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Economy and Society: Retiree advisers, AARP question Labor Department’s ESG proposal

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.

Predictions for the future of ESG

Late last month, as part of its end-of-the-year recap and start-of-the-year forecast, Roll Call provided a summary of the trends that it believes will drive ESG over the next several months. The paper singled out the Securities and Exchange Commission as the primary driver of ESG activity on the public/government side, and acknowledged that BlackRockthe world’s largest asset management firm, with almost $10 trillion in assets under managementwill drive events in the private sector:

“Activist shareholders may have the upper hand in holding companies more accountable on environment, social and governance issues next year, thanks to a combination of pressure from BlackRock Inc. and other institutional investors and proxy voting rule changes at the Securities and Exchange Commission.

BlackRock, the world’s largest asset manager, said this week it expects companies in which it invests to give more concrete details on climate-related risks and expand board diversity starting in 2022. In an update of its proxy voting rules, BlackRock said it will ask CEOs to explain how business strategies are resilient under “likely decarbonization pathways” and a scenario in which global warming is limited to 1.5 degrees Celsius.

Meanwhile, the SEC issued guidance and rules that will likely bolster activist, ESG-focused investors’ chances to get companies more focused on public policy issues and make it easier for shareholders to shake up corporate boards, as investment firm Engine No. 1 did in replacing three directors at Exxon Mobil Corp. in May….

BlackRock, which has about $9.5 trillion in invested assets, also said this week it wants U.S. corporate boards to reflect the increasingly diverse society and workforce. It said company boards should aim to reach 30 percent diversity of membership and have at least two directors who identify as female and at least one who identifies as a member of an underrepresented group.

The firm, which has stakes in thousands of companies around the world, said it may vote against directors who fail to demonstrate a strong commitment to mitigating climate risk and embracing diversity. The asset manager added it would support shareholder proposals on these issues if corporate executives are resistant to change, giving smaller activist investors more clout in the next proxy season.”

As for the SEC:

“Shareholders will likely be more empowered to bring forward stronger proposals thanks to recent guidance from the SEC.

Companies seeking to avoid shareholder votes on ESG issues face a higher burden to have the SEC grant their requests after the agency’s staff in November issued a legal bulletin on no-action requests under a provision known as Rule 14a-8 authorized by the Securities Exchange Act of 1934.

The agency, led by Gary Gensler, a Democrat, said it will be more likely to require companies to hold shareholder votes on public policy issues such as the environment and worker arbitration than it was during the Trump administration as part of its repeal of three legal bulletins issued between 2017 and 2019.

The SEC last month also adopted a final rule that will require companies to provide universal proxy cards in contested director elections, rather than making investors either vote for the company’s entire slate of directors or the dissidents’ slate. Although companies have until Sept. 1 to comply, some may opt in sooner rather than later or face pressure from shareholders to give them more flexibility in voting on directors….

The SEC is also working on other proposals, such as more guidance on reporting on material ESG issues and potential enforcement actions through a task force formed at the beginning of the Biden administration.

Companies and ESG investors are also waiting for the SEC to come out with its potential rulemaking on climate risk disclosure for public companies. That topic has been the main target of lobbyists’ advocacy on ESG issues this year for companies that support and oppose ESG.

“While the SEC has required climate-related disclosures since 2010, this represents an effort to significantly strengthen their relevance and expand the scope of credit risk assessments,” Marina Petroleka, global head of ESG research at the Fitch Group’s sustainability research division, said in an analyst note this month.”

Retirement advisor groups and AARP question Labor Department’s pro-ESG proposal

Last week, two large retirement-centered organizations discussed their reactions to the Labor Department’s proposed new rule on the use of ESG investment strategies in ERISA-governed retirement plans. According to Roll Call, both plan administrators and retirees themselves are leery of the changes proposed by Labor and concerned about their potential impact on retirement investments:

“The biggest trade group for pension professionals urged the Labor Department to clarify a proposed rule to allow retirement plan advisers to consider environmental, social and governance factors when selecting investments, saying it may increase legal risks.

The American Retirement Association, which represents more than 27,000 actuaries and plan administrators, as well as insurance professionals, financial advisers and others, said it’s concerned there could be added legal risks for advisers evaluating investment plans if they fail to consider the economic effects of climate change and other ESG factors.

“While nothing in the proposal gives fiduciaries license to pursue ESG objectives unmoored from or indifferent to an investment’s underlying economic merits, the ARA is concerned that the phrase ‘may often require,’ included in the required considerations, taken together with the Proposal’s preamble, strongly implies that fiduciaries not only have the option to consider ESG investments but should be considering climate change and other ESG factors,” the group said in a letter sent last month. 

Although ARA said it agrees with the proposed rule’s intent to ensure plan advisers can direct investments into ESG options more freely, the organization is concerned that advisers would have a new burden to show why ESG factors were not considered in selecting investments due to the safe harbor regulation. That creates a slippery slope for advisers overseeing larger plans, who view avoiding the risk of litigation as a top priority in demonstrating prudence when selecting plans, it said.

“We cannot emphasize enough how sensitive these stakeholders are to possible litigation risk,” ARA said. “This means that any language, reasonably read, implying, or even suggesting a particular course or fiduciary approach will be perceived as a directive and will be reacted to as such.””

Meanwhile, AARP (formerly known as the American Association of Retired Persons), a prominent retiree-advocacy group also expressed its concerns about the Labor Department proposal, questioning the viability of ESG in retirement portfolios:

“AARP, an advocacy group for people over the age of 50, asked the department to prevent plan fiduciaries from sacrificing ERISA-mandated considerations such as investment return or risk management so they can invest in ESG options. The organization, which has 38 million members, said the department should emphasize that the proposal does not establish a fiduciary standard that is less stringent than the statutory standard.

“As the Department recognizes throughout its proposal, the duty of loyalty is one of ERISA’s fundamental bedrock principles to protect participants and beneficiaries. The use of ESG factors in the selection of investments should be consistent with the duty of loyalty,” David Certner, AARP’s legislative counsel and legislative policy director, said in a Dec. 13 letter. 

“Indeed, these factors should be evaluated as a matter of course if they impact a fiduciary’s analysis of the economic and financial merits of a particular investment, competing investment choices, or investment policy, just like a myriad of other factors that may be material to investment value and risk and return,” he said.”

In the spotlight

Stanford paper describes the “Seven Myths of ESG”

Researchers at Stanford’s Rock Center for Corporate Governance recently released a paper detailing what they describe as the Seven Myths of ESG. According to Cydney Posner, who covers securities law for Cooley, LLP (a corporate law firm), “the authors set about debunking some of the most common and persistent myths about what ESG is, how it should be implemented and its impact on corporate outcomes, “many of which,” they contend, “are not supported by empirical evidence.” Among the myths identified are the following:

  • “Myth #1: We Agree on the Purpose of ESG”
  • “Myth #2: ESG Is Value-Increasing”
  • “Myth #3: We Can Tell Whether a Claimed ESG Activity Is Actually ESG”
  • “Myth #4: A Company’s ESG Agenda Is Well-Defined and Board-Driven”
  • “Myth #5: G (Governance) Belongs in ESG”
  • “Myth #6: ESG Ratings Accurately Measure ESG Quality”
  • “Myth #7: Mandatory Disclosure Will Solve the Problem”


Economy and Society: WSJ names ESG critique among best books of 2021

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

ESG Developments This Week

Lawsuit challenges California’s board diversity mandate  

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

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

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

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

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

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

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

Congressman pushes for mandatory disclosures

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

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

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

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

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

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

Exxon-Mobil faces new wave of ESG activism 

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

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

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

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

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

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

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

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

It has all become so very tiresome and predictable.”

ESG: no better, but no worse?

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

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

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

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

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

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

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

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

In the spotlight

Best Books of 2021

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

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



Economy and Society: SEC preps businesses for new ESG disclosure standards

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., and around the world

SEC preps businesses for new ESG disclosure standards

In a speech last month, SEC Commissioner Caroline Crenshaw provided companies under the SEC’s jurisdiction with significant insight as to what they should expect from the SEC’s proposal for new disclosure standards and how they should start planning to meet those expectations. Among other things, Commissioner Crenshaw suggested that the SEC will tacitly, if not overtly change the definition of materiality:

“In March of this year, the Commission sought public comment on climate change disclosure. We received hundreds of responses; many of which also addressed disclosures concerning other ESG risks. An overwhelming number of comment letters state that investors view ESG information as material to financial performance and that investors need consistent and reliable disclosures of ESG information to inform their investment decisions. According to commenters, ESG related information helps investors assess the long-term sustainability or value of an investment. And this makes sense if you think about the position investors are in today.”

Commissioner Crenshaw also discussed the types of issues that might confront companies and how they should work to incorporate their ESG disclosures into their financial statements and internal accounting practices:

“With ESG now front and center, the reliability of corporate ESG risk disclosures, and their potential impact on and connectivity to financial statements, is critical. As you know, corporate internal controls play a crucial role in ensuring such risk disclosures are consistent and reliable. The term “internal accounting controls” refers to an organization’s plan, methods, and procedures related to safeguarding a company’s assets and ensuring the reliability of corporate financial records. These controls broadly include systems designed to ensure transactions are authorized and recorded in a way that maintains accountability for assets and allows for financial statement preparation in conformity with GAAP. They also include procedures that control access to assets and the systems designed to test the effectiveness of internal controls. The concept of accounting controls is intentionally broad, because a company’s system for tracking its assets and recording transactions – regardless of their form – is vital to accurate financial reporting. And it is vital to identifying risks to the financial statements so leadership can manage them and prepare GAAP-compliant financial statements and disclosures accordingly. At the end of the day, management is responsible for establishing and maintaining an effective system of internal controls that reasonably safeguards corporate assets from risk. So as you think about and discuss ESG risks during this conference, I encourage you to think about them in the context of your internal accounting controls and audit functions.”

Finally, Crenshaw addressed climate change and the related matters that should draw companies’ attention:

“I would like to hear how public companies are assessing whether and how climate change risk impacts revenues and expenses, both now and in the foreseeable future. In particular, I am interested in understanding how companies are evaluating whether climate risk impacts their business. Some issues that I would think companies are considering as part of this process include whether assets are at risk of depreciating more quickly or becoming “stranded” in response to climate change; whether supply chain or transportation networks are at greater risk of being impacted by extreme weather events; or whether existing revenue streams depend on the status quo, such that new regulations pertaining to deforestation or carbon emission could potentially reduce income. No matter where public companies come out on these topics – or how they assess climate risk – I would like to understand the underlying internal accounting controls that guide decision making. On a related note, if climate change presents risks to a company, or at least requires disclosure, I’m interested in understanding how that company evaluates climate change risk. For example, do companies rely on third party service providers, and if so, do they evaluate the controls that the service providers have in place over information and disclose to investors the identity of the service provider, in the same way you disclose your auditors and underwriters?” 

