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Economy and Society, August 23, 2022: Attorney General ESG push back across the states

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.

BlackRock warns SEC about its proposed ESG rule

Last week, BlackRock – the world’s largest asset manager, with $10 trillion in assets under management – warned the SEC about its proposed new rule for regulating ESG funds. Unlike various state attorney generals, who recently indicated that they believe the SEC is overstepping its authority, BlackRock argued that the new rule would confuse investors and would create larger problems than it solved:

“The world’s largest asset manager BlackRock Inc. (BLK.N) warned the U.S. Securities and Exchange Commission (SEC) this week that its proposed rules aimed at fighting “greenwashing” by fund managers will confuse investors.

BlackRock made the claims in a letter filed this week in response to a SEC May proposal to stamp out unfounded claims by funds about their environmental, social and corporate governance (ESG) credentials. The rules also aim to create more standardization around ESG disclosures….

While BlackRock acknowledged the need to boost oversight, it questioned the SEC’s demand for more details on how funds should categorize strategies and describe their ESG impact, arguing such details could mislead investors about how much ESG really matters when managers pick stocks and bonds.

“The proposed requirements would increase the potential for greenwashing and lead to investor confusion,” BlackRock wrote in its letter.

“The granular nature of requirements will inevitably lead to the disclosure of proprietary information about these strategies, reducing the competitive advantage of those unique insights.”

Also at issue is how the SEC’s proposal outlines how ESG funds should be marketed and how investment advisors should disclose their reasoning when labeling a fund.”

Nevertheless, the SEC continues to push ahead

The Securities and Exchange Commission (SEC) continued last week to do as its Chairman Gary Gensler promised it would when he took over the Commission in the spring of 2021, namely cracking down on what it sees as a discrepancy between ESG funds’ promises and their records:

“US regulators are expanding their crackdown on misleading labels of investment products with a probe focused on whether managers of funds that are marketed as sustainable are trading away their right to vote on environmental, social and governance issues.

For the past several months, Securities and Exchange Commission enforcement lawyers have been peppering firms offering ESG funds with queries, including how they lend out their shares and whether they recall them before corporate elections, according to four people with knowledge of the matter. The practice lets asset managers earn fees that benefit investors, but it can also impact the ability to cast ballots. 

The SEC’s investigation delves into whether asset managers are making the proper disclosures to investors, said the people, who asked not to be named because the queries are private. It drives at the heart of whether ESG investment funds are able to meet their promise of helping combat societal ills through long-term investments in certain companies, especially if shares they lend out wind up with short-sellers taking an opposing view….

When it comes to proxy voting specifically, ESG money managers have been on the defensive at the SEC for more than a year. 

In March 2021, Allison Herren Lee, a former Democratic Commissioner who was acting as SEC chair, said funds should disclose more on how they vote for investors on related issues. The pressure has continued with Gensler pushing a plan introduced in May that could require funds to explain how proxy voting fits into strategies that purport to consider ESG factors….

The SEC enforcement division’s asset management unit, which polices fund disclosures, is leading the probe, according to one of the people familiar with the investigation. 

While it’s unclear if the securities-lending probe will lead to the regulator suing firms or investment advisers, the agency has started bringing cases over ESG disclosures.”

On Wall Street and in the private sector

Is ESG a Thing? Or should E, S, and G be unbundled?

Recently, Util, an ESG data company, conducted an analysis of thousands of US investment funds and determined that the “ESG” label is not helpful in determining which funds, investments, and corporations are, in its words, good from an ESG perspective and which ones are not:

“An analysis of 6,000 US funds has concluded there is no such thing as a “good” or “bad” investment in terms of the UN’s Sustainable Development Goals.

Instead, the picture is far more complex, according to Util, a sustainable investment data specialist, which is calling for the unbundling of environmental, social and governance (ESG) factors in a report that identifies leaders and laggards according to UN SDGs.

“Almost every company, industry and fund impacts some goals positively, others negatively,” Util said in its report released on Thursday that used machine learning in its assessment.

For example, it found that the 10 laggards on Climate Action were mostly utilities funds. Against other SDGs, however, every one of them is among the top 100 leaders in terms of the Quality Education; Affordable and Clean Energy; Decent Work and Economic Growth; and Industry, Innovation and Infrastructure metrics.

The “E”, “S” and “G” represented such different, even conflicting, objectives that it was time for the concept to be scrapped, the company argued.

“What our research highlights is the need for an approach that allows for a lot of different investor preferences,” said Patrick Wood Uribe, chief executive of Util, adding that attempts to categorise companies as only good or bad did not meet the need for nuance.

“This is more accurate,” Wood Uribe said, adding that it fitted with a global trend towards more personalisation.”

In the States 

18 states join Missouri Attorney General investigation over Morningstar ESG

Last month, Missouri Attorney General Eric Schmitt began an investigation of Morningstar, Inc. and its ESG-ratings subsidiary, Sustainalytics, for alleged consumer protection violations.  Specifically, Schmitt’s scrutiny has focused on accusations that Sustainalytics has used sources in developing and implementing its ESG ratings that violate state laws prohibiting discrimination against Israeli companies. Last week, the AG’s office announced that it had been joined in its inquiry by Attorneys General in 18 other states:

“Attorneys general in 18 U.S. states have joined Missouri’s probe into whether Morningstar Inc (MORN.O) violated consumer-protection law with its evaluations of companies’ performance on environmental, social and governance (ESG) issues, staff for Missouri Attorney General Eric Schmitt said on Wednesday.

Schmitt began the probe last month, and spokesman Chris Nuelle said the office invited attorneys general from states including Texas and Virginia “to widen our pool of resources and share information.”

A list from Schmitt’s office identified Republican attorneys general from 15 states while three more attorneys general were not identified because this was not allowed under their states’ rules, Nuelle said.

