tax Cut Ban coerces the states into relinquishing their sovereign taxing authority, the district court granted the states a permanent injunction against enforcement of the provision in September 2021.

In response to legal challenges from several states, the Treasury Department issued an interim final rule in May 2021 aiming to clarify that states could cut certain taxes under the Tax Cut Ban and to put forth compliance procedures. While this rule made Kentucky’s challenge moot, according to the Sixth Circuit, it failed to remedy Tennessee’s argument that the Tax Cut Ban, coupled with what the state considers to be a convoluted reporting scheme mandated in the final rule, burdens the states with compliance costs. Judges Bernice Donald, John K. Bush, and John Nalbandian found in favor of Tennessee, arguing that the Tax Cut Ban’s “impermissibly vague” language violated the Spending Clause. 

The Treasury Department had not responded to the decision as of December 17, 2022. Similar legal challenges brought by Arizona, Texas, Louisiana, Mississippi, Missouri, Ohio, and West Virginia are pending in the federal courts. 

Want to go deeper?

DOL issues final ESG rule; lawmakers respond with CRA resolution

What’s the story?

The U.S. Department of Labor (DOL) on November 22, 2022, released a final rule allowing retirement plan fiduciaries to consider environmental, social, and corporate governance (ESG) principles when making investments for Employee Retirement Income Security Act (ERISA)-governed retirement plans and when exercising proxy voting.

The final rule aims to implement a May 2021 executive order issued by President Joe Biden (D) that directed federal agencies to consider ESG principles in retirement decision-making. The rule reverses 2020 regulations issued by the Trump administration that aimed to limit ESG investments in 401(K) retirement plans. While the new rule allows retirement plan fiduciaries to consider ESG factors in investment decisions, they must still put the financial interests of employees first, according to DOL Assistant Secretary for Employee Benefits Security Lisa M. Gomez.

“The rule announced today will make workers’ retirement savings and pensions more resilient by removing needless barriers, and ending the chilling effect created by the prior administration on considering environmental, social and governance factors in investments,” said Gomez in a statement.

U.S. Representative Andy Barr (R-Ky.) and U.S. Senator Mike Braun (R-Ind.) responded to the change on December 15, 2022, by introducing a Congressional Review Act (CRA) resolution aimed at nullifying the rule and preventing similar rulemaking in the future. 

“By finalizing rule-making allowing plan fiduciaries to consider ESG factors, Biden’s Department of Labor is steering capital away from the American energy sector, discriminating against oil and gas producers, driving up prices at the pump, and preventing investors from reaping returns from high-performing energy stocks,” Barr told Axios.

The rule is scheduled to take effect on January 30, 2023.

Want to go deeper?

New FTC guidance broadens interpretation of agency’s enforcement authority

What’s the story?

The Federal Trade Commission (FTC) on November 10, 2022, published a policy statement that aims to broaden the agency’s interpretation of its authority under Section 5 of the FTC Act, which authorizes the FTC to investigate and challenge what it deems “unfair methods of competition in or affecting commerce.”

The policy statement—a type of agency guidance—replaces the agency’s 2015 enforcement standards (withdrawn in July 2021) that relied on the consumer welfare standard to determine what constitutes antitrust activity. According to the consumer welfare standard, only companies that artificially raise prices qualify as monopolies for the purposes of FTC enforcement. Under the 2015 policy, the FTC did not pursue companies via this standard if enforcement through the Sherman Act or the Clayton Act could address the competitive harm.

Under the FTC’s broadened interpretation of its authority, the commission can issue civil penalties to challenge what it deems to be anti-competitive behavior regardless of whether the behavior violates federal antitrust statutes. The text of the new policy aims to clarify “that Section 5 reaches beyond the Sherman and Clayton Acts to encompass various types of unfair conduct that tend to negatively affect competitive conditions.”

FTC Commissioners Alvaro M. Bedoya, Rebecca Kelly Slaughter, and Chair Lina M. Khan issued a joint statement in support of the new policy, arguing that the “policy statement is a long overdue step toward enforcing Section 5 of the FTC Act in line with what Congress intended when it prohibited unfair methods of competition in 1914.”

In a dissenting statement, FTC Commissioner Christine Wilson argued that “instead of providing meaningful guidance to businesses, the Policy Statement announces that the Commission has the authority summarily to condemn essentially any business conduct it finds distasteful.”

Want to go deeper?

U.S. Senate unanimously supports updates to plain language requirements for federal agency communications

What’s the story?

The U.S. Senate on December 7, 2022, unanimously passed legislation that would update requirements for government agencies to use plain language in certain communications with the public.

The Clear and Concise Act, sponsored by U.S. Senators Gary Peters (D-Mich.) and James Lankford (R-Okla.), would build on the Plain Writing Act of 2010, which requires agencies to use plain language when disseminating paper or digital information necessary for obtaining government benefits and services; information necessary for filing taxes; information about such programs generally; and information about complying with such programs. In addition to new reporting standards, the CCA would broaden these requirements to also mandate that agencies use “clear, concise, well-organized” language when providing information about agency operations, guidance, public interactions, how to navigate agency websites and offices, and instructions about participation in the rulemaking process. 

Agencies under the CCA would be required to make such communications accessible to “an audience who may be disabled, may not be proficient in English or may otherwise be disadvantaged or traditionally underserved.”

Senator Lankford described the motivation behind the bill in a statement, “Government is confusing enough. The least an agency can do is to speak plainly. … Our bill holds agencies accountable to speak ‘citizen speak,’ not government speak.”

Want to go deeper?

In the states

Lawsuit alleges Massachusetts agency unlawfully installed tracking app on mobile devices

What’s the story? 

A new class action lawsuit before the U.S. District Court for the District of Massachusetts alleges that the Massachusetts Department of Public Health (DPH) unconstitutionally installed a COVID-19 contact tracing app on Android mobile devices in the state without the knowledge or consent of device owners.