ESG in theory and practice

Several weeks after COP26 summit agreements to divest from fossil fuels and push toward a zero-carbon future, Japan appears to be backtracking:

“Government officials have been quietly urging trading houses, refiners and utilities to slow down their move away from fossil fuels, and even encouraging new investments in oil-and-gas projects, according to people within the Japanese government and industry, who requested anonymity as the talks are private.

The officials are concerned about the long-term supply of traditional fuels as the world doubles down on renewable energy, the people said. The import-dependent nation wants to avoid a potential shortage of fuel this winter, as well as during future cold spells, after a deficit last year sparked fears of nationwide blackouts.

Japan joined almost 200 countries last month in a pledge to step up the fight against climate change, including phasing down coal power and tackling emissions. However, the moves by the officials show the struggle to turn those pledges into reality, especially for countries like Japan which relies on imports for nearly 90% of its energy needs, with prices spiking partly because of the world’s shift away from fossil fuel investments….

To achieve net-zero emissions by 2050, the world needs to stop developing new gas, oil and coal fields, the International Energy Agency said in May. Japanese officials are echoing concerns highlighted by Australia last month, which said Europe’s gas supply squeeze is proof that nations need to continue to add more production.

Japan’s trading houses, including Sumitomo Corp. and Marubeni Corp., are aggressively divesting from fossil fuels amid an uncertain future for the energy sources and pressure from shareholders. These companies, formally known as “Sogo Shosha,” have traditionally been among the biggest investors in oil and natural gas assets in order to bring the fuel to resource-poor Japan.”

In the States

Report argues New York City’s ESG tax hits hardest upstate

As part of its push to move toward sustainability (and thus to meet municipal bond investors’ ESG demands), New York City has pledged to go green and recently signed two contracts to make that possible. According to a recent note from the Empire Center for Public Policy, most of the costs of the project, but none of the benefits, will hit upstate:

“A pair of recently inked contracts to fuel more than one-third of New York City’s electricity grid with renewable energy will raise monthly electricity bills for upstate ratepayers up to 9.9 percent once the projects are on-line. 

Both downstate (ConEdison) and upstate (National Grid) customers will bear the project costs equally based on load share, but upstate customers—who tend to have lower electricity bills—are expected to experience roughly double the percentage increase. 

That’s according to a petition just filed by the New York State Energy Research and Development Authority (NYSERDA), which is now seeking to have the contracted projects approved by the Public Service Commission. 

The projects seem headed for approval, since Governor Hochul signed off on them and her office issued a press release Tuesday trumpeting their expected contribution….”

The Empire State note also discussed recent refusals by the New York State Climate Action Council to be more transparent about who would pay for further plans to meet sustainability goals and how those goals would be met:

“In related news Tuesday, the New York State Climate Action Council (Council) held a virtual public meeting at which it discussed a strategy to continue dodging — in its long-awaited “draft scoping plan” to be issued later this month—the question of who will pay the hundreds of billions of dollars required to achieve the CLCPA’s climate goals. 

A draft plan circulated in advance to the Council members (but not the public) prompted member concern regarding the need for an analysis of “energy affordability and impacts to consumer pricing.” But the “proposed resolution” to that concern was to point to the Council’s cost-benefit analysis. As we recently noted, however, that analysis makes no attempt to estimate ratepayer impact on the grounds that it’s currently unclear what specific policies will be adopted to achieve the law’s climate goals.”

In the spotlight

ESG and business schools, again

This week, The Financial Times has two stories about ESG at business schools and whether the latest increase is meeting current demand. One story deals with specifically with European Business Schools and the impressions they give with respect to ESG education:

“As environmental, social and governance standards become ever more important criteria by which business schools are judged, the Financial Times’s ranking team analysed how European institutions are faring compared with their global rivals, as well as assessing how students are funding their degrees, alumni seniority and favoured sectors of employment….

Executive MBA and MiM graduates who studied outside Europe rate their business schools’ delivery of environmental, social and governance topics more highly than those from European institutions. Only MBA graduates from European schools rate them higher on the subject than their peers elsewhere.

MBA and executive MBA programmes taught in Europe dedicate a larger part of their courses to ESG compared with schools in the rest of the world. The average proportion of core MBA teaching hours dedicated to ESG in Europe is 75 per cent higher than the rest of the world, where only 12 per cent of the degree is related to ESG topics.”

The second piece made the case that in spite of European business schools’ dedication to ESG education, they are still failing the business community, which needs even more ESG capacity:

“Business is undergoing profound change. Urged on by regulatory reforms proposed by the European Commission, the continent’s executives are at the forefront of promoting purposeful, responsible and sustainable business. European business schools should be at the vanguard but risk being left behind.

Many schools have been slow to recognise the extent of reform required to their curricula. They have introduced electives on topics such as environmental, social and corporate governance and sustainable business but, for the most part, their core courses remain unchanged.

The recent final report from The British Academy Future of the Corporation programme highlights the extent to which business is embracing purposeful profit — making money by solving rather than exacerbating problems for people and planet. It argues that businesses should be supported and held to account, and sets out policies and practices.

Business school research and teaching should be the source of education for the coming generation of managers and entrepreneurs. But shareholder primacy remains at the heart of schools’ programmes, which are focused on economic theories, financial models and management studies. Courses start from the presumption that the purpose of a business is to maximise shareholder wealth and everything — accounting, finance, marketing, operations management, organisational behaviour and strategy — follows from that.”



Economy and Society: Lawsuit challenges SEC’s approval of NASDAQ diversity quotas

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.

Multinational regulatory agency crack down on overstated environmental credentials 

On November 23, the International Organization of Securities Commissions agreed to a framework that, in its view, ends what opponents refer to as greenwashing in ESG investments and brings transparency to ESG ratings providers. The effort to standardize the ESG ratings business follows the introduction, made earlier this month, of a global corporate ESG reporting standards organization, the International Sustainability Standards Board, which made its debut at the COP26 conference in Glasgow, Scotland, and will be based in Frankfurt, Germany. According to Reuters:

“Regulators are cracking down on many aspects of ESG investing with basic rules to make it easier to punish greenwashing, where the environmental credentials of an investment or activity are overstated, in a cross-border sector where investment is “exploding”.

The International Organization of Securities Commissions (IOSCO), which groups securities watchdogs from the United States, Europe, Asia and Latin America, published 10 recommendations for its members to apply in day-to-day work….

Asset managers use ratings from about 160 raters such as MSCI, S&P Global and Morningstar to pick stocks and bonds for “green” products now popular with ethical investors, but there are no regulatory checks on how those ratings were put together.

IOSCO said its recommendations will begin shining a light on how ratings are compiled and conflicts of interest handled in a largely unregulated business which is already worth around $1 billion and growing at 20% a year.

It recommends that ESG ratings and data providers consider implementing written procedures to underpin high quality ratings, and make public disclosure a priority.”

Lawsuit challenges SEC’s order approving diversity quotas for Nasdaq-listed companies

On November 22, in what experts believe is the first volley in a legal battle over various ESG-related investment rules, Boyden Gray & Associates filed its opening brief in a case brought by the firm’s client, the Alliance for Fair Board Recruitment, against the Securities and Exchange Commission (SEC). The case centers on the SEC’s approval of a diversity rule introduced by the Nasdaq Stock Exchange last year, which threatens corporations with de-listing from the exchange if they fail to meet certain board diversity demands. Citing its brief, the firm explains that the SEC has gone beyond its jurisdiction to promote a rule that, in its view, it has no legal or statutory right to promote:

“The SEC’s order violates the constitutional right to equal protection, as it encourages discrimination against potential board members and also by current board members and shareholders; and it stigmatizes board members who identify as one of the preferred demographics. The order also violates the First Amendment by demanding disclosure of “controversial” information, which the Supreme Court has prohibited absent compelling justifications and narrow tailoring. Finally, the SEC lacked statutory authority to issue the order, which seeks to regulate demographics through the guise of “financial disclosures.”

The firm continues, arguing that, in addition, the Nasdaq rule is discriminatory, thereby violating Supreme Court precedent:

“Nasdaq’s minority director rules, by requiring a quota of racial or sexual minorities to be board members—or else a public explanation—requires companies to discriminate based on race. The Supreme Court has always looked on such distinctions with extreme suspicion because, as the brief explains,

“Distinctions between citizens solely because of their ancestry are by their very nature odious to a free people.” Rice v. Cayetano (2000). There are no “benign” racial classifications; sorting people by race always “stimulates our society’s latent race consciousness,’ “delays the time when race will become … truly irrelevant,” and “perpetuates the very racial divisions the polity seeks to transcend.” Shaw v. Reno (1993).”

The firm’s namesakeC. Boyden Gray, the former White House Counsel to President George H.W. Bush and former U.S. Ambassador to the European Unionco-authored an op-ed for The Wall Street Journal this past April, in which he and one of the firm’s partners, Jonathan Berry, foreshadowed the case that they are currently making in court and argued that Nasdaq’s efforts are driven by social policy and not the best interests of companies, boards, and shareholders:

“Nasdaq has, in its own words, embraced “the social justice movement.” The actual job of a stock exchange, however, is to ensure that trading is orderly and its listed companies follow standard governance rules. But doing that doesn’t earn the applause of the political left.

Progressive approval apparently means a lot to Nasdaq, which has officially proposed to its regulator—the Securities and Exchange Commission, newly chaired by Gary Gensler —to increase boardroom diversity through a “regulatory approach.” This proposal would require that Nasdaq-listed companies not only disclose the diversity characteristics of their existing boards, but also retain “at least one director who self-identifies as female,” and “at least one director who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, two or more races or ethnicities, or as LGBTQ+.” Noncompliant firms must publicly “explain”—in writing—why they don’t meet Nasdaq’s quotas.

Nasdaq’s discriminate-or-explain rule is unlawful, unconstitutional, and unsupported by the evidence. Quota systems like this unjustifiably classify people by arbitrary categories of sex and race in violation of equal-protection principles, and the “alternative” of explaining why a firm won’t discriminate compels speech in violation of the First Amendment….

Under the Exchange Act, Nasdaq’s listing rules must be designed to achieve one of the lawful purposes of an exchange, such as preventing fraud or protecting investors. Aspirational statements of purpose are insufficient; Nasdaq needs to provide real evidence that its proposal is designed to further the purposes of an exchange. It doesn’t have the evidence….