Schmitt on July 26 sent questions to Morningstar, asking among other questions about which news sources the research firm uses for ESG analysis. The probe is also looking at whether the firm and its Sustainalytics ESG ratings unit violated a Missouri law aimed at protecting Israel from a campaign to isolate the Jewish state over its treatment of Palestinians.

Morningstar in June said it would cancel a Sustainalytics human rights product after an independent review sparked by complaints by Jewish groups found the product focused disproportionately on the Israeli-Palestinian conflict.

But the review by a law firm hired by Morningstar said it “found neither pervasive nor systemic bias against Israel” by Sustainalytics.”

State AGs push the SEC on ESG

On August 17, West Virginia Attorney General Patrick Morrisey (R) led a group of state attorney generals in filing comments with the Securities and Exchange Commission (SEC) opposing the Commission’s proposed rules for ESG funds. Morrisey and the others appear to be planning to challenge the SEC in the same manner as Morrissey recently (and successfully) challenged the Environmental Protection Agency (EPA) for overstepping its statutory authority:

“West Virginia Attorney General Patrick Morrisey has signaled that he plans to take a page from his recent Supreme Court climate win to challenge the Securities and Exchange Commission’s proposed rule for funds that are marketed as socially and environmentally responsible.

In formal comments filed yesterday with the SEC, 21 Republican state legal officers led by Morrisey argued that the agency is trying to transform itself from the federal overseer of securities “into the regulator of broader social ills.”

And they say SEC’s move runs afoul of West Virginia v. EPA, the landmark Supreme Court decision that curbed the federal government’s authority to regulate carbon emissions from power plants….

At issue is an SEC proposal that would require firms to prove that investments that purport to be green or socially aware live up to those claims (Climatewire, May 26).

While the rule cannot be challenged in court until it is finalized, the letter from West Virginia and other states provides an early look at the claims opponents are likely to raise.

Morrisey argued in the comment letter that the proposed SEC rule violates the “major questions” doctrine, which he said was “settled” in the Supreme Court’s June 30 decision in West Virginia. The high court’s conservative majority agreed with Morrisey and other parties in the case that the doctrine — which says Congress must speak clearly if it wants a federal agency to act on a matter of “vast economic and political significance” — precludes a broad EPA carbon rule like the Obama-era Clean Power Plan.”

Notable quotes

Wall Street Journal: “The ESG Investing Backlash Arrives”

On August 15, The Wall Street Journal published an editorial titled, “The ESG Investing Backlash Arrives,” which featured two issues previously detailed in this newsletter, the state AGs’ efforts to push back against BlackRock’s ESG program and the rise of new, “post-ESG” investment vehicles like Strive Asset Management:

“Recent events show that the backlash against ESG investing has finally arrived…. Arizona Attorney General Mark Brnovich explains how he and 18 other state AGs are seeking answers from the investing giant BlackRock about its political agenda. BlackRock—a titan of passive investment funds—has been a leader in impressing ESG standards on the corporations it invests in.

The letter is significant politically and financially. These AGs represent states with public pension funds that invest in BlackRock and other funds on behalf of state employees. The states need to know they are getting the best financial returns possible in the market to meet their commitments to retirees….

“Based on the facts currently available to us, BlackRock appears to use the hard-earned money of our states’ citizens to circumvent the best possible return on investment, as well as their vote,” says the AGs’ letter.

It adds: “BlackRock’s past public commitments indicate that it has used citizens’ assets to pressure companies to comply with international agreements such as the Paris Agreement that force the phase-out of fossil fuels, increase energy prices, drive inflation, and weaken the national security of the United States.”

The eight-page letter goes on to ask detailed questions about BlackRock’s relationship with climate-change advocacy groups, its support for net-zero carbon emissions, and how its ESG advocacy conflicts with its fiduciary duty to investors, among other things. The AGs add that “BlackRock’s coordinated conduct with other financial institutions to impose net-zero also raises antitrust concerns.”…

Meanwhile, an intriguing new investment alternative to ESG funds has gone public. Strive Asset Management last week announced its first exchange-traded fund, DRLL, a passively managed energy index fund designed to mimic BlackRock’s passive U.S. energy index fund, IYE. Strive says it raised more than $100 million in assets under management and had $160 million in traded volume in its first week.

We have no brief for any particular business model. Let everyone compete for the investment dollar and see who prevails and offers the best return. But the Strive model is notable because it says it will use shareholder engagement and proxy voting to impress a non-ESG policy on companies. Strive says it will use proxy measures to persuade companies to pursue the overriding goal of maximizing return to shareholders. This is an antidote to the “stakeholder” model of corporate governance that is the fraternal twin of ESG standards.”



Economy and Society, August 16, 2022: ESG becomes a campaign theme

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.

Is an SEC ESG crackdown imminent?

According to Bloomberg Law, a recent spate of activity by the Securities and Exchange Commission’s (SEC) Climate and ESG Task Force “Hints at [a] Looming Crackdown on ESG Claims.” Last Wednesday, the newswire noted that SEC Chairman Gary Gensler is facing political pressure to ramp up ESG enforcement and suggested that this pressure might be the source of the task force’s recent activity and might also portent even more action:

“A new SEC task force to police corporate environmental, social and governance disclosures is gradually ramping up enforcement, putting companies on notice.

The Securities and Exchange Commission created its Climate and ESG Task Force a year and a half ago. The unit has mostly kept working behind the scenes. But in the last four months, it has helped bring at least three enforcement actions, according to agency records.

Companies that have faced allegations of misleading ESG claims include Bank of New York Mellon Corp., health insurance distributor Benefytt Technologies Inc., and Brazilian mining company Vale S.A.