Plaintiffs Robert Wright and Johnny Kula argue in Wright v. Massachusetts Department of Public Health et al. that DPH has worked with Google since June 2021 to secretly install a COVID-19 tracking app on more than one million Android mobile devices in the state without first obtaining a search warrant. DPH moved to automatically install the app after few Massachusetts citizens chose to voluntarily download the software. Once installed, the app is invisible on users’ home screens and can only be accessed through the device settings. The covert installation, according to the lawsuit, violates citizens’ constitutional privacy and property rights. 

“The government may not secretly install surveillance devices on your personal property without a warrant—even for a laudable purpose. For the same reason, it may not install surveillance software on your smartphone without your awareness and permission,” argued Sheng Li, litigation counsel at the public interest law firm New Civil Liberties Alliance.

DPH told the Daily Caller News Foundation that the agency “has not received any documentation related to this lawsuit and does not comment on pending litigation.”

Want to go deeper?


Examining the relationship between federal agencies and state attorneys general

A new report in The Journal of Federal Agency Action by attorneys Ryan J. Strasser, Timothy L. McHugh, Abigail D. Hylton, and William H. Smith III questions whether a fourth type of federal agency action exists when federal agencies coordinate with state attorneys general to implement federal agency initiatives. This type of action, the authors argue, functions beyond the scope of agencies’ traditional rulemaking, adjudicative, and investigative processes:

“In recent years, federal agencies have sought to expand their reach and broaden their capabilities by utilizing state attorneys’ general (‘state AGs’) enforcement powers to accomplish federal regulatory goals. For example, commentators note that federal agencies ‘have enjoyed a synergistic relationship … working on privacy and data security issues’ in recent years. For their part, state AGs have recognized that there is a particularly ‘critical role State Attorneys General play’ in the federal regulatory context and argued ‘for increased partnerships between federal enforcers and the states.’ And while federal agency reliance on state AGs is not entirely new, its recent growth in the face of real and perceived limitations of federal law presents evolving opportunities and challenges. How regulators resolve these issues will affect the regulatory landscape for countless industries, in innumerable ways, and shift the balance of power between federal and state governments for years to come.”

Want to go deeper

  • Click here to read the full text of “Should Conscription of State Attorneys General Be a Recognized Fourth Form of Federal Agency Action? How Federal Agencies Are Using the States to Expand Their Regulatory Reach and Advance Their Missions.” 


Regulatory tally

Federal Register

Office of Information and Regulatory Affairs (OIRA)

OIRA’s November regulatory review activity included the following actions:

  • Review of 37 significant regulatory actions. 
  • Two rules approved without changes; recommended changes to 34 proposed rules; one rule subject to a statutory or judicial deadline.
  • As of December 1, 2022, OIRA’s website listed 98 regulatory actions under review.
  • Want to go deeper? 

Vanguard announces exit from net zero climate investment alliance

ESG Developments This Week

In Washington, D.C.

The Fed and ESG

On December 2, the Federal Reserve’s board of governors released its proposed rule on climate risks for big banks, including its proposed environmental stress tests. The board asked for public comments:

“The Federal Reserve Board of Governors on Dec. 2 invited public comment on proposed principles for managing climate-related risks of banks with $100 billion or more in assets.

Six of the board’s seven members voted in favor of the move. They included Federal Reserve Chair Jerome Powell, who became chair under President Donald J. Trump. Powell was first appointed to the board by President Barack Obama.

One governor, Christopher Waller, dissented.

“I cannot support this issuance of guidance on climate change. Climate change is real, but I disagree with the premise that it poses a serious risk to the safety and soundness of large banks and the financial stability of the United States. The Federal Reserve conducts regular stress tests on large banks that impose extremely severe macroeconomic shocks and they show that the banks are resilient,” Waller, a Trump appointee, said in a statement.

Governor Michelle W. Bowman, another Trump appointee, made it clear that she wasn’t conveying her approval of the proposal in her Dec. 2 vote.

“While I support seeking public comment, this vote does not indicate my support for the finalization of this guidance. I will evaluate any future recommendation to finalize this guidance on its merits,” she said.

“The new principles contemplate additional obligations on firms to monitor and measure a broader set of climate-related risks, over indefinite time horizons. I look forward to public input on whether the guidance will improve safety and soundness at a reasonable cost.”…

“Regulators must issue guidance that addresses the growing threats to both individual banks and the stability of the entire financial system,” David Arkush, director of the climate program for the Ralph Nader-founded non-profit Public Citizen, said.

“There is no time for the Fed or other banking regulators to delay finalizing these rules.”

Phillip Basil, director of banking policy at Better Markets, praised the Fed’s stated commitment to working with the OCC and the FDIC.

“The effects of climate change present serious and complicated risks to our banking system, and this type of coordination between the banking agencies is critical to addressing those risks,” he said in a statement.

Not everyone shares that enthusiasm.

“Hooray for the courageous Chris Waller,” Hoover Institution economist John Cochrane told The Epoch Times in a Dec. 2 email.

Waller cast the lone dissenting vote.

“Chris is right that it is completely obvious that ‘climate risk’ does not conceivably imperil the financial system, or at least not with more than infinitesimal probability and a lot less than other dangers—war, sovereign debt collapse, pandemic, etc.,” Cochrane wrote in a subsequent post on his blog, The Grumpy Economist.

“Assume it means nothing as the Fed doesn’t have authority to do anything directly on this,” Boris Ryvkin, a corporate attorney who served as national security adviser for Sen. Ted Cruz (R-Texas), said in a post on Twitter.

Members of the public have 60 days to comment on the proposed principles….”

In the states

Arizona divests from BlackRock over firm’s ESG policies

On December 8, Arizona Treasurer Kimberly Yee (R) announced that the state’s Investment Risk Management Committee had completed its review of BlackRock – including Larry Fink’s own letters – and had decided to proceed with removing its funds from BlackRock’s management because of the firm’s ESG positioning:

“Arizona is forging ahead with its plan to pull the state’s funds from BlackRock due to concerns over the massive investment firm’s push for environmental, social, and governance (ESG) policies that have led other states to take similar actions.

Arizona Treasurer Kimberly Yee said in a statement released Thursday that the state treasury’s Investment Risk Management Committee (IRMC) began to assess the relationship between the state’s trust fund and BlackRock in late 2021. 