Together with University of Pennsylvania professor Jonathan Klick, our own examination of Nasdaq’s sources—and those it omits—shows that the effect of boardroom gender diversity on firm performance is inconclusive. Instead, Nasdaq cherry-picks the studies it reports, and then cherry-picks even among the results of those studies. Take its citation of a 2019 study as finding “a positive association between women on the audit committee with financial accounting expertise and the voluntary disclosure of forward-looking information.” Nasdaq doesn’t cite that same study’s ultimate conclusion: It is the financial expertise of committee members—not their sex—that improves reporting outcomes. Counter to Nasdaq’s narrative, the study concludes that “intrinsic characteristics linked to women” are “insufficient . . . to enhance voluntary disclosures.”

As sparse as the evidence is for its female director quota, Nasdaq has even less support for its catchall minority director mandate. Indeed, none of the sources Nasdaq cites to prove that board diversity enhances corporate governance even examine racial diversity. And not one of Nasdaq’s sources examined firms with LGBTQ board members.”

On Wall Street and in the private sector

Schwab gets in the ESG game while some argue the game is too crowded as it is

Two weeks ago, Charles Schwab, one of the world’s best-known names in retail brokerage and one of the pioneers in commission-free stock and ETF trading, announced the launch of its first ESG ETF, which is also its first actively managed ETF. On November 12, Bloomberg Green reported that the deluge of new ESG funds was frustrating to many analysts and “risks [a] breaking point”:

“The flood of new ESG funds is threatening to test the limits of investor demand, with the world’s largest credit ETF the latest to get a socially responsible doppelganger even as it bleeds cash.

The iShares ESG Advanced Investment Grade Corporate Bond exchange-traded fund (ticker ELQD) — a copycat of the $38.4 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) — debuted this week touting higher environmental, social and governance standards. 

The BlackRock Inc. ESG launch comes despite a market backlash against credit strategies teeming with interest-rate risk….

The arrival of ESG versions of these currently unloved products is an acid test of demand for socially conscious investing options. U.S. issuers alone have launched 27 such ETFs in 2021 so far, one shy of last year’s record.

“Within the next year, I think we’ll start seeing a spike in ESG ETF closures,” said Nate Geraci, president of The ETF Store, an advisory firm. “A lot of product is being launched without proof that investor demand actually exists.”

Skeptics point to the modest $750 million invested on average in the 111 U.S.-listed ETFs that are designated as ESG — among the lowest asset-to-product ratios in the industry. By comparison, value-oriented funds have around $3.6 billion and growth-focused funds $5 billion, according to data compiled by Bloomberg. 

Eric Balchunas, senior ETF analyst with Bloomberg Intelligence, reckons issuers are “way overestimating the demand.” He doesn’t see such funds becoming a sizable chunk of the industry even as it grows over the medium term.”

In the spotlight

Professors argue supply chains potential ESG blind spot

With supply chain dominating business news the past few weeks, it should come as no surprise that the issue is now starting to appear in ESG news as well. Supply chains and their management are issues that some in the ESG field believe have been overlooked and should be given more attention, particularly now, when investors and others are more keenly attuned to their overall impact.

In a piece published on November 9, by the online magazine The Conversation, two management professorsTinglong Dai from Johns Hopkins and Christopher Tang from UCLAaddressed the issue as follows:

“[I]nvestors’ trust in ESG funds may be misplaced. As scholars in the field of supply chain management and sustainable operations, we see a major flaw in how rating agencies, such as Bloomberg, MSCI and Sustainalytics, are measuring companies’ ESG risk: the performance of their supply chains.

Nearly every company’s operations are backed by a global supply chain that consists of workers, information and resources. To accurately measure a company’s ESG risks, its end-to-end supply chain operations must be considered.

Our recent examination of ESG measures shows that most ESG rating agencies do not measure companies’ ESG performance from the lens of the global supply chains supporting their operations.

For example, Bloomberg’s ESG measure lists “supply chain” as an item under the “S” (social) pillar. By this measure, supply chains are treated separately from other items, such as carbon emissions, climate change effects, pollutants, and human rights. This means all those items, if not captured in the ambiguous “supply chain” metric, reflect each company’s own actions but not their supply chain partners’.

Even when companies collect their suppliers’ performance, “selective reporting” can arise because there is no unified reporting standard. One recent study found that companies tend to report environmentally responsible suppliers and conceal “bad” suppliers, effectively “greenwashing” their supply chain.

Carbon emissions are another example. Many companies, such as Timberland, have claimed great successes in reducing emissions from their own operations. Yet the emissions from their supply chain partners and customers, known as “Scope 3 emissions,” may remain high. ESG rating agencies have not been able to adequately include Scope 3 emissions because of a lack of data: Only 19% of companies in the manufacturing industry and 22% in the service industry disclose this data.

More broadly, without accounting for a company’s entire supply chain, ESG measures fail to reflect global supply chain networks that today’s big and small companies alike depend on for their day-to-day operations.”



Economy and Society: Responses to ESG-disclosure rules

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.

Responses to ESG-disclosure rules 

As discussion continues about the Labor Department’s ERISA retirement plan rule, which is in the comment period, and the Securities and Exchange Commission’s proposal on ESG-related disclosure rules, the Mercatus Center at George Mason University released a report on the subject by Amanda M. Rose, a professor of law at Vanderbilt University Law School. Rose concludes that general, all-purpose disclosure requirements are too vague and too broad and suggests that the SEC move more deliberately, more simply, and more incrementally:

“The breadth of topics embraced by ESG and the breadth of motivations spurring the ESG movement have created a big tent that has undoubtedly served a purpose by helping the various causes of those involved to gain momentum. But it has also created problems. For example, ESG performance ratings are inconsistent and difficult to decipher. Which of the myriad ESG issues are factored into a rating, how performance on those issues is measured, and the weight each issue is given are subjective, usually nontransparent determinations that vary across ratings providers.

The breadth of ESG topics also makes studies that purport to show a positive link between ESG performance and financial performance difficult to interpret. There is no a priori reason to believe that a company’s approach to climate change and a company’s approach to diversity or any other ESG issue will each have the same sort of impact on a company’s financial performance; yet these studies often bundle ESG issues together to measure ESG performance or rely on ESG performance ratings that themselves bundle the issues together. They therefore leave unanswered which, if any, discrete corporate policies related to ESG actually affect financial performance….

Many are urging the SEC to create a comprehensive, mandatory, ESG disclosure regime, and title I of H.R. 1187, a bill recently passed by the House of Representatives, would require the SEC to do so….

The trouble with these proposals, however, is that they speak in generalities about the importance of ESG to investors without specifying which, if any, specific ESG topics are financially material, and they invite the SEC to model a mandatory ESG-disclosure framework after frameworks developed by private standard setters without strict regard for notions of financial materiality….

Questions of institutional competence and democratic accountability are particularly significant because advocates for ESG disclosure clearly see ESG disclosure as a mechanism for promoting certain types of corporate behavior and discouraging others. Mandating that such disclosures appear in SEC filings would amplify this effect by involving the board and executives who certify SEC filings in the ESG disclosure process. Advocates view this as a benefit of SEC-mandated ESG disclosure. But the SEC lacks the expertise and authority to broadly regulate corporate behavior.”

Professor Rose concludes by suggesting that: “Whether the SEC ought to mandate ESG disclosure and, if so, how it should do so can be approached and debated on a discrete, topic-by-topic basis, like any other item of arguably material information.” 

Will an emphasis on ESG compromise future retirements?

On November 19, RealClearMarkets published a piece on ESG in ERISA governed retirement funds by Bryan Bashur, a Federal Affairs Manager at Americans for Tax Reform and executive director of the Shareholder Advocacy Forum. Bashur argues against the Labor Department’s new proposed rule as follows:

“[R]eturns on ESG-driven investment strategies risk being lower than is the case with their more traditionally run counterparts. According to Pacific Research Institute research, $10,000 invested in an ESG fund would be around 44 percent lower than an investment in a fund that tracks the S&P 500 for ten years. 

In fact, some industry experts such as Tariq Fancy, a former chief investment officer for sustainable investing at BlackRock, believe that “the ESG industry today consists of products that have higher fees but little or no impact and narratives that mislead the public.”…

Biden is effectively allowing pension plan managers to redefine their fiduciary duty to the plan beneficiaries, in the name of ESG and other forms of socially responsible investing, a move that may well mean that could hit the amount in a beneficiary’s pension pot when the time comes to retire. 

Bashur also argues that the political warfare is not restricted to the federal level and some states are pushing back:

[T]here are solutions to ensure that Americans are secured after retirement. The Texas legislature passed, and Gov. Greg Abbott signed, a bill that would aim to maximize returns for state employee pensions and retirement funds by punishing governmental entities from contracting with or investing in financial institutions boycotting fossil fuel companies. The bill went into effect in September. 

Under the new Texas law, retirement funds will not be subjected to using taxpayer dollars to pay high fees for ESG products more focused on political initiatives than creating real economic value for employees.”

In education

The rise of ESG in business schools

A recent New York Times “DealBook” column detailed the rise of ESG in business schools. As it turns out, two years before, The Financial Times did its own rundown of the burgeoning field of ESG studies in business and management education. Among other things, FT noted:

“The University of Chicago has long been considered the epitome of free-market thought. No wonder: this was the intellectual home of economists such as Eugene Fama and Milton Friedman, who championed the pursuit of profit and the doctrine of shareholder primacy which has driven corporate America for nearly half a century.

“In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business, ” Friedman wrote in a highly influential 1970 essay. “His primary responsibility is to them.”

But today something striking is under way in Chicago, says Randall Kroszner, an esteemed economist who teaches at Chicago Booth business school (and formerly served on the Federal Reserve Board).

While the business school remains a bastion of free markets, it has also started to teach its students about environmental, social and governance issues (ESG) — including the importance of serving “stakeholders” such as customers, employees and communities rather than just shareholders. “We have been changing,” explains Mr Kroszner, who argues that it is entirely wrong to view Chicago today just through the narrow lens of Friedman-style economics.

It is a powerful symbol of a bigger paradigm shift….

[W]hile investors watch the C-suite to see if it can (or cannot) live up to these lofty new goals, what has hitherto grabbed less attention is the crucial role that business schools are playing in this pivot to a more socially responsible model of capitalism….

Take Harvard Business School — an institution that was once viewed as the seminary of the religion of red-blooded, profit-focused American capitalism. Two years ago, Vikram Gandhi, a Wall Street veteran, developed the first HBS impact investing course which he teaches as part of the elective MBA curriculum. “We have written more than two dozen new case studies [for the course],” he says, including entities ranging from BlackRock to private equity group TPG’s Rise Fund and Japan’s government pension investment fund. “We, like others, recognise that ESG isn’t a fad — it’s part of a long-term trend.”