The SEC is working on new rules to combat bogus ESG claims by investment funds and to force companies to disclose how climate change affects their operations. New rules or not, SEC Chair Gary Gensler is facing pressure from Democrats and investor advocates to guard against misleading corporate disclosures about climate change and other ESG issues.

The task force’s actions, which started to become public this spring, are likely just the beginning, with more cases expected soon, corporate lawyers told Bloomberg Law. SEC investigations often take more than a year to complete, they said.

The SEC’s fiscal year-end in September traditionally brings a flurry of cases, said Kevin Muhlendorf, a Wiley Rein LLP partner and former agency lawyer, who advises companies on ESG matters.

“I don’t think it’s all bark and no bite,” Muhlendorf said of the task force. “Anytime you create one of these task forces, there’s going to be actions.””

Bloomberg continued, suggesting that financial giant Goldman Sachs may well be the next target in the task force’s sites:

“Goldman Sachs Group Inc. may be the task force’s next announced case.

The SEC is investigating claims the banking giant’s funds didn’t align with ESG metrics touted in marketing material, Bloomberg News reported in June.

The report came after the agency announced in May that BNY Mellon agreed to pay $1.5 million to settle claims of ESG misstatements concerning its funds, without admitting or denying any wrongdoing.”

On Wall Street and in the private sector

A new fund makes waves

On August 9, Strive Asset Management – the newest startup venture from author and entrepreneur Vivek Ramaswamy – launched trading on its first ETF, an energy fund tagged DRLL on the New York Stock Exchange (NYSE). Bloomberg described the launch as follows:

“An anti-activism exchange-traded fund of sorts has launched to supposedly “unshackle” energy companies from climate concerns that some investors have forced them to reckon with. 

The aim of the Strive US Energy ETF (ticker DRLL), which began trading Tuesday, is to accumulate enough assets for the Ohio-based manager to have say in the boardroom, according to co-founder Vivek Ramaswamy. Strive launched in 2022 with backing from billionaire investors including Peter Thiel and Bill Ackman.

DRLL joins a small but growing wave of so-called anti-woke ETFs after issuers such as BlackRock Inc. put their heft behind environmental, social and governance-focused funds in recent years….

“We are post-ESG,” Ramaswamy said in a phone interview. “US energy stocks have tremendous potential if they’re unshackled from the shareholder-imposed ESG mandates.”…

Roughly $27 million traded in DRLL on Tuesday, Bloomberg data show. While most of that likely came from investors lined up ahead of time, it’s an impressive amount of day-one volume for an “indie ETF,” according to Bloomberg Intelligence senior ETF analyst Eric Balchunas.”

In the Wall Street Journal’s “Weekend Interview” with James Taranto, Ramaswamy had an opportunity to describe Strive and its new fund in his own words:

“The standard advice to retail investors is to buy passively managed index funds, which invest in the stocks of a broad range of companies. That’s an excellent way to balance risk and return, to ride waves of economic growth and offset losses from individual companies that sink beneath them. But Vivek Ramaswamy, a newly minted investment-fund executive, says that politics have quickly come to dominate index funds too. He has an ambitious plan that aims to break its grip.

The problem arises from what’s known as “the separation of ownership from ownership.” When you invest in, say, a BlackRock fund, you own shares in the fund, which in turn owns stocks or other underlying assets. Formal ownership of a company share gives BlackRock a vote in elections for the board of directors and on resolutions governing corporate policy. Multiply that share by hundreds of millions, and it adds up to real clout.

The three biggest fund managers—BlackRock, Vanguard and State Street—manage a combined total of some $20 trillion in assets. Their holdings of Exxon Mobil Corp., to take a prominent example, totaled more than 890 million shares, or about 21% of the company, as of March 31. When they vote as a bloc, that can easily tip the balance, as it did in 2021 when the big three backed a slate of Exxon Mobil directors put forth by the tiny activist fund manager Engine No. 1, which held fewer than a million shares.

“It was an accident of this investment structure that gave that much voting power to that concentrated group of actors with an unprecedented aggregation of capital,” Mr. Ramaswamy says in a Zoom interview from his home office in Columbus, Ohio. The big fund managers began only a few years ago “to exercise that voting power to advance social and political agendas.”…

When a fund manager uses your money “to advance agendas that do not serve the capital owner’s interest,” Mr. Ramaswamy says, “that represents a large-scale fiduciary breach.” But what can you do about it? Litigation is prohibitively expensive, and regulatory solutions are unpromising with an ESG-friendly administration in Washington. Buying stocks directly and voting them yourself is a high-risk investment, not to mention a labor-intensive one, and for a nonbillionaire the return in recovered voting power is trivial. Besides, pursuing any of these possible remedies would take you down a political rabbit hole, exactly what you’re trying to avoid.

Enter Mr. Ramaswamy, a 37-year-old wunderkind. He founded a biotech investment firm in 2014, at 28, then left it in 2021 and published two books, “Woke, Inc.: Inside Corporate America’s Social Justice Scam” last August and “Nation of Victims: Identity Politics, the Death of Merit, and the Path Back to Excellence,” forthcoming next month. “I enjoyed writing the books,” he says. “I thought I was going to keep going at it.”

Instead he decided that “problems in our culture, created in the market, . . . needed to be solved through the market,” and Strive Asset Management was born, with Mr. Ramaswamy as executive chairman. Its first offering, the Strive U.S. Energy ETF (ticker symbol DRLL), began trading this week on the New York Stock Exchange, where Mr. Ramaswamy will ring the closing bell on Wednesday.

Strive is an activist investment manager. “Our mission,” its website declares, “is to restore the voices of everyday citizens in the American economy by leading companies to focus on excellence over politics.” The firm won’t do this, Mr. Ramaswamy emphasizes, by selecting stocks in accord with “right-wing values” the way ESG funds promote left-wing values.