“Part of the review by IRMC involved reading the annual letters by CEO Larry Fink, which in recent years, began dictating to businesses in the United States to follow his personal political beliefs,” Yee wrote. “In short, BlackRock moved from a traditional asset manager to a political action committee. Our internal investment team believed this moved the firm away from its fiduciary duty in general as an asset manager.”

In response to those findings, Yee noted that Arizona began to divest over $543 million from BlackRock money market funds in February 2022 and “reduced our direct exposure to BlackRock by 97%” over the course of the year. Yee added that Arizona “will continue to reduce our remaining exposure in BlackRock over time in a phased in approach that takes into consideration safe and prudent investment strategy that protects the taxpayers.”

Although the state will continue to hold some BlackRock stock through shares in a passive index of the top 1,500 American corporations, Arizona will have “minimal direct exposure” to BlackRock amounting to “less than 1 tenth of one percent of our total assets under management” as of the end of November. Yee said that Arizona intends to vote its shares in the index in an effort to “change the political activism of BlackRock.””

Texas legislators subpoena BlackRock and other financial firms in ESG investigation

Last week, a Texas legislative committee subpoenaed BlackRock and other asset managers, plus proxy advisory service Institutional Shareholder Services (ISS), as part of an investigation of ESG policies at the companies. The companies ignored the committee’s previous request for documents. 

“In August, the Texas Senate Committee on State Affairs requested documents from the financial firms BlackRock, State Street, Vanguard, and Institutional Shareholder Services. The State Affairs Committee is studying the investment practices of financial services firms and how those practices affect the state’s public pensions. It is responsible for ensuring the state’s public pension funds are not being invested in furthering political or social causes.

Now, Texas has issued a subpoena to BlackRock to provide documents in person for failure to produce the requested records. Representatives of the asset manager are ordered to appear on December 15, the same day the State Affairs Committee has called to convene the entire committee for a hearing. The committee requested that the “Big Three” asset managers — BlackRock, State Street Global Advisors (State Street), and Vanguard — appear. They also want to speak with Institutional Shareholder Services (ISS).

The purpose, as mentioned above, is to discuss the effects of environmental, social, and governance (ESG) policies on the state’s pension programs….

ISS is at the meeting because they advise Texas on how to vote on the proxy shares the state maintains responsibility for. In some cases, ISS may be automatically voting for the funds. The committee wants to ensure its proxy votes are not being used to pass proposals that ultimately damage the economy or reputation of Texas. Every year thousands of shareholder proposals are submitted, and thanks to the SEC under the Biden administration, they are no longer required to relate to business operations.

There are proposal votes on equity audits, funding abortion travel, climate reporting, and dozens of other social and political issues. As State Financial Officers Foundation Chairman and Louisiana State Treasurer John Schroder has pointed out, ESG investing allows companies like BlackRock to bypass the legislative process and push political agendas through corporate decision-making without being accountable to voters. Derek Kreifels, CEO of the State Financial Officers Foundation, has made a similar observation. “Ultimately, ESGs will encompass everything the Left can’t get done through the legislative process or the courts,” he warned.”

North Carolina treasurer asks BlackRock CEO to resign over ESG commitments

Also last week, North Carolina State Treasurer Dale Folwell sent a letter to BlackRock CEO Larry Fink, asking him to resign his position over his dedication to ESG:

“The treasurer of one of the largest state pension funds in the U.S. is urging BlackRock CEO Larry Fink to resign from the investment firm over its environment, social, and governance (ESG) policies.

North Carolina State Treasurer Dale Folwell sent a letter to BlackRock’s board of directors calling for Fink to step aside because the CEO’s “pursuit of a political agenda has gotten in the way of BlackRock’s same fiduciary duty” to its investors. “A focus on ESG is not a focus on returns and could potentially force us to violate our fiduciary duty,” Folwell wrote.

He noted that the North Carolina Retirement System (NCRS), which is valued at roughly $111 billion, has invested roughly $14 billion through BlackRock in a variety of active and passive funds, in addition to $55 million passively invested in BlackRock’s stocks and bonds. He wrote, “There is no blue money or red money at the treasurer’s office, only green. As the fiduciary for NCRS, I seek not to be political, but mathematical.”…

Amid its broad push for ESG, BlackRock’s stance against investing in fossil fuels has been a particular point of controversy for its detractors. Folwell noted in his letter that in 2020, Fink “used BlackRock’s clients’ votes against two management-supported board members of ExxonMobil because of ‘insignificant progress’ towards green energy. Yet, ExxonMobil stock rose 60% in the 12 months since the board member election because of an increase in demand for oil.”

“BlackRock needs to be totally focused on returns for their clients, not on the political effort to ‘transform’ the economy to you vision of carbon zero. Fossil fuels will be the engine that drives the world’s economy for the foreseeable future,” Folwell told the BlackRock board.

In his letter, Folwell informed BlackRock’s board that the NCRS will begin voting the shares it has under the management of BlackRock in an effort to counteract the investment giant’s ESG push, but said “the existence of the proxy voting program does not mitigate the need for a new direction at BlackRock.”

Folwell’s letter to the BlackRock board concluded that Fink must leave the firm for it to refocus on its fiduciary duty to investors: “Given his dogged pursuit of these political objectives over a number of years, I’m skeptical that he would or could lead the necessary course correction. Having lost confidence in his leadership to responsibly steward investors’ resources, I request, quite simply, that he resign or be removed from the asset management firm’s leadership team immediately.””

On Wall Street and in the private sector

Vanguard announces exit from net zero climate investment alliance

Last week, the second-largest asset manager in the world and the world’s largest passive asset manager, Vanguard, announced that it had decided to leave a $66 trillion climate investment alliance. 

The move came after 13 Republican state attorneys general filed a motion last month asking the Federal Energy Regulatory Commission to hold a hearing on Vanguard’s plans to purchase a large number of shares in public utility stocks. Stephen Soukup, a market analyst, an opponent of ESG, and the author of “The Dictatorship of Woke Capital,” wrote that “to the best of my knowledge, this is the first time that a coalition of state officials has taken action against a single ESG-committed asset management firm that isn’t BlackRock.”