George Serafeim, another Harvard Business School professor, is overseeing a course that explores how companies and consumers can adopt ESG in their own lives….

New York University’s Stern School of Business has established a special ESG hub run by Tensie Whelan, formerly of the Rainforest Alliance, which offers intensive study on how ESG impacts specific business sectors, such as the auto industry.

Other business schools, such as Thunderbird in Arizona, or Berkeley in California, are also developing significant ESG footprints.”

In his book on ESG investing The Dictatorship of Woke Capital, independent market analyst Stephen Soukup writes that “When the histories of this era are written, 2019 will go down as the year of ESG….” It appears, at least according to The Financial Times, that many business schools would likely agree.

On Wall Street and in the private sector

Will the Labor ERISA rule further empower proxy advisory services?

In a piece published November 12, the editors of PlanAdvisor magazine suggested that the Biden Department of Labor’s proposed rule on ESG in ERISA-compliant plans will require some plans to change their fiduciary disclosures and guidelines, perhaps increasing their reliance on the two proxy advisory services that dominate that market, Glass-Lewis and Institutional Shareholder Services (ISS). As the editors point out in the text, PlanAdvisor is owned by ISS:

“Under the DOL’s proposal, funds or asset owners increasing their focus on ESG factors may require changes in their proxy voting disclosures and guidelines, according to Adam Shoffner, fund chief compliance officer at compliance and technology firm Foreside. For example, an asset owner that subscribes to a standard set of proxy advisory opinions may need to update the type of proxy advice it receives.

Gabriel Alsina, head of Americas, Continental Europe (ex-France) and global custom research at ISS, says ISS’s benchmark policy reviews environmental and social considerations when providing voting recommendations in some situations. ISS also offers specialty policies that focus on sustainability, socially responsible investing (SRI) and climate.

The DOL’s prior guidance hadn’t diminished the importance of ESG issues to institutional investors, says Alsina, who adds that demand for environmental and social research has increased. “E, S and G have become inseparable to most institutional investors, providing distinct avenues to assess risk and preserve long-term shareholder value,” he says. “Proxy voting guidelines have evolved to add more environmental and social criteria into consideration, not less.”…

Separate from the DOL action, the Securities and Exchange Commission (SEC) has proposed amendments to Form N-PX, “Annual Report of Proxy Voting Record of Registered Management Investment Company.” According to a legal update from Stradley Ronon, the proposed amendments are designed to enhance disclosure by requiring funds to identify the subject matter of the reported proxy votes.

From an adviser’s perspective, the information on the revised Form N-PX would provide greater insight into how closely a fund’s voting patterns align with the plan sponsor’s values. For example, if BlackRock’s change causes more fund managers to allow split proxy voting, it could create new opportunities for plans to vote their values versus defaulting to the fund manager.

It could also result in the development of proxy advisory services that focus on specific themes. Hoeppner says the industry isn’t there yet, but he speculates that proxy advisory services that have pro-environment or pro-manufacturing perspectives, for instance, could emerge. Plan advisers could use these services to help their plan clients determine their votes.”

In the spotlight

Incentivizing corporate leaders to meet ESG metrics on the rise while critics skeptical of impact

The incentivization of corporate leaders to meet ESG metrics was the topic of a November 14 piece in the The Financial Times, which summarized that “[s]enior management pay is increasingly linked to sustainability targets, but critics are sceptical this will amount to meaningful change”:

“As climate change has advanced up the boardroom agenda, so, inexorably, it has started to find its way into the incentives of senior executives. That has raised questions, not only about the clarity and solidity of the underlying goals and the ease with which chief executives might hit them, but about the purpose and effectiveness of monetary rewards as a way of changing corporate behaviour.

For now absolute numbers of companies using climate targets to calculate chief executives’ bonuses and long-term incentives remain low: just 24 companies in the FTSE 100, and only 20 in the S&P 500, according to ISS ESG, the responsible investment arm of proxy adviser Institutional Shareholder Services. But from a low base, the number of companies using climate pay targets more than doubled between 2019 and 2020. A survey by Deloitte in September suggested a further 24 per cent of companies polled expected to link their long-term incentive plans for executives to net zero or climate measures over the next two years.

“We have not seen that sort of increase since TSR became the measure in vogue” in the early 2000s, says Phillippa O’Connor, a partner at PwC, who advises companies on executive rewards, referring to total shareholder return, the metric of choice for tying executives’ incentives to financial performance.

The push to integrate climate goals, and wider ESG targets, into pay plans has been led by consumer companies such as Unilever. Investors have also intensified the pressure on oil and gas groups such as Royal Dutch Shell to follow suit. According to ISS ESG, 39 per cent of energy companies in the world’s biggest indices had incorporated climate targets into their chief executives’ pay by last year, the highest proportion of any sector.

Harlan Zimmerman, senior partner at Cevian Capital, an activist investment group, sees the introduction of targeted pay as a “forcing mechanism” to change mindsets about climate change.”



Economy and Society: Bank of America warns regulatory scrutiny could halt ESG growth

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.

FINRA Chair joins the regulatory chorus

On November 3, CNBC released an interview with former co-CEO of Ray Dalio’s Bridgewater Associates Eileen Murray, who is currently the chair of the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization that oversees and regulates the actions of its members. Murray joined a growing number of government officials and regulators who argue that the key to making ESG investing work is, in their view, more serious and stringent government regulation. On the specific matter of the environment she said the following:

“My skepticism is not about tackling ESG. I think we absolutely have to do that. I think the way we’re going about it, there’s a lack of consistency and standards, in terms of what’s being reported to the public. Who’s accountable? Who’s accountable for those disclosures? Right. And what is the transformation that we need to have to make ESG really real? You know, we’re polluting the planet. How are we going to stop that? And so when I stepped back, my skepticism is about – and I wouldn’t have said this 20 years ago – I really think we need regulators to step up. They have in certain parts of the world, and start to ensure that companies are applying standards and disclosure, that companies are being open about what they’re doing and transparent. 

It’s complicated. And you know, it’s evolving. So people say, “Oh, it’s too complicated. We can’t deal with it.” Well, 20 years ago, we had a lot of changes in credit exposure reporting and people thought that was very complicated. Same thing with trading analytics. So I don’t believe that this is so complicated, that smart people can’t come to solutions. But I think it’s going to take regulators, business, and educators to deal with this. And it’s an ecosystem problem. One company cannot do this alone and that’s why I think we need government and regulators. So my skepticism is not about the call to action, my skepticism is, are we doing enough? Or are we going to wait till this is a pandemic to deal with?”

Regarding the “S” in ESG (i.e. “social”) Murray said the following:

“Take DE&I – how many years has that been around?…

Diversity we’ve been talking about since I was in my 20s, which was quite a quite a long ways ago. But you know, when I first started working, diversity, it was like, 0.5% of the senior people were women and today it’s 17%. And you know Leslie, I don’t know if I should do the happy dance or cry. But we just haven’t made enough progress. And I believe had regulations been more involved, that we would be further along on diversity. I don’t think it’s just about diversity. I think it’s also about inclusion to really be successful and so I think we both know that. One of the things for example, what the NASDAQ just did, I’m not talking as the chair of FINRA, but as Eileen Murray, individual, I applaud them….

Yeah, and they’re basically saying, comply or disclose. So you either comply or you disclose. Well, what’s wrong with that? What’s the criticism about that? I just think without those kinds of movements, we’re not going to make progress. And I think history demonstrates that….I think without disclosure and transparency, it’s going to continue as it is with people focused on the urgent, people focused on short term profits, and not looking at the long term impact to their company, or socially.”

Murray argued that, in her view, government regulation and leadership are absolutely imperative:

“[I]f you asked me 20 years ago, should we have government or regulators involved in diversity, I’d say no, companies will get there, they’ll do it on their own, it’s the right thing to do, it’s great for business. Well, I was wrong. I was dead wrong….

And, and what I have seen work is when regulations come out and say, “Thou shalt report on the following things, and it will be disclosed.” And directors will have fiduciary responsibilities to see that it’s done well, and CEOs will be held accountable through compensation. I see that really work.”

But not everyone thinks more regulation will help

As FINRA’s chair was arguing for greater regulation of the ESG industry, Bank of America was arguing that any such increase would stall the growth in ESG and, thereby, stall the progress its advocates argue it’s making. ETF Stream notes the following:

“The boom in environmental, social and governance (ESG) asset gathering could hit a stumbling block as global regulators intensify scrutiny of financial products amid greenwashing fears, the Bank of America (BofA) has suggested.

In a research note published last Thursday, the BofA said investors should be more cautious in labelling their products ESG in the face of a regulatory clampdown, adding it expects asset managers to temper their ESG assets under management (AUM) figures as a result of stricter definitions.

Last year was a record year for ESG inflows with the rise of products claiming to adhere to climate or ESG considerations reaching $1.7trn AUM by the end of 2020.

Globally, ESG funds AUM is growing at three times the rate of non-ESG funds, BofA said.

However, the scale of greenwashing in the asset management industry was laid bare last month after it emerged 71% of equity funds falling into the broad ESG category were misaligned with on the Paris Aligned Benchmark, according to research from think-tank InfluenceMap.

As a result, BofA said ESG AUM inflows could stall as regulatory oversight intensifies.

Menka Bajaj, EMEA ESG strategist at BofA, said: “Given the surge in ESG financial products, global regulators are ramping up the review of sustainability statements for compliance with current law.

“We believe investors should reconsider their ESG criteria and be more cautious when making claims about green/social investments….””

On Wall Street and in the private sector

Effects of ESG investing driving inflation 

Bill Ackman, the activist investor who is the founder and CEO of Pershing Square Capital Management, has arguedand has, most notably, argued to the Federal Reserve Bank of New Yorkthat the Fed, its interest rate policies, and the effects of ESG investing are driving inflation too far, too fast. On November 4, Markets Insider (a publication of Business Insider) had the details:

“Bill Ackman believes initiatives related to ESG investing are contributing to a surge in inflation, and that the Federal Reserve is not paying attention….

“Central bankers have not considered how inflationary ESG initiatives are. ESG is not transitory, but rather persistent and growing. Stakeholder capitalism will drive much needed increases in wages, but also higher energy costs, among other inflationary factors,” Ackman tweeted on Wednesday.

ESG’s focus on companies that implement various environmental, social, and governance practices has shifted investment away from lower-cost fossil fuel energy and towards higher-cost renewable energy. Some on Wall Street have warned that energy prices are spiking now because years of underinvestment in oil, gas and coal resulted in lagging supplies….