Instead its first few funds, including DRLL, will be managed passively, and subsequent ones actively, for profit, not politics.”

In a letter to supporters late in the week, Ramaswamy reported that the fund had done well in its launch – even better than Bloomberg had noted:

“We launched our U.S. energy index fund ($DRLL) on the New York Stock Exchange yesterday. Our aim is to liberate the U.S. energy sector from Environmental, Social, and Governance (ESG) constraints by delivering a new shareholder mandate to American energy companies….

Our first two days showed strong trading with over $60 million in flows already. The folks at NYSE told us this is one of the biggest launches of its kind.”

In the States 

ESG becomes a campaign theme

The states continue to be the main battleground for much of the ESG debate, and according to Bloomberg, concerns about investing, environmental and social mandates, and the perceived politicization of capital have started slipping into various state election campaigns:

“To Blake Masters, the newly minted Republican Senate nominee in Arizona, ESG scores are an existential threat to the US economy along with inflation — an issue worth campaigning on as ardently as securing the border, preventing voter fraud and challenging Big Tech.

“They represent a further merger of government and corporation,” Masters said, comparing ESG scores to the tactics of the Chinese Communist Party in a statement to Bloomberg Government on Wednesday. “These scores have absolutely no place in our country.”

Masters’ advocacy is part of a growing movement among Republicans to make ESG scores — the grading of companies’ performance based on their environmental and societal effects, as well as their governance structure — a cultural issue alongside Democrats’ social justice and environmental advocacy. Those Republicans could seek legislative avenues to limit use of the scores if they take control of the next Congress….

If elected, Masters could seek to limit the incentives for companies to value factors other than their bottom line.

The Securities and Exchange Commission, which has oversight of some firms that offer ESG scores and a Democratic chairperson, is unlikely to ban the scores or severely restrict firms that offer them. But a Republican-controlled Congress could pressure the agency to ramp up its scrutiny of the ratings or stop it from taking actions to encourage ESG scores, which socially conscious investors use to compare companies.

ESG scores have been around for about two decades but only attracted negative political attention more recently. One of ESG’s most prominent critics is Republican megadonor Peter Thiel, who is backing Masters’ campaign. Masters’ refrain on the campaign trail may be replicated by other like-minded candidates.”

In the Ivory Tower

New paper examines ESG ratings effectiveness

On August 4, David Larcker and Brian Tayan of Stanford, Edward Watts of the Yale School of Management, and Lukasz Pomorski of AQR Capital Management published a paper examining the reliability and effectiveness of ESG ratings. The paper, titled “ESG Ratings: A Compass without Direction,” found that ratings tend to fall short of their claims on both counts.

“In this Closer Look, we examine these concerns. We review the demand for ESG information, the stated objectives of ESG ratings providers, how ratings are determined, the evidence of what they achieve, and structural aspects of the industry that potentially influence ratings. Our purpose is to help companies, investors, and regulators better understand the use of ESG ratings and to highlight areas where they can improve. We find that while ESG ratings providers may convey important insights into the nonfinancial impact of companies, significant shortcomings exist in their objectives, methodologies, and incentives which detract from the informativeness of their assessments.”

Among other specific critiques, the authors noted the following:

“Having reviewed the objectives and methodological choices of ESG firms, we can better understand the research evidence regarding ESG ratings quality, consistency, and effectiveness. Unfortunately, it is rare for ratings providers to offer concrete, systematic evidence to back up claims about their ratings….

Systemic patterns are observed in ESG ratings. One pattern is related to company size: Large companies receive higher average ratings than smaller companies. This might be due to the more significant resources large firms are able to invest in ESG initiatives, or it might be due to the fact that large companies have greater disclosure of ESG data. A second pattern is industry-related: While some ESG ratings are industry adjusted, those that are not may have higher average scores for certain industries (such as banks and wireless communications) than for others (such as tobacco and gaming). It is not clear if these patterns are due to fundamental differences in ESG quality across industries, or a result of the methodological choices and input variables that underpin ESG ratings models. A third pattern is country-related: European companies have higher average ESG scores than U.S. companies, which might be due to political and regulatory differences across countries. Firms in emerging markets also have lower ratings than firms in more developed economies….

Studies find that ESG ratings have low associations with environmental and social outcomes.

A review of MSCI ratings conducted by Bloomberg finds that most upgrades occur for what Bloomberg calls “rudimentary business practices” rather than substantive improvements. In justifying 155 upgrades, MSCI cited governance improvements almost half (42 percent) of the time—significantly more than social (32 percent) or environmental (26 percent) improvements. Upgrades were often driven by check-the-box practices, such as conducting an employee survey that might reduce turnover, and rarely for substantial practices, such as an actual reduction in carbon emissions. Half of companies were upgraded for doing nothing—the result of methodological changes.

Raghunandan and Rajgopal (2022) find that companies in ESG portfolios (those with high Sustainalytics ratings) have worse records for compliance with labor and environmental laws relative to companies in non-ESG portfolios during the same period. Companies added to ESG portfolios also do not subsequently improve compliance with labor or environmental regulations.”



Economy and Society, August 9, 2022: NYC newspapers differ over ESG and its opponents

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.

NYC papers squabble over ESG and its opponents

On August 5, the New York Times ran an investigative report on the people and organizations that it argues are, in its words, weaponizing public office to push back against ESG:

“Nearly two dozen Republican state treasurers around the country are working to thwart climate action on state and federal levels, fighting regulations that would make clear the economic risks posed by a warming world, lobbying against climate-minded nominees to key federal posts and using the tax dollars they control to punish companies that want to reduce greenhouse gas emissions.

Over the past year, treasurers in nearly half the United States have been coordinating tactics and talking points, meeting in private and cheering each other in public as part of a well-funded campaign to protect the fossil fuel companies that bolster their local economies.