Vanguard said in its statement that “the move [to leave the climate alliance] had been in the works for several months.” The Financial Times reported the news on December 7:

“Vanguard is pulling out of the main financial alliance on tackling climate change at a time when Republicans in the US have stepped up their attacks on financial institutions that they say are hostile to fossil fuels.

With $7.1tn under management and more than 30mn customers as of October 31, Vanguard is the second-largest global money manager after BlackRock. The group said on Wednesday that it was resigning from the Net Zero Asset Managers initiative, whose members have committed to achieving net zero carbon emissions by 2050.

Vanguard, which mainly manages passive funds that track market indices, said the alliance’s full-throated commitment to fighting climate change had resulted “in confusion about the views of individual investment firms”.

“We have decided to withdraw from NZAM so that we can provide the clarity our investors desire about the role of index funds and about how we think about material risks, including climate-related risks — and to make clear that Vanguard speaks independently on matters of importance to our investors,” the Pennsylvania-based company said in a statement.

NZAM was founded in December 2020 and had 291 members managing $66tn in assets as of November. Last year NZAM joined an umbrella climate finance organisation, the Glasgow Financial Alliance for Net Zero (Gfanz) upon its launch last year under Mark Carney, the former Bank of England governor.

Vanguard will exit both groups. In a statement, NZAM said Vanguard’s decision was regrettable.”

Florida divests from BlackRock

ESG Developments This Week

In the states

Florida divests from BlackRock over its ESG policies

Last week, the state of Florida, at the direction of Governor Ron DeSantis (R) and State Chief Financial Officer (CFO) Jimmy Patronis, became the latest state to divest funds from BlackRock over its sustainability and ESG policies:

“Florida will replace BlackRock as the manager of $2bn in state Treasury funds, part of a spreading Republican backlash against sustainable investing.

The move comes after Florida governor Ron DeSantis, a potential Republican US presidential candidate in 2024, led a resolution to stop the state’s pension funds from considering environmental, social and governance principles to guide investment.

BlackRock, the world’s largest asset manager, has been outspoken about the need to consider climate change in investing decisions under chief executive Larry Fink.

Republican state leaders have argued that ESG investing incorporates unwarranted concerns about climate change and curtails exposure to oil and gas companies in a way that can hurt performance.

“Florida’s Treasury Division is divesting from BlackRock because they have openly stated they’ve got other goals than producing returns,” state chief financial officer Jimmy Patronis said on Thursday. “There’s no lack of companies who will invest on our behalf, so the Florida Treasury will be taking its business elsewhere.”

Florida will divest $1.4bn of long-term securities and $600mn in short-term funds from BlackRock, Patronis’s office said.

The assets are a tiny fraction of the $8tn that BlackRock managed at the end of the third quarter. Republican states had already pulled more than $1bn from BlackRock as of October. Florida is the first state to remove some of its longer-term investments from the manager over ESG concerns.

At least 19 Republican-leaning states including Florida have now taken action to restrict ESG factors in investing or targeted asset managers for potentially boycotting the energy sector, according to an analysis by law firm Ropes & Gray.”

State attorneys general file motion to oppose Vanguard utility company stock purchases

Last week, 13 Republican state attorneys general filed a motion asking the Federal Energy Regulatory Commission to hold a hearing on ESG-mutual-fund player Vanguard’s plans to purchase large numbers of shares in public utility stocks. The states said they were concerned that, as an ESG advocate, Vanguard might engage in environmental activism with its stakes in the utilities:

“A coalition of 13 Republican attorneys general filed a rare motion Monday, asking a top federal energy regulator to prevent a financial institution from purchasing shares of publicly listed utility companies.

The state officials, led by Utah Attorney General Sean Reyes, asked the Federal Energy Regulatory Commission (FERC), to hold a hearing examining whether Vanguard Group should be given blanket authorization to purchase large quantities of public utility stocks due to its support for environmental, social and governance (ESG) investing. ESG standards broadly promote investments in green energy over fossil fuels. 

As it and other major financial institutions do every three years, in February, Vanguard asked FERC for the green light to own more than $10 million worth of public utility shares. Under the Federal Power Act, FERC is required to periodically review and approve or deny such applications.

“The Commission granted the 2019 Authorization based on assurances from Vanguard that it would refrain from investing ‘for the purpose of managing’ utility companies,” the state officials wrote in the filing Monday. “Vanguard also guaranteed that it would not seek to ‘exercise any control over the day-to-day management’ of utility companies nor take any action ‘affecting the prices at which power is transmitted or sold.’”

“Now, Vanguard’s own public commitments and other statements have at the very least created the appearance that Vanguard has breached its promises to the Commission by engaging in environmental activism and using its financial influence to manipulate the activities of the utility companies in its portfolio,” the filing continued. 

The filing stated that the FERC should at least hold the requested hearing to examine the previous authorization it granted Vanguard in 2019….

In addition to Utah, Kentucky, Indiana, Alabama, Arkansas, Louisiana, Mississippi, Montana, Nebraska, Ohio, South Carolina, South Dakota and Texas also joined the motion. The filing noted that there are investor-owned utilities in each of the states represented and argued that if those companies were weakened, their residents would be harmed.”

On December 1, in a related piece, The Wall Street Journal carried an op-ed by Will Hild, the executive director of Consumers’ Research, who gave his opinion on why the states don’t trust Vanguard’s intentions. Consumers’ Research has been involved in opposition to ESG in recent years:

“Americans are paying sky-high electricity rates and companies like Vanguard are making the problem worse. This week my organization, Consumers’ Research, joined 13 state attorneys general in a complaint against Vanguard at the Federal Energy Regulatory Commission. With more than $7 trillion in assets under management, the Pennsylvania-based investment firm has publicly committed to pressuring utilities to lower their emissions. Vanguard appears to be not only putting America’s critical infrastructure at risk but violating its agreement only to control utility company shares passively. To protect U.S. consumers and safeguard national security, FERC should investigate the company’s conduct….

Vanguard isn’t shy…and it has made climate its top priority. In March 2021 the company joined a group of other asset managers in the Net Zero Asset Managers Initiative—a U.N.-linked organization dedicated to transforming the global economy to reach net-zero carbon emissions. Before joining the initiative, each member must commit to implementing a “stewardship and engagement policy” consistent with “achieving global net zero emissions by 2050.” Asset managers like Vanguard then use their clients’ assets—not their own—to “accelerate the transition.”