In a tweet last month, the billionaire investor said the Fed should taper its bond buying program and raise interest rates as soon as possible. Fed Chairman Jerome Powell, however, has indicated that the central bank likely won’t begin to raise interest rates until 2023….”

New tools for private company ESG disclosure

Last Tuesday, Institutional Investor magazine ran a piece making the case that, as its title put it, “It’s Time for Private Companies to Come Clean on ESG.” In it, writer Hannah Zhang made her case thusly:

“Private companies are under pressure to disclose more data relating to their performance on environmental, social, and governance issues….

Larry Lawrence, executive director and head of ESG products for the wealth management market at MSCI ESG Research, said that public companies have been publishing ESG data in their financial reports, making it easier for investors and rating agencies to track their performance on these measures. But when it comes to alternative assets, including private equity and private debt, “there’s really little to no information,” Lawrence said.

To address the transparency gap in the private markets, MSCI constructed an ESG analytic tool to be similar to the ones it designed for the public markets. And it chose to tackle the “E” element first through a partnership with Burgiss, a data and analytics provider focused specifically on private markets and based in Hoboken, New Jersey. 

Starting in October, the index provider has been tracking the carbon footprint of private assets by using market information collected by Burgiss and a model it has developed. The new analytical tool can now estimate carbon emissions for more than 15,000 private companies and nearly 4,000 active private equity and debt funds.”

But is a new tool necessary?

The demand for disclosureand the creation of this new tool for creating estimatesmight not be entirely necessary, some argue. As Institutional Investor itself reported only a week before:

“Investing with environmental, social, and governance goals is quickly climbing in private markets.

Asset managers committed to ESG investing now oversee an aggregate $3.1 trillion, or 36 percent of the value of total global private market assets, as of October, according to a Preqin report released Wednesday….

According to the report, larger asset managers disclose more information about ESG, and the average ESG transparency metric becomes more robust as the funds’ assets increase….

There’s no question that private capital is the future of ESG, said Yury Yakubchyk, CEO and co-founder of Elemy, a privately held business-to-business platform that connects users with in-home pediatric healthcare providers. As a business with a socially-driven mission, Elemy has attracted high-profile investors, including Pershing Square’s Bill Ackman.

“The mentality that I’m detecting from investors is that, over the past few years, Silicon Valley has gravitated more toward mission-oriented businesses,” Yakubchyk told Institutional Investor. “Now, the financial and investment community is playing catch up. I’ve had investors point-blank tell me that if a company doesn’t have a mission that makes sense to their LPs, they’re not going to invest.””

In the spotlight

Professor Luigi Zingales argues “Democracy before ESG”

In a recent piece published by Project Syndicate, University of Chicago Finance Professor Luigi Zingales made the case that supporting and promoting democracy must be the first step in any realistic and legitimate ESG investment scheme:

“Amid growing concerns about climate change and social unrest, institutional investors are increasingly applying environmental, social, and governance criteria in their portfolio decisions. Yet while ESG factors are important for investors to consider, the new focus risks obscuring an even bigger issue: the role that corporations play in the democratic process.

What do corporations have to do with democracy? In fact, many corporations play a leading role in distorting the democratic process, the proper function of which is to transform popular will into legislative action. Let me illustrate the point with examples from the United States, which used to be considered the world’s most advanced democracy.

In 2019, Ohio’s Republican-controlled state legislature passed House Bill 6, which provided $1 billion in subsidies to bail out FirstEnergy Solutions, a nuclear-plant subsidiary of an electric utility. The bill was hardly an expression of the will of the people of Ohio. On the contrary, a dark-money group, Generation Now, has since pleaded guilty to charges of carrying out a massive bribery scheme to secure approval for the bailout. Generation Now backed the campaigns of 21 different state-level candidates, including the Speaker of the House, Larry Householder, who also received more than $400,000 in personal benefits.

And if this was not bad enough, when Ohioans started collecting signatures for a referendum to abolish HB6, Generation Now launched an ad campaign claiming that the Chinese would take over the state’s power grid if the repeal was successful. A local news outlet also found that the group had “hired ‘blockers’ who followed, encircled, harassed, and (in a couple cases) physically hit petition gatherers.” It was later revealed that Generation Now was founded with $56.6 million from FirstEnergy Solutions, but this scandal would never even have been exposed if not for an FBI investigation.

Since this episode seems to belong more in 1950s Guatemala than in twenty-first-century America, can we dismiss it as an isolated case, limited to one bad company, one state, or just the Republican Party? Unfortunately, we cannot….

The first principle of responsible investing, then, is to ensure that corporations are not violating or rewriting the rules of the democratic game, either at home or abroad.”



Economy and Society: Opponents respond to proposed Labor Department ESG rule

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.

ESG opponents offer arguments against proposed Labor Department rule

The Biden Labor Department’s proposed rule on ESG investments in ERISA-governed retirement plans, mentioned in last week’s newsletter, generated additional pushback over the past week. Below is a selection of responses from ESG opponents. 


Journalist Charles Gasparino focused his commentary for Fox Business (and his follow-up for The New York Post) on asset management firm BlackRock and what he described as its influence on the Biden administration:

“The world’s largest money management firm, with more than $9 trillion under assets, stands to profit from a government adoption of new environmental and social governance standards, FOX Business has learned.

BlackRock has been forging a new path into so-called Environmental Social Governance, or ESG investing, nearly tripling its ESG offerings in the past year. The company now offers more than 150 mutual funds and exchange traded funds (ETF) that adhere to ESG standards – more than any other firm on Wall Street – and manages more than $400 billion in ESG client money….

A newly proposed rule by the Labor Department that could force U.S. companies to offer ESG funds into their employees’ 401K plans has promising implications for BlackRock. If the rule were to pass, workers and businesses would become more heavily involved in ESG investing and BlackRock as the industry leader for ESG ETFs would profit. 

What’s more, investing in ESG funds, including BlackRock’s exchange traded funds, carry management fees as much as 40% higher than regular ETFs….

The likelihood of the 401K rule passing is unclear, but BlackRock has close ties within the Biden administration and that could help push the move through the necessary channels….

Brian Deese, Biden’s national economic council chief, was formerly global head of sustainable investing at BlackRock. Deese also has as much as $100,000 in each of seven BlackRock ETFs and in 2020 received a $2.3 million salary from the company and earned a further $2.4 million from his vested restricted shares in the company. 

Deese also has a 401K account with BlackRock, according to his financial disclosures that were updated in March of 2021.  

Wally Adeyemo holds the position of deputy Treasury Secretary but was Fink’s chief of staff and a senior adviser at the firm before joining the administration. Adeyemo holds between $250,000 and $500,000 worth of company stock according to his 2020 financial disclosures and his close ties to Fink and the company could help tilt the scales in favor of ESG implementation, lobbyists tell FOX Business. 

Other BlackRock alum serving in the Biden administration is Michael Pyle, BlackRock’s former global chief investment strategist who is now serving as chief economic adviser to Vice President Kamala Harris. Pyle also worked in the Obama administration as a special assistant to the president on economic policy matters.

Tom Donilon is chairman of the BlackRock Investment Institute and held previous positions in the Obama, Clinton and Carter administrations. His brother, Mike Donilon, is Biden’s senior adviser and was also the chief strategist on his campaign.”


Lawrence A. Cunningham, a professor at George Washington University, and founder of the Quality Shareholders Group, wrote in MarketWatch, a Dow Jones publication, that the proposed rule could, in his view, hurt workers:

“[I]n 1994, the Clinton administration opened the door to allow managers to consider social factors in their investment picks too, then known as “economically targeted investments” (ETIs), at least when related to financial considerations.  In 2008 and again in 2015, the Obama administration opened the door further by condoning “environmental, social and governance” (ESG) factors as part of an investment process.

Perceiving excessive departures from the investment mandate into contentious political topics from climate change to race to political donations, the Trump administration began to close the door. In 2018, it advised that managers should not too readily treat ESG factors as economically relevant to investment analysis. In 2020, the government functionally shut the door, prioritizing risk and return, requiring non-ESG investments be considered in every plan, and mandating specific explanations for choosing any ESG alternative. 

Now, the Biden administration wants not only to reverse the Trump guidance but go further than Clinton or Obama ever did. In rules just recently proposed, the Department of Labor says it “may often require an evaluation of the economic effects of climate change and other ESG factors on the particular investment or investment course of action” (emphasis added). 

In lengthy elaboration, it is therefore clear that the Biden proposal would mandate that retirement fund managers incorporate ESG factors into investment analysis. It says this is “intended to counteract negative perception of the use of . . . ESG factors in investment decisions” left by the Trump administration.

All these political incursions into investment processes and stewardship are misguided….

Politicians in the White House and their administrative appointees lack the competence to tell investment professionals how to conduct their investment analysis or to limit or expand their purview. It is certainly outside their competence to direct American workers how their funds should be managed. When politicians and ideologues do so, it is the investors in those funds — American workers — who lose. 

The Biden administration acknowledges as much. Lacking expertise of their own, they report reaching out informally to numerous unnamed interested parties, including asset managers, plan sponsors, consumer groups, and investment advisers. In theory, outreach is the right approach, but a representative sampling across those and other relevant groups, such as employees, will not yield a consensus view favoring or opposing ESG investing (let alone agreement on exactly what that means).”


Rupert Darwall, a senior fellow at RealClearFoundation, writing at RealClearEnergy, argued that the proposed rule’s special documentary requirement could have what he described as a “chilling effect”:

“[T]he DOL published its proposed rulemaking earlier this month. The outcome is a model of everything a rule should not be: ambiguous, at times contradictory, and, most deleterious of all, dissembling in its claim to uphold the letter of the law when the intent and effect of the rule – if finalized – is to weaken it. When Congress wrote the ERISA legislation in 1974, it was determined that pension plan fiduciaries, who manage retirement income plans on behalf of plan beneficiaries, act solely in the financial interests of those beneficiaries. Section 404 of the act is tightly drafted to require plan fiduciaries to discharge their duties for the exclusive purpose of providing benefits to plan participants and plan beneficiaries and defraying reasonable expenses of so doing.