Last week, Riley Moore, the treasurer of West Virginia, announced that several major banks — including Goldman Sachs, JPMorgan and Wells Fargo — would be barred from government contracts with his state because they are reducing their investments in coal, the dirtiest fossil fuel.

Mr. Moore and the treasurers of Louisiana and Arkansas have pulled more than $700 million out of BlackRock, the world’s largest investment manager, over objections that the firm is too focused on environmental issues. At the same time, the treasurers of Utah and Idaho are pressuring the private sector to drop climate action and other causes they label as “woke.”

And treasurers from Pennsylvania, Arizona and Oklahoma joined a larger campaign to thwart the nominations of federal regulators who wanted to require that banks, funds and companies disclose the financial risks posed by a warming planet.

At the nexus of these efforts is the State Financial Officers Foundation, a little-known nonprofit organization based in Shawnee, Kan., that once focused on cybersecurity, borrowing costs and managing debt loads, among other routine issues.

The New York Times reviewed thousands of pages of internal emails and documents obtained through public records requests by Documented, a watchdog group, that shed light on the treasurers’ efforts since January 2021.

At conferences, on weekly calls, and with a steady stream of emails, the foundation hosted representatives from the oil industry and funneled research and talking points from conservative groups to the state treasurers, who have channeled the private groups’ goals into public policy.

The Heritage Foundation, the Heartland Institute and the American Petroleum Institute are among the conservative groups with ties to the fossil fuel industry that have been working with the State Financial Officers Foundation and the treasurers to shape their national strategy.

Many Democratic state treasurers support efforts to combat climate change and want banks and investment firms to be clear about risks posed to returns for retirees and others. Democratic lawmakers in California and New Jersey are working on legislation that would require their state pension systems to divest from fossil fuels. But Democrats have not mounted anything like the national campaign being orchestrated by the State Financial Officers Foundation.”

On August 7, the New York Post responded with an editorial critiquing its crosstown rival, declaring that “The New York Times’ cluelessness just hit an astounding new high”:

“Whoof, that was some truly deranged reporting by The New York Times the other day on “How Republicans Are ‘Weaponizing’ Public Office Against Climate Action,” painting an evil conspiracy of Republican state treasurers “to use government muscle and public funds to punish companies trying to reduce greenhouse gases.”

Yes, a bunch of GOP officials are fighting back against the progressive drive “to use government muscle and public funds” to destroy carbon-based fuel industries — and against banks and investment firms that are using their power to the same end. And the Republicans are working with think tanks, nonprofits and so on in this effort.

Exactly as Democrats have long been doing on their side. Just for starters, the New York city and state comptrollers boast of their anti-carbon strategies for investing huge pension funds, as do other Dems in similar jobs across the nation.

Heck, Mike Bloomberg has been sending millions to state Attorney General offices to fund special units to sue oil, gas and coal companies. That’s far more of an offense against good government than anything the Times uncovered.

Lefties generally think it’s awesome when they leverage government power to their ends, whether it’s dubious anti-carbon use of pension funds etc. or all those silly “state travel bans” that have taken off in recent years, mostly targeting other states whose school trans-bathroom policies don’t toe the progressive line.”

Missouri Attorney General Schmitt launches investigation of Morningstar over ESG business practices 

Even as the New York Times highlights state treasurers pushing back against ESG, other state officials – not connected to the treasurers’ offices – are also pushing back. Missouri Attorney General Eric Schmitt, for example, has launched an investigation of Morningstar for its ESG business practices:

“Missouri Attorney General Eric Schmitt has launched an investigation into whether Morningstar Inc (MORN.O) violated a state consumer-protection law through its evaluations of environmental, social and governance (ESG) issues, his office told Reuters.

The review is two-pronged, covering ESG matters as well as whether the financial research firm violated a separate Missouri law aimed at protecting Israel from a campaign to isolate the Jewish state over its treatment of Palestinians.

Staff for Schmitt said it is the first instance of a state looking into ESG ratings products potentially breaching such laws, on the books in more than 30 U.S. states….

In a pair of July 26 civil investigative demands to Morningstar and to its Sustainalytics ESG-ratings unit, Schmitt said they may have violated the Missouri Merchandising Practices Act such as by misrepresenting or omitting facts.

Schmitt’s office said the violations may have occurred through the sale of ESG products to Missouri-based businesses and other consumers, such as if the products overly emphasized the risk for companies of doing business in Israel.

Among his demands, Schmitt is seeking documents or communications relating to “ESG Services and BDS,” referring to efforts to boycott, divest or sanction the Jewish state or companies there.”

Morningstar is not the only investigative target of Schmitt’s office. The state of Missouri – along with several other states – is also investigating BlackRock, Inc., the world’s largest asset management firm and one of the most visible advocates of ESG and sustainability:

“Missouri Attorney General (AG) Eric Schmidt and 18 other Republican AGs are investigating BlackRock concerning the company’s push to place environmental, social and corporate governance (ESG) standards on states’ pension funds, according to the AGs’ letter.

The Republican AGs, including those from Arizona, Texas, Ohio and Montana, sent a letter to BlackRock CEO Larry Fink on Thursday claiming that BlackRock did not attempt to make money for states’ pensioners, but rather used funds to pressure companies to phase-out fossil fuels and comply with its climate agenda. The AGs allege that numerous of the firms’ actions ‘may violate multiple state laws’ as BlackRock may have an ulterior motive, particularly concerning its “climate agenda,” that differs from its public stances and statements.

“They’re dancing on the precipice of being in breach of their fiduciary obligations…and that’s where you’d run into law-breaking in a state like Montana,” Montana AG Austin Knudsen told the Daily Caller News Foundation.