Translation: They pressure companies through meetings and board votes.

Committing to net zero isn’t an abstract goal. The Net Zero Asset Managers Initiative requires its members to prescribe specific emissions targets for industry sectors, especially utilities. The International Energy Agency’s net-zero road map envisions eliminating fossil fuels from electricity generation by 2050. That would require every American utility to remake its operations radically.

Under FERC rules, asset managers aren’t permitted to meddle in a utility’s operations. Vanguard is aware of this; that’s why the company promised FERC at its August 2019 authorization hearing it would be a passive investor in the utilities in which it holds shares. The commission granted authorization, and Vanguard’s investment has been anything but passive, actively pushing corporate managements to pursue net-zero targets and shutter coal and natural-gas electricity generation….

FERC should investigate Vanguard’s activities to determine exactly what the asset manager has been telling utilities.”

 On Wall Street and in the private sector

Deutsche Bank and BNP downgrade ESG funds

Deutsche Bank AG and BNP Paribas SA have downgraded their ratings for several European ESG funds, joining others in the research and management business. The move is raising concerns about what ESG opponents describe as greenwashing:

“BNP said it was stripping Europe’s top ESG designation from $16 billion worth of funds, while DWS Group’s reclassification will hit eight funds holding about $265 million, after announcing $2.1 billion in downgrades last week. The industry has blamed unclear rules for the chaos, as investors start to voice their anger.

The DWS and BNP cuts are the latest in a string of ESG fund downgrades that have ensnared investing giants including BlackRock Inc. and Pacific Investment Management Co. Amundi SA revealed last week it will reclassify almost all its $46 billion in so-called Article 9 funds, as the EU’s highest ESG designation is known. In all cases, the decisions were triggered by fresh guidance from the EU Commission on how to interpret the bloc’s regulations. 

The development has alarmed onlookers, with the head of Europe’s main retail investor organization now planning to meet with regulators and legislators to convey concerns that members are being exposed to greenwashing.

“We need to have much clearer guidance from the authorities to make sure we aren’t misled and we aren’t being sold greenwashed investment products,” Guillaume Prache, managing director of Better Finance, said in an interview. 

BNP is downgrading 26 so-called Article 9 funds. Of those, 24 are index funds, it said in an email to Bloomberg on Friday. The majority of its actively managed Article 9 funds, equivalent to about $20 billion, will be unaffected, BNP said. 

The current lack of clarity has the potential to damage the reputation of Europe’s ESG rulebook, the Sustainable Finance Disclosure Regulation, Bioy said. 

“The credibility of SFDR and the whole asset management industry is at stake here,” she said. “We can’t ignore the fact that some investors have invested in these Article 9 funds thinking they were dark green strategies. Even if these strategies haven’t changed and the portfolios remain the same, the perception of the ‘greenness’ of these strategies will change.”

European pension managers are also voicing concerns.”

In the spotlight

ESG funds underperform other funds and charge higher fees, argues AIER fellow 

On December 1, Law & Liberty published an essay critical of ESG by Samuel Gregg, the Distinguished Fellow in Political Economy at the American Institute for Economic Research and author of the recently released book The Next American Economy: Nation, State, and Markets in an Uncertain World.” Among other things, Gregg said:

“Based on a large sampling of Morningstar-identified American ESG mutual funds from 2010 to 2018, Raghunandan and Rajgopal determined “that these funds hold portfolio firms with worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds managed by the same financial institutions in the same years.” As if that is not enough, Raghunandan and Rajgopal conclude that “ESG funds appear to underperform financially relative to other funds within the same asset manager and year, and to charge higher fees.” In short, not only have such funds failed to deliver on many of their ESG goals; they also cost more and provide less by way of financial return.

A similar picture of ineffectiveness emerges when we take a closer look at the composition of ESG funds. In his analysis of the makeup of ESG funds managed by some major investment houses, the Wall Street Journal’s Andy Kessler found that their composition differed only marginally from non-ESG-labeled funds. He discovered, for instance, that BlackRock’s ESG Aware MSCI USA EFT had “almost the same top holdings as its S&P 500 EFT.” Nevertheless, Kessler noted, the ESG-labelled fund cost 5 times more by way of fees. If this was the subtext to Elon Musk’s tweet proclaiming that ESG “is a scam,” he may have had a point.

Another complication involves the stability of the issues that preoccupy ESG investment vehicles. The areas covered by ESG are numerous and fluctuating. Once upon a time, the focus was on products like tobacco. Then climate change became popular, thereby making fossil-fuel industries a major target of ESG ire. More recently, ESG has embraced the universal prominence given to diversity, equity, and inclusiveness.

These ongoing shifts in emphases have generated substantial disparities and disagreement within and between ESG ratings providers about, among other things, what counts as ESG and what doesn’t; how to measure ESG compliance; and how much weight should be assigned to a particular ESG goal (e.g., protect the environment) vis-à-vis other ESG objectives (e.g., promote diversity). In a May 2022 Review of Finance article surveying these methodological and measurement issues, Florian Berg, Julian F. Kölbel, and Roberto Rigobon found that ESG scores across six of the most prominent ESG ratings providers correlated on average only by 54 percent. You don’t need a degree in statistics to recognize that such a low number indicates significant disagreements about which measures and goals really matter. In an earlier 2021 article, Berg, Kornelia Fabisik, and Zacharias Sautner presented evidence of unexplained and undocumented retrospective alterations to the data on which ESG scores were based. Data alterations are not unusual. Not explaining the reasons for the alteration, however, is.”

Midterm results could strengthen state opposition to ESG

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ESG Developments This Week

In the States

Republican midterm gains could strengthen state opposition to ESG according to Roll Call

Republicans flipped five state financial officer positions previously held by Democrats in Kansas, Iowa, Missouri, Nevada, and Wisconsin during the midterm elections. The partisan changes could strengthen opposition to ESG investing, according to a Roll Call report:

“Republicans picked up state financial officer positions during the midterm elections amid a campaign against environmental, social and governance investing.