“The fundamental principle is that an ERISA fiduciary’s evaluation of plan investments must be focused solely on economic considerations that have a material effect on the risk and return of an investment based on appropriate investment horizons,” the November 2020 financial factors rule stated. “The corollary principle is that ERISA fiduciaries must never sacrifice investment returns, take on additional investment risk, or pay higher fees to promote non-pecuniary benefits or goals.” In operationalizing these two principles, the financial factors rule was designed to show how plan managers can be assured they are acting as they are legally required to. There was little novel in the Trump DOL’s articulation of these principles. A 2015 DOL interpretative bulletin issued during the Obama presidency advised plan fiduciaries that they “may not use plan assets to promote social, environmental, or other public policy causes at the expense of the financial interests of the plan’s participants and beneficiaries. Fiduciaries may not accept lower expected returns or take greater risks in order to secure collateral benefits.”…

The replacement rule, the DOL claims, is needed because the current one “has created a perception that fiduciaries are at risk if they include any ESG factors in the financial evaluation of plan investments.” Many stakeholders, it says, “misperceive” that consideration of ESG factors is banned except in cases of a tiebreaker. Not really: the financial-factors rule explicitly acknowledges that “ESG factors can be pecuniary factors, but only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories.” In the proposed replacement, the DOL says that ESG is the one category of investment singled out for special documentation….

The special documentary requirement of the current rule arises in rare cases when a plan manager can’t distinguish between two alternatives based on pecuniary factors alone. In these circumstances, a non-pecuniary factor can be used as a tiebreaker provided that the manager fully documents the factors leading to the selection. This documentary requirement, the DOL claims, could have a “chilling effect.”…”

On Wall Street and in the private sector

Is an ESG bubble about to burst?

Twice in the past several weeks, heads of large financial institutes warned that ESG would createor, in one case, already has createdsignificant investment bubbles. On Thursday, October 21, the president of the Institute of International Finance urged caution:

“Speaking during a panel at CNBC’s Sustainable Future Forum on Thursday, Adams said it was inevitable that the current drive toward ESG (environmental, social and governance) would create assets that exceeded their fundamental value.

“There’s always bubbles, it’s a lesson of history. Anyone who thinks we won’t have it is naïve,” he said.

“In times of great technological or economic transformation there’s disruption, there’s bubbles, we see it in the crypto markets now. We saw in the internet throughout the 1990s that all popped in March of 2000. And the weak firms were washed out and new firms rose like a phoenix. Yes, there’s going to be bubbles — there’s too much money chasing too few deals.”

Having appropriate policies and a resilient financial system in place when the bubble pops, Adams added, would allow investment into promising firms in the space to continue.”

Meanwhile, the Swiss Finance Institute of Finance released a report making the case that ESG, as an investment segment, is already a bubble and could pop:

“The doing-well-by-doing-good conviction driving ESG investors around the world is nothing more than an illusion of their own making, according to a controversial new study.

Research from the Swiss Finance Institute argues stocks highly rated on environmental, social and governance metrics have outperformed in recent years all thanks to the trillions of dollars flooding the sector. The fundamentals of socially responsible investing have played no role in driving these returns.

In fact, ESG bets would have backfired spectacularly without this influx of cash — leaving Wall Street portfolios at the mercy of volatile capital flows.

“Under the absence of flow-driven price pressure, the aggregate ESG industry would have strongly underperformed the market from 2016 to 2021,” Philippe van der Beck said in the “Flow-Driven ESG Returns” paper published this month. “If however, ESG inflows unexpectedly revert, the realized future return may be strongly negative.”…

To the researcher, the point is that flows have so far driven industry performance — more than commonly acknowledged. Just as retail traders were able to power seemingly deadbeat companies to dizzying highs this year from GameStop Corp. to AMC Entertainment Holdings Inc., prices of stocks bought by ESG investors will naturally rise — even without any fundamental justification.”

In the spotlight

ESG reverberates beyond the markets: new review of The Dictatorship of Woke Capital: How Political Correctness Captured Big Business by Stephen R. Soukup

The Fall, 2021 edition of American Affairs, a journal of culture, philosophy, and politics contains a 4300-word review of The Dictatorship of Woke Capital, by Stephen R. Soukup, a book, at its heart, about stakeholder capitalism and ESG investing. Though the review, written by Ronald W. Dworkin, is, more than anything, a discourse on dialectics and examines Soukup’s unwillingness to use the term to explain what he described as “woke capital,” one would be hard-pressed to find many books about markets and investing in the pages of such journals.  ESG appears to be something different altogether. From the review:

“[I]f Soukup had paid more attention to Marx, he might have found a better way to explain “woke capital”—and to fight it. In a supreme irony, those seeking to advance a center-right agenda today could benefit from reading Marx.

Marx thought dialectically. What does this mean? Take a certain social phenomenon: it develops to its utmost limits, makes use of all its potentialities, creates the highest thing it can, and stops. This is called the thesis. Then comes the antithesis, a hostile force. It also unfolds to the very end, and stops. Born out of these two hostile phenomena is a third force, the synthesis, making use of the result achieved by both, and reconciling them. And society moves forward again, always forward, toward the new.

A rough dialectical history of the United States since the end of the Civil War might be said to unfold as follows, with woke capitalism the most recent entry. In 1870, most Americans worked as independent small farmers. Most business firms were also small, with one or two employees besides the owner. A culture of individualism and a religious ethos that gently repressed greed complemented this economy. The country prospered, yet the economy’s small scale limited how much it could produce. This was the thesis.

Hostile forces emerged in the form of robber barons who built large corporations, sometimes through deceit and manipulation. A culture of social Darwinism that equated worldly success with spirit­ual superiority replaced the older, more innocent religious ethos. Many Americans found themselves subject to both the vicissitudes of the market and business chicanery, as large companies undercut their ability to make a living as independent operators. Indeed, one of the most important changes in the U.S. economy during the second half of the nineteenth century was the dramatic increase in the size of the average enterprise, along with a reduction in the number of firms in each sector. The new system produced more wealth than before through improved economies of scale, yet its boisterous atmosphere created uncertainty, and it soon reached its productive limits. This was the antithesis. Corporate America and welfare-state liberalism were the synthesis.”



Economy and Society: Labor Department rule makes ESG investing in 401(k) plans easier

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.

Labor Department rule makes ESG investing in 401(k) plans easier 

As was reported in previous issues of this newsletter, one of the Biden Administration’s first actson inauguration daywas to suspend a Trump Labor Department rule that, essentially, barred ESG investments from retirement plans. The Trump administration held that many, if not most, ESG-directed investments potentially violate investment fiduciaries’ responsibilities under ERISA (the Employee Retirement Security Act of 1974). In turn, it warned fiduciaries to be careful and judicious in their use of ESG investment criteria. On his first day in office, President Biden signed an executive order asking Labor to reconsider the rule. Labor simultaneously suspended enforcement of the Trump rule and began the process of creating a new regulatory proposal for dealing with retirement plans’ use of ESG. That proposal was released this past Wednesday, October 13.

The new proposed rule not only reverses the Trump rule but, in fact, makes ESG investing in ERISA-covered plans much easier than it had been previously. The Wall Street Journal provides the details:

“The Labor Department on Wednesday proposed a rule that would make it easier for investors to purchase funds focused on environmental, social and governance measures in their 401(k) plans….

The proposal would reverse a Trump administration rule making it harder for 401(k) plans to offer investments based on environmental, social and governance, or ESG, measures.

“ESG factors can be financially material, and when they are, considering them will inevitably lead to better long-term risk-adjusted returns, protecting the retirement savings of America’s workers,” said Ali Khawar, acting assistant secretary for the Employee Benefits Security Administration at the Labor Department….

A statement by the American Retirement Association, which represents retirement-plan professionals, expressed support for the proposal.

“We are pleased that the DOL has established a level playing field for ESG investment considerations in retirement programs,” the group said.”

Does the Labor rule establish a duty to consider ESG factors?

Tara Siegel Bernard, writing in The New York Times’ “Business Briefing,” noted an additional detail that was largely absent from most of the rest of the reporting on the story:

“The Labor Department proposed rule changes on Wednesday that would make it easier for retirement plans to add investment options based on environmental and social considerations — and make it possible for such options to be the default setting upon enrollment.

In a reversal of a Trump-era policy, the Biden administration’s proposal makes clear that not only are retirement plan administrators permitted to consider such factors, it may be their duty to do so — particularly as the economic consequences of climate change continue to emerge….

The new regulations would also make it possible for funds with environmental and other focuses to become the default investment option in retirement plans like 401(k)s, which the previous administration’s rules had prohibited.”

Response to the Labor rule 

In the June 10 issue of National Review, Patrick Pizzella, the Deputy Secretary of Labor (and briefly, the Acting Secretary) penned an article explaining why the Trump administration promulgated its rule and why he believes that reversing the rule is a significant mistake. He wrote:

“Asset managers often apply supposedly “socially conscious” ESG — environment, social, and (corporate) governance — criteria to screen potential investments. Pension funds are the deep pockets for woke capitalism. But ESG or “sustainable” investing is anything but a slam dunk for pension beneficiaries. There are real risks, and many financial professionals have begun to raise serious questions about them….

Since 1994, four different secretaries of labor — two from each party — have issued what’s known as an “interpretive bulletin” (IB), providing guidance for investing in ERISA-managed funds in compliance with the statute. I refer to this as “IB ping-pong” because it is relatively easy for one administration to respond to another administration’s IBs without soliciting formal stakeholder input. In 2020, however, Secretary Eugene Scalia decided that the De­partment of Labor (DOL) should undertake formal rulemaking under the Ad­ministrative Pro­cedures Act — which requires the solicitation of comments from the public — and provide more-enduring certainty to the regulated community and America’s retirees.

The department received over 1,500 comments and revised and tailored a final rule, published last November, that was in part based on them. The rule reminds plan providers that it is unlawful to sacrifice returns or to accept additional risk through investments intended to promote a social or political end. It allows for the inclusion of an ESG fund among other investment options, provided that it is selected based on pecuniary considerations. But ESG factors are often touted for nonpecuniary reasons, as addressing social welfare more broadly. That may appeal to some in­vestment advisers, but it is inappropriate for an ERISA fiduciary managing other people’s retirement funds….

Ironically, the department — without an assistant secretary for the Employment Benefits Security Administration, a solicitor, or a deputy secretary — maintains that it had heard from a wide variety of stake­holders, including asset managers, labor organizations, plan sponsors, and in­vestment advisers. But the rule that the DOL published last November, titled “Financial Factors in Selecting Plan Investments,” wasn’t written just for those stakeholders. It was primarily written for the plan participants and beneficiaries — the people depending on the income once they retire….

We should all keep in mind that annual expenses for so-called sustainable exchange-traded funds (ETFs) are more than ten times higher than those for the cheapest index funds, according to the financial-services firm Morning­star. As Jason Zweig, a well-respected financial analyst, recently wrote in the Wall Street Journal: “ESG is the last best hope for investment firms seeking to hang onto fat fees.”