“BlackRock’s past public commitments indicate that it has used citizens’ assets to pressure companies to comply with international agreements such as the Paris Agreement that force the phase-out of fossil fuels, increase energy prices, drive inflation, and weaken the national security of the United States,” the letter said….

AGs are scrutinizing BlackRock’s assertions that it posits a neutral stance on energy investments and merely offers its clients as many investment options as possible, according to the letter. The supposed neutrality is contradictory to the company’s public commitments to stopping climate change.”

On Wall Street and in the private sector

Is ESG “Losing its Mojo?”

In his newsletter for Bloomberg, Javier Blas, a columnist and former reporter for Bloomberg and a former editor at The Financial Times, argues that for many in the financial industry, “ESG is So, So, So Yesterday.” In the August 5, edition of “Elements” – the newswire’s new energy and commodities letter – Blas writes:

“Few companies have been as toxic as Glencore Plc for hard-core ESG investors. The Swiss-based commodity giant is the world’s largest exporter of coal, the biggest contributor to climate change.

For years, Glencore was on the defensive, with shareholders and analysts questioning its plan to close coal mines gradually rather than spin them off or sell them, as many competitors did.

Until now.

“The world seems to be short of energy,” one sell-side analyst told Glencore Chief Executive Officer Gary Nagle after the company reported record half-year results Thursday. “How do you think about your plans to shrink the output of the coal business? What would it take for you to delay the ramp down and, ultimately, make investments to give the world the energy it needs in the short term?

For months, it has been clear that the ESG boom was in retreat. The question at Glencore’s conference call highlights by how much.

In energy and commodities, ESG has gone from hottest item to démodé in about two years. Or as one major European institutional investor put it to me recently: “ESG is so, so, so yesterday.”

Even BlackRock Inc., an early evangelist of the movement, called for time earlier this year, warning that pushing companies to meet climate-change targets needed to take into consideration the “current geo-political context, energy market pressures, and the implications of both for inflation.””

ESG hits a wall in China

ESG funds in the United States and Europe have been struggling over the past couple of quarters, with energy stocks soaring and tech stocks sagging, which has caused American investors to pull funds out of the sector at an unprecedented pace. This week, The Financial Times notes that this phenomenon is not restricted to the United States and that ESG is also struggling to attract and keep investors in Asia, particularly in China:

“Chinese funds focused on environmental, social and governance recorded net outflows of $1.4bn in the second quarter, marking an even sharper slowdown than sustainable funds elsewhere in the region.

ESG funds in the Asia-Pacific region, excluding Japan and China, suffered a second consecutive quarterly decline in net inflows, attracting just $929mn during April to June, down from $1.27bn in the first quarter, Morningstar noted in its latest sustainable funds report.

Taiwan raked in the most net inflows for the quarter at $91mn, while Hong Kong had $129mn. South Korea, India and Indonesia had the biggest net outflows apart from China in the second quarter among regional markets.

Figures for China, which were only available after the publication of the report, showed net outflows of $1.4bn in the second quarter were a dramatic turnround from the $208mn in net inflows that the country had in the first quarter….

Europe, with inflows of $307bn, accounted for 94 per cent of total global net flows for the second quarter, but this was still a 57 per cent drop from $71.7bn in the first quarter….

“Amid investor concerns over a global recession, inflationary pressures, rising interest rates and the conflict in Ukraine, sustainable funds net inflows plummeted in the second quarter, [but] fared better than the broader market,” said Hortense Bioy, Morningstar’s global director of sustainability research.”



Economy and Society, August 2, 2022: Governor DeSantis bans ESG criteria in state pension fund management

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

Proposed bill would clarify fiduciary duty of retirement plan administrators to invest solely based on monetary factors

Last week’s edition of Economy and Society highlighted an op-ed co-authored by the entrepreneur and Strive Asset Management founder Vivek Ramaswamy and the former Secretary of Labor Alex Acosta, in which the two argued that the Biden Labor Department’s proposed rule for retirement plans could force plan managers to incorporate ESG principles into their management schemes.

This week, Roll Call reports that Senate Republicans are taking that argument seriously:

“Senate Republicans are teaming up to curb retirement plan sponsors’ ability to consider environmental, social and governance factors in selecting investments, as a counter to the Biden administration’s efforts to expand worker and retiree access to such investing.

Sen. Mike Braun of Indiana this week unveiled a bill that would specify the fiduciary duty of plan administrators is to select and maintain investments based solely on monetary factors under 1974 legislation known as the Employee Retirement Income Security Act, a law that governs a broad range of retirement and health benefit plans.

If plan sponsors want to consider non-pecuniary factors when choosing between funds, they could do so only if they are unable to distinguish them “on the basis of pecuniary factors alone,” according to the bill text. Even if an ESG investment choice is able to meet that standard, plan advisers would also have to make lengthy justifications to include it. 

The bill essentially would reinstate a Trump administration Labor Department rule that took away retirement plan sponsors’ ability to direct investments into ESG options. 

The bill is also similar to recent legislation from Sen. Steve Daines of Montana, who joined Braun’s bill as a co-sponsor, as did Sens. Richard M. Burr of North Carolina, Tommy Tuberville of Alabama, Cynthia Lummis of Wyoming, Roger Marshall of Kansas, Roger Wicker of Mississippi and James M. Inhofe of Oklahoma.” …

While Braun’s legislation and similar bills are unlikely to advance with Democrats in charge, it may foreshadow what’s to come if Republicans take control of either chamber of Congress after the midterm elections this fall.

“Forcing ESG standards on retirement accounts is a clear violation of the Employee Retirement Income Security Act, which requires fiduciaries to put the financial interests of plan participants first,” Rep. Virginia Foxx, R-N.C., said in a July 13 House floor speech. “ESG requirements pressure investors to subject retirement savings to low-yield investments. This is irresponsible.”