Five positions — in Kansas, Iowa, Missouri, Nevada and Wisconsin — flipped from Democratic to Republican in races for state auditor, controller or treasurer. Of the 50 directly elected positions, Republicans won 29 and Democrats won 19, according to an analysis from Ballotpedia. Two races remain uncalled.

A handful of Republicans’ campaigns for state financial officers focused on ESG, echoing sentiments from GOP officials at statehouses across the country and in Congress who say ESG investing is harming capital markets and domestic energy production and reject the case made by Democrats, major investors and other proponents.

At stake is a suite of legislation and rules that would curb ESG as a material consideration, along with other financial factors, for investors. The proposals include policies for states’ pension funds to divest hundreds of millions of dollars from financial institutions that incorporate ESG — and especially climate — in their investment decisions.

At least 17 states are proposing rules that would nearly ban the use of ESG in such decisions. Several Republican state treasurers and other financial officers implied they would double down on such policies in the coming months.

“ESG funds only invest in companies based on their environmental and corporate policies, making returns on investment a secondary concern,” Republican Kansas state Rep. Steven C. Johnson, who beat Democratic incumbent Lynn Rogers in the state’s treasurer race this month, said on his campaign website. In his new role, Johnson will manage the state’s investments and pensions, including the $20 billion Kansas Public Employees Retirement System.

Other elected officials have already shown their opposition to ESG in other capacities. Republican Utah state Treasurer Marlo Oaks, who won reelection, this year joined the state’s congressional delegation to criticize S&P Global Inc.’s credit rating division for plans to supplement its analysis of states with a score on certain ESG indicators.”

BlackRock facing political pressure from state officials of both parties 

Writing at National Review Online last week, Andy Puzder, the former CEO of CKE Restaurants and a visiting fellow at The Heritage Foundation, argues that leading ESG asset management firm BlackRock is facing pressure from Republican states to deemphasize its ESG investing strategy and focus on investment performance. At the same time, Democratic states are pressuring the company to continue with its ESG investing strategy:

“The world’s largest asset manager, BlackRock Inc., has lodged itself securely between a blue-state rock and a red-state hard place because of its environmental, social, and governance (“ESG”) investment criteria.

While left-leaning states have long supported BlackRock’s ESG investing, conservative states increasingly object. In August, 19 red-state attorneys general sent BlackRock CEO Larry Fink a letter stating that BlackRock’s ESG investing violates their laws governing fiduciary duties. According to these AGs, investor returns must be a fiduciary’s sole focus, and BlackRock is sacrificing those returns to advance its “net-zero” carbon emissions agenda.

The AGs’ concerns are not unfounded. BlackRock is a net-zero zealot. Its “Path to Net Zero” website states that “the transition to a net zero world is the shared responsibility of every citizen, corporation, and government” and describes at length BlackRock’s commitment to that transition. But is that commitment really in BlackRock’s clients’ best financial interests?

As John Kerry, President Biden’s climate envoy, stated in a recent interview, some of BlackRock’s clients “want the best return they can get,” and “you don’t get that necessarily from climate” related investments. He’s right, of course. Fink’s own 2022 letter to CEOs conceded that “[w]e need to be honest about the fact that green products often come at a higher cost.” Thanks for the honesty, but you don’t need an accounting degree to know that high-cost/low-return “climate” policies will reduce a company’s profits — and its investors’ returns.

So, perhaps it’s no surprise that, since January of 2022, red-state treasurers in Missouri, South Carolina, Louisiana, Utah, Arkansas, and West Virginia have announced the divestment of over $3 billion in assets from BlackRock’s management because of its ESG and net-zero policies….

the blue-state reaction is already beginning. Concerned that BlackRock might moderate its net-zero stance to retain red-state clients following the AGs’ letter, 14 blue-state financial officers launched a website ironically criticizing red states for the negative financial consequences of “blacklisting financial firms that don’t agree with their political views” and failing to acknowledge that “climate change is real.”

Everybody knew this was a signal to BlackRock and other financial firms not to back away from ESG and net zero. A week later, New York City comptroller Brad Lander went and said the quiet part out loud. He wrote to Fink, concerned that BlackRock might moderate its commitment to net zero to the detriment of both New York City pensions (which fall under his purview) and “our planet” (which does not). Lander wants BlackRock to make its net-zero commitment clear “across its entire portfolio,” dedicate itself “to keeping fossil fuel reserves in the ground,” and work “to end lending and insurance for new fossil fuel supply projects.”

Lander also noted, with little subtlety, that he “will be prudently reassessing” the city’s business relationship with BlackRock, “through the lens of our climate responsibilities.” Talk about blacklisting financial firms that don’t agree with your political views! BlackRock manages approximately $43 billion for New York City.

And that’s why BlackRock is between a rock and a hard place.”

On Wall Street and in the private sector 

ESG engagement in practice

One of the distinctions between ESG and its social investing predecessors is that ESG is an engagement-based strategy, meaning its goal is not to divest from poor-performing companies but to leverage shareholder investments to compel poor performers to improve. While shareholder resolutions and contentious proxy votes garner much of the attention in corporate governance, behind-the-scenes negotiations are often where the most significant changes in corporate behavior are made. Reuters notes one recent example of this leveraging tactic from Costco:

“Costco Wholesale Corp (COST.O) will set new targets by next year to cut its greenhouse gas emissions, according to an activist investment firm that said the retailer had been a laggard on climate matters.

Rivals including Walmart Inc (WMT.N) and CVS Corp (CVS.N) already have targets to cut their own emissions and those from their supply chains and customer bases, or have plans to set such goals.

Costco’s new approach “shows that the company is starting to treat climate change with the gravity that the issue – and shareholders – demand,” said Leslie Samuelrich, president of Green Century Capital Management, which had pressed for the change and described the company’s new position in a statement.

“Costco is no longer a laggard among its peers,” she added….

Green Century withdrew a similar resolution meant for Costco’s next shareholder meeting in exchange for the forthcoming targets, yet to be described in detail, a representative for the Boston-based firm said….

Green Century said under the deal Costco will update those targets by next month and will set further targets in the coming year to bring down its Scope 3 emissions including those from goods it acquires and goods it sells to consumers.”