The skeptics of ESG investing in­clude a growing list of distinguished financial experts, such as Alicia Munnell, executive director of the Center for Retirement Research at Boston College (“I really have no respect for ESG investing”); Tariq Fancy, former chief investment officer for sustainable investing at BlackRock, the largest asset manager in the world (“The financial services industry is duping the American public with its pro-environment, sustainable investing practices. This multitrillion dollar arena of socially conscious investing is being presented as something it’s not. . . . In truth, sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community”); and Securities and Exchange commissioner Hester Peirce (“The first issue is we don’t even know what ESG means”; “Not only is it difficult to define what should be included in ESG, but, once you do, it is difficult to figure out how to measure success or failure”)….

As for plan fiduciaries considering ESG factors when selecting investment options, they should curb their enthusiasm. The Biden administration’s ability to shield fiduciaries from legal exposure may be very limited without congressional action or a sudden change of heart by the Supreme Court, whose long-established ruling on the matter is that ERISA’s duty of loyalty requires fiduciaries to act for the exclusive purpose of providing financial benefits to participants. Fidu­ci­aries would be wise to act very prudently and document their decision-making processes.”

On Wall Street and in the private sector

Canada’s six largest banks join Net-Zero Banking Alliance

This past Friday, Canada’s six largest banks announced that they had entered into an agreement to align their lending and investment portfolios with a net-zero-carbon future. The banks all joined Mark Carneythe former governor of the Bank of England, former governor of the Bank of Canada, and one of the first global bankers to advocate using the banking system to fight climate changein his organization, Net-Zero Banking Alliance:

“The commitment by the banks, which include Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, Bank of Nova Scotia and TD Bank, comes ahead of the UN climate summit set to start in Glasgow at the end of the month and where a major focus will be on finding the finances to fund the climate promises.

The industry-led alliance commits signatory banks to aligning their lending and investment portfolios with net-zero emissions by 2050, as well as to setting intermediate reduction targets for 2030 or sooner….

Carney said in a statement that the financial systems needs to transform to ensure a “prosperous and just transition to net-zero” and that by joining the alliance, Canadian banks are “bringing their deep expertise and strong balance sheets to drive solutions for the sustainable economy.”

The alliance has, however, come under criticism for not going far enough, including ads published last week by more than 90 environmental groups that urged Carney to be more ambitious with membership requirements.

The groups want to see more immediate targets laid out to phase out fossil fuel funding, a prohibition on financing any new fossil fuel projects, and a goal of halving financed emissions by 2030.”

Response to Net-Zero Banking Alliance

Mark Carney, the brainchild of net-zero banking and originator of the idea that banking is not merely an available tool but a necessary tool in the fight against climate change was described by independent investment-market analyst Rusty Guinn of Epsilon Theory as, in his words, the “first mission-creep missionary” in the creation of the narrative that banks must do something about perceived climate change. In a note for clients, Guinn wrote:

“[W]hat interests us is Goldman alum Carney, the first mission creep missionary. From a June 2016 article in Canada’s Globe And Mail, he was already active establishing the idea that something must be done (emphasis in original) to create a connection between regulatory policy – more to the point, monetary policy – and climate change. And he did so in a way that was crafted for an audience of institutional investors….

Carney’s September 2016 speech in Berlin was a masterpiece in narrative construction, explicitly conflating climate change with terms of art in the world of financial risk management. He begins:

Your invitation to discuss climate change is a sign of the broadening of the responsibilities of central banks to include financial as well as monetary stability. It also demonstrates the changing nature of international financial diplomacy.

That is, I believe, what we call saying the quiet part out loud. Still, to really appreciate the skill being applied here, take note of the effective redefinition of climate change in the most well-known memes of financial risk….

[In Carney] we had a missionary – or perhaps a prophet – alone in the wilderness, shouting that something must be done to address the risks of climate change through monetary policy (emphasis in original).

In the spotlight

ESG goes royal

On October 12, the New York Times’ financial column “Dealbook” reported on the newest ESG royaltyliterally:   

“Prince Harry and Meghan, the Duchess of Sussex, are getting into the investment business. They are joining Ethic, a fintech asset manager in the fast-growing environmental, social and governance space, as “impact partners” and investors. Ethic has $1.3 billion under management and creates separately managed accounts to invest in social responsibility themes.

The couple could attract more attention to sustainable investing (emphasis in original). Harry and Meghan can make E.S.G. investing part of pop culture in a way that, say, BlackRock’s Larry Fink can’t. “From the world I come from, you don’t talk about investing, right?” Meghan told DealBook in a joint interview with Harry. “You don’t have the luxury to invest. That sounds so fancy.”



Economy and Society: SEC Chairman issues another warning to fund managers

ESG Developments This Week

In Washington, D.C.

SEC Chairman Gensler testimony on crypto, disclosure, and more

On September 14, Securities and Exchange Commission (SEC) Chairman Gary Gensler testified before the Senate Committee on Banking, Housing, and Urban Affairs, covering several topics related to ESG investing.

First, he discussed the SEC’s interest in regulating crypto-currencies and laid out his plans:

“Currently, we just don’t have enough investor protection in crypto finance, issuance, trading, or lending. Frankly, at this time, it’s more like the Wild West or the old world of “buyer beware” that existed before the securities laws were enacted. This asset class is rife with fraud, scams, and abuse in certain applications. We can do better.

I have asked SEC staff, working with our fellow regulators, to work along two tracks:

One, how can we work with other financial regulators under current authorities to best bring investor protection to these markets?

Two, what gaps are there that, with Congress’s assistance, we might fill?

At the SEC, we have a number of projects that cross over both tracks:

The offer and sale of crypto tokens

Crypto trading and lending platforms

Stable value coins

Investment vehicles providing exposure to crypto assets or crypto derivatives

Custody of crypto assets…

Further, I’ve suggested that platforms and projects come in and talk to us. Many platforms have dozens or hundreds of tokens on them. While each token’s legal status depends on its own facts and circumstances, the probability is quite remote that, with 50, 100, or 1,000 tokens, any given platform has zero securities. Make no mistake: To the extent that there are securities on these trading platforms, under our laws they have to register with the Commission unless they qualify for an exemption.

I am technology-neutral. I think that this technology has been and can continue to be a catalyst for change, but technologies don’t last long if they stay outside of the regulatory framework.”

Gensler also addressed proposed disclosure rules that the SEC has pondered for several months; rules that he claimed many ESG investors hope will bring greater uniformity and greater consistency to the ESG marketplace. To that end, Gensler stated the following:

“Since the 1930s, when Franklin Delano Roosevelt and Congress worked together to reform the securities markets, there’s been a basic bargain in our capital markets: investors get to decide what risks they wish to take. Companies that are raising money from the public have an obligation to share information with investors on a regular basis.

Those disclosures changes over time. Over the years, we’ve added disclosure requirements related to management discussion and analysis, risk factors, executive compensation, and much more.

Today’s investors are looking for consistent, comparable, and decision-useful disclosures around climate risk, human capital, and cybersecurity. I’ve asked staff to develop proposals for the Commission’s consideration on these potential disclosures. These proposals will be informed by economic analysis and will be put out to public comment, so that we can have robust public discussion as to what information matters most to investors in these areas.

Companies and investors alike would benefit from clear rules of the road. I believe the SEC should step in when there’s this level of demand for information relevant to investors’ investment decisions.”

The Chairman also issued another warning to fund managers that he and the Commission are watching closely and intend to ensure that promises and results match up closely:

“[W]e’ve seen a growing number of funds market themselves as “green,” “sustainable,” “low-carbon,” and so on.

I’ve asked staff to consider ways to determine what information stands behind those claims and how we can ensure that the public has the information they need to understand their investment choices among these types of funds.”

Plan advisors have big hopes for Labor Department

Last week, the National Association of Plan Advisors (NAPA) held its annual 401(k) Conference, and among the hot topics was the impending decision by the Department of Labor regarding the suitability of ESG investment funds in retirement plans, under the authority of the Employee Retirement Income Security Act of 1974 (ERISA). As has been previously noted in this newsletter, the Trump Labor Department issued a rule late last year that suggested that ESG plans did not meet fiduciary requirements of ERISA and, therefore, should be handled sparingly by retirement plan managers. The Biden Labor Department, however, declined to enforce the rule and has been working on a new rule of its own, which will presumably be more ESG-friendly. According to Roll Call, advisors at the NAPA conference were keenly interested in the timing and content of the new Labor rule:

“As the Labor Department mulls a proposed rulemaking on environmental, social and governance investment options by retirement plans, advisers say the rules are likely to temper a “chilling effect” caused by the prior administration’s guidance.

Advisers say more retirement savers are asking about ESG investing and that the forthcoming rules could place them on equal footing with many retail and institutional investors who examine factors such as environmental sustainability and corporate responsibility on social issues alongside traditional financial metrics.

“I don’t know if DOL is going to go as far as requiring plan sponsors to think about ESG investments as part of a plan menu, but I am pretty confident we’re going to get a level playing field,” National Association of Plan Advisors Executive Director Brian Graff told attendees as he led a panel discussion of experts during the NAPA 401(k) Summit this week.

Retirement plan fiduciaries haven’t had that much leeway in directing investments into ESG options….

“Retirement plan sponsors and participants deserve the freedom to choose the 401(k) investment that best suits their needs,” Graff, who is also CEO of the American Retirement Association, said in a prior statement in support of proposed legislation….

Investors worldwide are seeking more ESG options, according to another panelist, Charles Nelson, vice chairman and chief growth officer of Voya Financial.

“We meet with analysts and investors, and every time there’s a question around ESG,” Nelson said at the event. “I think this is one of the greatest opportunities for advisers in your practices as you go forward, because businesses, whether they’re publicly traded or they’re privately held by private equity or ultimately a hedge fund, they’re getting asked these questions.”

Another panelist noted it gives plan advisers more credibility with clients when they can discuss and offer ESG options.

“You’re now not just the guy or gal that comes in to do the 401(k) review — you become a strategic business partner with them, so it puts you at a much different level,” said Jania Stout, senior vice president at OneDigital Retirement. “I think that’s a huge opportunity for us as advisers.”…

One notion shared by all the panelists: ESG investing is here to stay.

“Look, you can run your practice how you want, and you all should, but there’s a reason investors and shareholders are asking about this around the world and increasingly in the U.S,” said Nelson. “And I really believe it’s going to continue to build here in the U.S., and those advisers that lean into it and can find a way to engage with their customers in a different way on this will find some new growth as well.””

In the spotlight

NYU professor Damodaran posts criticism of ESG 

Last week, Aswath Damodaran, a finance professor at the Stern School of Business at New York University, published a post on his personal blog, Musing on Markets, criticizing ESG and its claims of ethical superiority in unflinching terms, calling ESG “The Goodness Gravy Train.” Among other things, Damodaran reiterated his four key conclusions from earlier work on ESG:

“1. Goodness is difficult to measure, and the task will not get easier!