Democrats largely support ESG options and have sided with activist shareholders and sustainable investing organizations, arguing that such factors are just as material as traditional financial considerations. The Democrats’ tight margin in the Senate makes it tougher to pass additional legislation to support ESG investors.”

Can an energy crisis become an ESG crisis?

In large part due to the conflict between Russia and Ukraine and the related economic sanctions against Russia, many nations of Europe are facing an energy crisis that is expected to worsen as summer turns to fall and then to winter. In response, some European governments are turning to coal to fill in the gaps left by Russian natural, which, according to Reuters, threatens to create ESG-score challenges for energy companies operating on the continent:

“European companies turning to coal as an alternative to Russian gas face a hit to their environmental, social and governance ratings, leaving them scrambling to impress investors still vocal on sustainability.

Despite an energy crisis following sanctions on Russia, major European investors say they will not relax their investment principles of reaching net zero targets on greenhouse gas emissions by 2050 or earlier.

Investors increasingly use ESG ratings, developed by companies such as MSCI or Sustainalytics, to judge firms’ merits. Burning coal, which puts out more carbon dioxide than alternatives like oil and gas, gives companies a black mark.

European countries including Germany and Italy are nonetheless considering bringing back coal due to the Ukraine crisis, which has cut Russian gas flows. Some companies, such as German speciality chemicals maker Lanxess (LXSG.DE), have also said they may consume more coal….

Other companies, such as Europe’s top copper smelter Aurubis (NAFG.DE), also said their aim remains to decarbonise, despite the additional short-term complication of including coal in the energy mix.

Investors insist they are similarly committed. AXA Investment Managers, Allianz Global Investors and Zurich Insurance, which between them manage $1.8 trillion in assets, all said they were keeping to their plans to cut back on coal despite the war in Ukraine.

“We are not changing our position and we are not changing our policy – we are sticking to the course,” said Zurich group head of sustainability Linda Freiner.

So far Europe’s energy crisis is showing few signs of being resolved. It remains to be seen how far either companies or investors can keep faith in the importance of long-term ESG principles like cutting out coal if the situation worsens.”

In the States

Governor DeSantis bans the use of ESG criteria in state pension fund management

On July 27, Florida Governor Ron DeSantis announced that he had banned the use of ESG criteria in the management of Florida’s state-sponsored pension funds. The Governor made his announcement at a press conference during the day and then reiterated it that evening on Fox News’s “Tucker Carlson Tonight”:

“The Florida State Pension System will now be under a “flat ban” against incorporating the globalist ESG platform into its investments, Gov. Ron DeSantis announced on Fox News Wednesday.

DeSantis told “Tucker Carlson Tonight” the proponents of ESG – which places what its supporters say are environmentally-necessary regulations – like to “wiggle around” definitions and verbiage to supersede the purely fiduciary responsibilities of fund managers.

“It’s basically a way for [ESG proponents] to do politics,” the Republican governor said. “So we’re going to make sure that that fiduciary duty is defined very clearly and that they stick to that. We also want to provide protections for people in the financial marketplace from being discriminated against based on ideology.”

DeSantis said some Wall Street banks are already inserting their politics in their investments in other ways – discriminating against contractors unfriendly to unfettered immigration or those firms who invest in firearms manufacturers while Democrats seek to pass gun control laws opponents say infringe on the Second Amendment.”

ESG policies of five financial institutions land groups on West Virginia’s restricted financial institution list 

In West Virginia, State Treasurer Riley Moore announced that five firms have been placed on his state’s restricted financial institution list because their ESG policies conflict with what the Treasurer says are his state’s financial interests, namely coal and other fossil fuels:

“West Virginia State Treasurer Riley Moore today announced he has published West Virginia’s first Restricted Financial Institution List, deeming five financial institutions ineligible for state banking contracts.

Treasurer Moore has determined that BlackRock Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co. are engaged in boycotts of fossil fuel companies, according to a new state law, and are no longer eligible to enter into state banking contracts with his Office.

“As Treasurer, I have a duty to act in the best interests of the State’s Treasury and our people when choosing financial services for West Virginia,” Treasurer Moore said. “Any institution with policies aimed at weakening our energy industries, tax base and job market has a clear conflict of interest in handling taxpayer dollars.”

Six financial institutions were initially identified as potentially engaged in boycotts of energy companies and provided with written notice. These institutions then had 30 days to submit additional information disputing their potential inclusion on the Restricted Financial Institution List. All six institutions submitted responses, which the Treasurer reviewed alongside each institution’s public policy statements.

Out of the six financial institutions initially noticed, U.S. Bancorp was not placed on the List because it demonstrated to the Treasurer that it has eliminated policies against financing coal mining, coal power and pipeline construction activities from its Environmental and Social Risk Policy.

“Each financial institution placed on the Restricted Financial Institution List today has published written environmental or social policies categorically limiting commercial relations with energy companies engaged in certain coal mining, extraction or utilization activities, rather than considering the financial or risk profile for each company,” Treasurer Moore said. “These policies explicitly limit commercial engagement with an entire energy sector based on subjective environmental and social policies.””

Notable quotes

Aswath Damodaran speaks

On July 28, wealth manager David Bahnsen – who is also a trustee of the National Review Institute – hosted Aswath Damodaran on his National Review-produced podcast, the Capital Record. Damodaran is a professor of finance at NYU’s Stern School of Business and has, in the past, expressed skepticism about ESG and its impact.