Canadian bank will soon track personal ESG metrics for individuals

For years, corporations have been able to negotiate credit terms using ESG data and targets as leverage. According to a report from Summit News, similar negotiating tactics will soon be available to individuals for personal ESG behaviors. Vancity, a Canadian bank, will soon track the carbon emissions of individual customers based on purchases made with personal credit cards:

“A bank in Canada has become the first in the country to launch a credit card that tracks a customer’s carbon emissions, amid concerns that such a scheme could one day be used to restrict purchases.

In an effort by the credit union to display its commitment to ‘climate action’, Vancity will offer a credit card that links purchases to carbon emissions, allowing customers to compare their monthly carbon footprint to the national average.

The bank will also advise customers on how to limit their carbon footprint.

“We know many Vancity members are looking for ways to reduce the impact they have on the environment, particularly when it comes to the emissions that cause climate change,” said Jonathan Fowlie, Vancity’s Chief External Relations Officer.

“As a member-owned financial cooperative, we believe it is our job to do everything we can to help, especially when it comes to the decisions people make with their money. This tool will equip Vancity Visa credit cardholders with valuable information on their purchases and enable them to connect their daily spending decisions to the change they want to see in the world.”

According to research carried out by Visa, more than 50% of Canadians are interested in monitoring their carbon footprint.”

In the spotlight

FTX Founder Sam Bankman-Fried criticizes ESG

Recently, FTX Founder Sam Bankman-Fried discussed ethics, investing, and ESG in a long Twitter thread. The editors of The Wall Street Journal turned SBF’s comments into an editorial:

“Crypto dark knight Sam Bankman-Fried may have deceived investors, customers and various journalists and politicians. But now the FTX founder is at least telling the truth about a few things. Lo, he says that environmental, social and governance (ESG) investing is a fraud, and so was his progressive public posturing….

Mr. Bankman-Fried virtue-signaled by committing to make FTX “carbon neutral” and donating generously to fashionable progressive causes such as a foundation working to provide solar energy in the Amazon River basin. “We’re giving millions each year to launch sustainability related initiatives,” he said in an April Forbes magazine interview with—you can’t make this up—Brazilian super-model Gisele Bündchen.

Meanwhile, he was leveraging FTX customer funds to make risky, ill-timed bets. “Problems were brewing. Larger than I realized,” he tweeted. “In the future, I’m going to care less about the dumb, contentless, ‘good actor’ framework,” he added. “What matters is what you do—is *actually* doing good or bad, not just *talking* about doing good or *using ESG language*.”…

“ESG has been perverted beyond recognition,” Mr. Bankman-Fried confessed in an interview this week with Vox in which he also acknowledged that his advocacy for strong crypto regulations was “just PR.”

He said he feels “bad for those who get” harmed by “this dumb game we woke westerners play where we say all the right shiboleths [sic] and so everyone likes us.” Ah, yes, the poor saps who invest in companies because they claim to be sustainable.”

Economy and Society: Shareholder activist group alleges SEC bias in allowing companies to reject its shareholder proposals

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

In Washington, D.C.

Shareholder activist group alleges SEC bias in allowing companies to reject its shareholder proposals

In a press release on October 1, the National Center for Public Policy Research’s Free Enterprise Project, which describes itself as the only full-time shareholder activist organization working to keep politics out of capital markets, alleged that its opposition to ESG has made it a political target of the Securities and Exchange Commission. 

When a shareholder proposal is submitted, the company to whom it is submitted may accept the proposal and fight it during proxy season. They may choose to negotiate with the activist shareholders who submitted the proposal, in order to keep it off the proxy ballot altogether. Or they can request that the SEC reject the proposal as immaterial. These decisions are made by SEC lawyers and not the commissioners. FEP accused those SEC lawyers of unfairly and illegitimately targeting their proposals for rejection, thereby politicizing the SEC:

“It would appear that the National Center’s Free Enterprise Project (FEP) is encountering similar bias at the U.S. Securities and Exchange Commission (SEC) as Tea Party groups experienced from the Internal Revenue Service during the Obama Administration.

In the Biden era, the SEC has always sided with companies seeking to reject shareholder proposals filed by FEP. This is a dramatic change from past behavior, when the government agency sided with FEP on approximately half of the attempts by companies to leave proposals off their proxy statements….

Until recently, according to Fox Business, approximately half of the shareholder proposals FEP filed were rejected, and the SEC sided with FEP in “no action” challenges around half the time. But since President Biden entered office, the SEC has ruled against FEP every time.

“I guarantee you that, somewhere in the SEC’s posh D.C. headquarters, there is a letter directing staff to blacklist our proposals,” said National Center Executive Vice President Justin Danhof, Esq.

This would be reminiscent of the IRS’s treatment of Tea Party groups. In 2017, that agency admitted that Tea Party and other conservative groups received extraordinary scrutiny during the Obama Administration because of their political beliefs.

One example of the suspicious circumstances surrounding FEP’s proposals is a rejection challenge by AT&T. The FEP proposal asked for an annual report “listing and analyzing” the previous year’s corporate charitable contributions. Despite the SEC defending a similar proposal in the past when Wells Fargo tried to reject it, and noting that such contributions are “beyond a company’s business operations,” the Biden SEC still sided with AT&T and allowed it to reject the FEP proposal.

“All of [FEP’s proposals] were good proposals,” Justin explained, “meaning we had prior precedent that the SEC had allowed very similar language in the past.””

On Wall Street and in the private sector

BlackRock scores, predicts ‘vast reallocation’ into ESG

As noted in the previous edition of this newsletter, on September 15, the Wall Street Journal took a look at the winners (so-far) in the ESG investing trend and came to the following conclusion: the biggest thus far is the biggest firm in the world, BlackRock.

If the trend continues, and if ESG reallocations continue to favor the biggest firms, then BlackRock shareholders can expect, what Philipp Hildebrand, the vice chairman of BlackRock, predicted this week will be a ‘vast reallocation’ into ESG:

“Global capital markets are about to witness a seismic shift of capital into products that promise to support environmental, social and governance goals, according to Philipp Hildebrand, the vice chairman of BlackRock Inc.