2. Being “good” will add to value some companies, hurt others, and leave the rest unaffected!

3. The ESG sales pitch to investors is internally inconsistent and fundamentally incoherent

4. Outsourcing your conscience is a salve, not a solution!”

Damodaran finished with the following repudiation of what he describes as ESG gravy train-riders:

“The ESG movement’s biggest disservice is the message that it has given those who are torn between morality and money, that they can have it all. Telling companies that being good will always make them more valuable, investors that they can add morality constraints to their investments and earn higher returns at the same time, and young job seekers that they can be paid like bankers, while doing peace corps work, is delusional. In the long term, as the truth emerges, it will breed cynicism in everyone involved, and if you care about the social good, it will do more damage than good. The truth is that, most of the time, being good will cost you and/or inconvenience you (as businesses, investors, or employees), and that you choose to be good, in spite of that concern.”

Notable quotes

“I am willing to listen to arguments for why this new model is better, but I am certainly not willing to concede, without challenge, that a corporate CEO knows my value system better than I do, as a shareholder, and is better positioned to make judgments on how much to give back to society, and to whom, than I am.”

Aswath Damodaran, “The ESG Movement: The ‘Goodness’ Gravy Train Rolls On!” September 14, 2021



Economy and Society: JP Morgan decides all financial instruments should be ESG-compliant

ESG Developments This Week

In Washington, D.C., and around the world

Saudi sovereign wealth fund reportedly seeking ESG framework, redux

In the July 21 edition of this newsletter, we noted that the Saudi “sovereign wealth fund reportedly has begun the process of developing ESG reporting standards that will, presumably, allow it to raise greater funds in the global debt market.” We cited Reuters as follows:

“The Public Investment Fund (PIF) sent a request for proposals to banks last month, said the four sources with direct knowledge of the matter, speaking anonymously because the matter is private.

PIF – at the centre of Saudi de facto ruler and Crown Prince Mohammed bin Salman’s Vision 2030 that aims to wean the economy off oil – has been funding itself in recent years with tens of billions of dollars in loans.

One of the sources said developing an ESG framework was likely a precursor for a multibillion dollar bond sale, which would be the Saudi wealth fund’s first.”

Last Wednesday, Reuters reported that the Saudis have made some decisions and have decided to move forward with the PIF ESG initiative:

“Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF), has hired five international banks as members of an environmental, governance and social (ESG) panel for its medium-term capital-raising strategy, IFR News reported on Monday….

The hydrocarbon-rich Gulf has seen a surge of interest in ESG-related initiatives and deals amid growing awareness among global investors about ESG risks.

Credit Agricole (CAGR.PA), Deutsche Bank (DBKGn.DE), Goldman Sachs (GS.N), HSBC (HSBA.L) and Standard Chartered (STAN.L) were hired to advise the investment fund’s global capital finance division on an ESG framework for public market capital raisings, IFR, a fixed income news service owned by Refinitiv, reported.

IFR also said that Saudi Arabia’s finance ministry hired HSBC and JPMorgan (JPM.N) as structuring agents for the kingdom’s sustainability financing framework.”

Reuters also reported last Monday that the government of Oman is also working on developing an ESG framework that would allow it to attract new investors/creditors:

“The government of Oman is working on an environmental, social and governance (ESG) framework which could allow the heavily indebted Gulf oil-producing country to widen its funding base, two sources familiar with the matter said.

The move comes as Oman works with the International Monetary Fund to develop a debt strategy after state coffers were hurt by low oil prices and the COVID-19 pandemic last year….

Work on developing an ESG framework is at its early stages, said one of the sources.

A second said that while it was not linked to specific debt issuance plans, it would prove useful to tap ESG-focused investors in future fundraising exercises.”

On Wall Street and in the private sector

PwC expanding its ESG services—and others join in

In the June 29 edition of this newsletter, we noted that PwC (Price Waterhouse Cooper) planned to get more heavily involved in ESG and, given this, “expects to add as many as 100,000 jobs worldwide and spend as much as $12 billion over the next five years to address the needs of clients in navigating the waters of ESG disclosures.”

On September 9, Accounting Today reported that PwC is significantly expanding its ESG services:

“PricewaterhouseCoopers is broadening its array of environmental, social and governance services to help clients deal with growing demands for sustainability and climate risk reporting and assurance on their disclosures….

Last month, PwC released its Next in Work Pulse Survey, which indicated that 42% of companies are planning to improve ESG reporting over the next few months in response to investors and other stakeholders….

“ESG is one of those topics that is high on the priority list of business leaders,” said Wes Bricker, vice chair and U.S. trust solutions co-leader at PwC. “It’s high on their priority list because it’s relevant to businesses and how they create value. Boards want to know how corporate strategies are incorporating a view about the impact on the environment, whether it’s carbon or water usage or plastics. They also want to know the human capital strategy, which is the essence of ESG. And boards want to understand management’s plans around how to govern all of this. Do they have high-quality information and reporting? We’re seeing companies increasingly are pledging very ambitious climate targets and plans.”…

PwC recently reorganized the firm into two areas — Trust Solutions and Consulting Solutions — to emphasize the concepts of trust and sustained outcomes. But Bricker sees ESG cutting across all the different service areas at the firm.

“ESG reporting is a capability that we see being relevant across the entire firm, and all of our services,” he said. “We’ve taken that approach by providing training for all of our partners, whether you’re sitting in trust or consulting, whether you’re in a specialty group or whether you’re in more of a standardized service. All of our partners, all of our teams need to understand ESG and how it connects to business, how it impacts our clients and the services that we deliver when it comes to trust solutions. We’ve trained all of our partners on the connection of ESG to our financial statement audits and financial reporting and the attestation services that we can provide on ESG metrics.”…

PwC is also expected to get involved in the International Financial Reporting Standards Foundation’s efforts to set up an International Sustainability Standards Board. “We will do our part in providing our best thinking about the structure for setting standards and the content of standards,” said Bricker. “For example, we have developed a relationship with the [Sustainability Accounting Standards Board] to deliver the first-of-a-kind XBRL taxonomy for SASB … . We’ll continue to do that with each of the standard-setters who look to us for our experience.””

Two weeks ago, on August 29, The Financial Times reported that other major accounting firms are, following PwC’s lead:

“The sustainability boom has moved trillions of dollars into environmental, social and governance funds and brought a new stakeholder-led agenda to corporate boardrooms.

Now the Big Four accounting firms are jumping on a bandwagon that offers two tempting opportunities: an expansion of what companies must account for, and a chance to rebrand a scandal-plagued profession as experts on climate change, diversity and winning consumers’ trust.

PwC put the booming demand for ESG advice at the heart of a $12bn investment plan it announced in June that will involve adding 100,000 employees and launching “trust institutes” to train clients in ethics….

Deloitte, in turn, announced a “climate learning programme” this month for its 330,000 employees. KPMG’s ESG work has included helping Ikea to analyse social and environmental risks linked to the Swedish furniture retailer’s raw materials, and advising on the first green bond issued in India.

Alongside EY, all four have been at the table as business groups try to thrash out new international standards for measuring sustainability….

The Big Four are responding in part to a rise in clients’ budgets for developing net zero emissions plans and other sustainability initiatives. Tracking nonfinancial metrics such as companies’ carbon footprints, and not simply their financial results, gives them a chance to generate more fee income and improve profit margins.

The introduction of standardised ESG reporting metrics for companies would also create more work for accountants. This will potentially be facilitated by the proposed International Sustainability Standards Board, a body that could be created by November to mirror the role the International Accounting Standards Board plays in setting financial reporting standards.

The Big Four are responding in part to a rise in clients’ budgets for developing net zero emissions plans and other sustainability initiatives. Tracking nonfinancial metrics such as companies’ carbon footprints, and not simply their financial results, gives them a chance to generate more fee income and improve profit margins.

The introduction of standardised ESG reporting metrics for companies would also create more work for accountants. This will potentially be facilitated by the proposed International Sustainability Standards Board, a body that could be created by November to mirror the role the International Accounting Standards Board plays in setting financial reporting standards.”

Deutsche Bank gets back in the ESG game, while JP Morgan seeks to boost ESG credentials

Despite the issues that its asset management arm, DWS, is having with U.S. regulators over what some have alleged are its fuzzy definitions of ESG-investments, Deutsche Bank has dived into the world of ESG-friendly repo offerings. Meanwhile, JP Morgan has decided that all financial instruments should be ESG-compliant. Bloomberg reported the following last Friday:

“Deutsche Bank AG has just completed its first green repurchase agreement, marking another foray into a world of increasingly complex ESG instruments.

It’s the latest example of product proliferation in a market that’s moving much faster than regulators. JPMorgan Chase & Co. has already said it plans to attach environmental, social and governance labels to all forms of finance, as ESG derivatives start to become a market fixture. Deutsche says it intends to continue expanding its offering of ESG instruments….

For its green repo, Deutsche transferred securities to London-based asset manager M&G Investments. In return, the German bank received cash to fund its green asset pool, which includes renewable energy projects such as wind and solar power plants, as well as the improvement of energy efficiency in commercial buildings. 

Deutsche says the transaction is the first of its kind in Europe. BNP Paribas SA has completed a similar deal with Agricultural Bank of China Limited. 

Claire Coustar, Deutsche Bank’s global head of ESG for fixed-income and currencies, said the hope is that the green repo “will encourage more activity so that a new source of green finance can be developed for the industry, as well as a new asset class for investors.””

Concerning JP Morgan’s efforts, Reuters reports that the firm has hired a well-experienced ESG hand to help boost its credibility in the arena:

“JPMorgan Chase & Co (JPM.N) named Aaron Bertinetti, the former head of environmental, social and governance (ESG) research at proxy advisor Glass, Lewis & Co, its new head of ESG for investor relations.

The bank created the position so it can communicate better on ESG with investors and research analysts, according to a note sent to analysts who cover JPMorgan. JPMorgan said in the note it is accelerating ESG efforts across the firm.

Bertinetti will report to Reggie Chambers, head of the bank’s investor relations.”

Glass-Lewis is one of the major Proxy Advisory Services, and has played a role in promoting ESG-related investor activism; although smaller than its principal competitor, ISS, Glass-Lewis is considered one of the chief forces behind ESG.

Notable quotes

“We will only be able to use the best conditions [of ESG] if we ourselves change — and I’m speaking first and foremost about our own company…This is about culture, it’s about leadership culture.”

Bloomberg, “Deutsche Bank CEO Wants to Change Culture to Ride ESG Boom,” September 8, 2021.