“The long-term story is clear,” Hildebrand said in an interview on Friday with Bloomberg Television’s Francine Lacqua. “We’re going to continue to see a vast reallocation of capital toward sustainable products.”…

BlackRock, the world’s largest asset manager with $9.5 trillion in client money, plans to expand its range of ESG products, Hildebrand said. The firm is already the biggest provider of ESG exchange-traded funds as investors increasingly look for cheaper, passive strategies within sustainability….

“Our job as an asset manager is to increase the scope of our product offering, ensure that it’s transparent and continue to innovate together with the index providers to make sure we can offer more choices,” Hildebrand said.”

ESG and private equity

In the midst of the confusion surrounding ESG disclosures by publicly traded companies and the plethora of standards offered for asset managers, a handful of private equity investment managers have banded together to set standards for their segment of the financial services business. According to Reuters, this is the first attempt by private equity investors to broach the subject of ESG reporting standards:

“A group of global private equity firms and pensions funds managing over $4 trillion in assets said on Thursday they have agreed to standardize reporting on environmental, social and corporate governance (ESG) performance of portfolio companies.

The group, led by Carlyle Group (CG.O) and the California Public Employees’ Retirement System (CalPERS), will track data on greenhouse gas emissions, renewable energy, board diversity and other metrics of companies in their portfolio….

“We have found it challenging to effectively measure impact in our private equity portfolio because of the multitude of frameworks and definitions used,” said Marcie Frost, chief executive officer of CalPERS, which is the largest U.S. public pension fund.

The investor group also includes Canada Pension Plan Investment Board (CPPIB), Blackstone Inc (BX.N), Sweden’s EQT AB (EQTAB.ST), Permira and CVC Capital Partners.

Under the initiative, private equity firms will gather and report ESG metrics from their portfolio companies, starting from this year. Boston Consulting Group, a consulting firm, will aggregate the data into an anonymized benchmark.

The founding group plans to meet on an annual basis to assess prior year’s data and build on initial metrics, the statement said.”

In the spotlight

ESG whistleblower joins Bloomberg New Economy Conversations panel

Former CIO for sustainable investing at BlackRock, Tariq Fancy, who has argued that ESG is a placebo and a distraction, recently appeared on an ESG panel discussing and debating the merits of the investment trend with others who appear mildly skeptical of ESG narratives. Andrew Browne, the editorial director of the Bloomberg New Economy Forum, told the tale as follows:

“Fancy’s argument draws on a sports metaphor. Wall Street is focused on scoring points (maximizing profits) not good sportsmanship (being a responsible investor.) To save the planet, you have to change the rules of the game. Ultimately, that means forcing companies to alter their ways by taxing their carbon emissions.

Fancy, a Canadian born to parents who emigrated from Kenya, turned whistle-blower to spark public debate. In that spirit, I invited him to join a panel on this week’s edition of Bloomberg New Economy Conversations along with Anne Simpson, the director for Board Governance & Sustainability at CalPERS, the California Public Employees System. Also on the show was Noel Quinn, the Group Chief Executive of HSBC.

The funds that Simpson represents are anything but trivial: close to $500 billion in CalPERS, and another $55 trillion (with a “t”) as part of a group that CalPERS helped form called Climate Action 100+, which describes itself as “an investor-led initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.”

This financial firepower is highly directed. Fewer than 100 companies in CalPERS equity portfolio account for more than 80% of all its emissions. Simpson’s goal is to hold the boards of these companies—steel and cement makers, utilities, aviation companies and so on—accountable. One approach: force them to align executive compensation with “net zero” goals.

Like Fancy, Simpson is skeptical of the green marketing pitch fueling the rise of ESG funds. “Snake oil is as old as the hills,” she said. But Simpson takes issue with Fancy’s contention that government alone must drive change. In her view, regulators should set standards for corporate disclosure on climate change risk but a “partnership between public, private and civil society is what’s needed to get us over the line.”…

Yet Fancy’s insider revelations have drawn much-needed attention to industry abuses. His accusations of greenwashing are backed by academic research.

A recent report by EDHEC, one of Europe’s top business schools, found that climate factors represent at most 12% of ESG portfolio stock weights on average. To boost their “green scores,” funds simply underweight sectors like electricity, which does nothing to greenify the economy. Bizarrely, the report finds that ESG funds “favor companies whose climate performance deteriorates over time.”

“From everything I saw,” Fancy said of his time running ESG investing, “being irresponsible is actually profitable, right?” He added that “most of what we were doing wasn’t really creating any systemic change as much as lulling a fantasy that was delaying the action by government required to create that.””

U.S. Supreme Court rejects challenge to California law limiting church attendance

On May 29, 2020, the United States Supreme Court rejected a challenge to California’s religious gathering limits, which order attendance in churches or places of worship to a maximum of 25% or 100 attendees.

The 5-4 decision was joined by Chief Justice Roberts who warned against intervening in emergencies: “Where those broad limits are not exceeded, they should not be subject to second-guessing by an ‘unelected federal judiciary,’ which lacks the background, competence, and expertise to assess public health and is not accountable to the people.”

Justice Kavanaugh joined the remaining three Republican-appointed justices in dissenting from the ruling, arguing that the California limits “indisputably discriminates against religion.”

What are the arguments for and against universal or mass COVID-19 testing before the economy can reopen?

Testing before reopening the economy has emerged as one of the major areas of debate around when states should end COVID-related stay-at-home orders.

Proponents of universal or mass testing for COVID-19 before the economy can reopen argue universal testing is necessary to avoid a second wave and that universal testing will increase confidence among the populace about the safety of a reopened economy.

Opponents of universal or mass testing before the economy can reopen argue that representative samples of a population can provide sufficient information and that over-reliance on tests, which can produce false negatives, might give a false sense of security.

Ballotpedia has curated a taxonomy of the main arguments that have been advanced concerning universal or mass testing for COVID-19 before the economy can reopen. These arguments come from a variety of sources, including public officials, journalists, think tanks, economists, scientists, and other stakeholders.

Click here to read arguments in favor of and here to read arguments against universal or mass testing for COVID-19.