In an accompanying article published at National Review Online, Bahnsen wrote about “A few points I find worth highlighting for those interested in a deeper dive on the subject,” including:

“The claim that ESG comes at “no cost” — that investing in a way that meets these environmental, social, and governance tests involves no trade-offs — ought to ring some alarm bells. Basic laws of economics tell us that there is no such thing as a free lunch. As Damodaran puts it, “constrained optima cannot beat unconstrained optima” (this should be so elementary to any first-year business student, it hurts). It would be one thing if ESG zealots were claiming that although we have to accept lower returns or more difficult business conditions, it is worth it in exchange for the alleged environmental, social, and governance benefits that investing subject to ESG constraints will provide. But alas, that’s not what most of them have been saying. Instead, they claimed they would make the world a better, more “sustainable” place by forcing restrictions on others, and that no sacrifice would be involved. These intelligence-insulting claims are a great place to start one’s critique….”

And:

“Fundamentally, and I cannot say this emphatically enough, ESG is a pharisaical way for people to feel virtuous and good without having to do anything at all. The lack of individual sacrifice being made by those who push so hard for ESG is damning. The sacrifices that are being made are being made by the shareholders in the companies (or the underlying shareholders in the funds that invest in those companies), now expected to measure up to ESG’s standards. Virtue is not something exhibited at no cost to the individual; agency, sacrifice, and cost are part of character and justice. The ESG movement has put the cost on other actors, abusively so, and feigned progress and moral superiority.”



Signatures submitted for $15 minimum wage ballot initiative in Michigan

On July 26, 2022, the One Fair Wage campaign announced that it submitted more than 610,000 signatures to qualify a $15 minimum wage initiative for the Michigan ballot in 2024.

The proposal is an indirect initiative, meaning, if enough signatures are verified, it goes to the state legislature first for consideration before being placed on the ballot. If the legislature approves the measure, it is enacted into law, but if the legislature does not approve of the measure, it goes to the ballot for voters to decide.

If approved by the legislature or voters, the initiative would increase the state minimum wage incrementally by a dollar every year, over the course of five years, until it reaches $15. The state’s current minimum wage is $9.87 per hour. The initiative would also phase out the lower-than-minimum wage for tipped, disabled, and underage workers, and would increase regardless of the unemployment rate.

“This is going to help hundreds of thousands of Michiganders get a raise that’s much needed,” said One Fair Wage co-organizing director Maricela Gutierrez.

The signature submission follows a recent ruling by a Michigan judge regarding two 2018 citizen-initiated laws, including one that would raise the minimum wage to $12 incrementally by 2022. Rather than having the measures go to the ballot, the state legislature voted to approve them, but later amended the minimum wage measure to increase the wage to $12 by 2030, changing the timeline for the wage increase. The amended version was signed into law by Gov. Rick Snyder (R). Michigan One Fair Wage and Michigan Time to Care — the campaigns behind the two initiatives — sued the state of Michigan. The Michigan Court of Claims struck down these two amended initiatives, ruling that the adopt-and-amend tactic is unconstitutional.

“We’re going to get it back on the ballot,” said State Sen. Mallory McMorrow (D), “We saw the court decision. That is a huge move in the right direction but as we saw in the recent Dobbs decision on the federal level, court rulings are also not settled. So that requires all of us getting into it.”

Brian Calley, chief executive officer of the Small Business Association of Michigan, said, “This type of government action is a big part of the reason we are now facing such devastating inflation, which hurts lower-income families the most. We should not make a bad problem worse with this proposal.”

There is currently one minimum wage ballot measure certified for the ballot in 2022. It would raise the minimum wage to $12 an hour by 2024 in Nevada.

In Michigan, between 1985 and 2020, 26 citizen-initiated measures have appeared on the ballot. Eight of them (31%) were approved, while 18 of them (69%) were defeated.

Additional reading:

Michigan 2024 ballot measures



Economy and Society- July 26, 2022: Responses to proposed Biden administration ESG 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., and around the world

Will the SEC’s proposed disclosure rule harm materiality standards? 

As the Securities and Exchange Commission (SEC) continues to evaluate its options regarding the issuance of a final rule on climate change-related disclosures by publicly traded companies, Bernard S. Sharfman – a senior corporate governance fellow at RealClearFoundation and a research fellow with the Law & Economics Center at George Mason University’s Antonin Scalia Law School – penned a piece for National Review Online’s “Capital Matters” arguing that the new rule will harm the existing materiality standard by creating a new standard – a climate change standard – that is, in his view, based on a fallacy:

“Materiality has been the hallmark of the Securities and Exchange Commission’s disclosure regime since the Supreme Court’s 1976 decision in TSC v. Northway. Materiality limits disclosures “to those matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security registered.” In the SEC’s recently proposed rule on climate-change disclosures, the SEC tries, but fails, to make the argument that the proposed disclosures will provide investors with “material” information that is critical to their investment decisions. That the SEC even tries to make a materiality argument may surprise many readers, as it is made so indirectly and done so poorly that readers may have missed it.

The materiality argument in the proposed rule revolves around the term “transition risk.” As defined in the proposed rule, this term includes increased operating and investment costs resulting from stricter climate-related regulations, reduced demand for carbon-intensive products, and the potential for stranded assets such as oil and gas reserves.

There are over 100 mentions of transition risk in the proposed rule. It is mentioned so often because the SEC is using it to create the necessary link between its legal authority to require public companies to make disclosures and the disclosures found in the proposed rule. This legal authority requires the SEC’s mandated disclosures to be “for the protection of investors,” a term that requires such disclosures to be directed at informing investors of the firm-specific financial risk that they take when investing in public companies.

As the SEC states in the proposed rule, “Understanding the extent of this potential exposure to transition risks could help investors in assessing their risk exposures with respect to the companies in which they invest.” For example, the SEC tries to justify the need for companies to provide data on Scope 1 (carbon emissions that come directly from sources owned by a company) and Scope 2 emissions (resulting primarily from the generation of electricity purchased and consumed by the company) in the following manner: “Should a transition to a low-carbon economy gain momentum, registrants with higher amounts of Scope 1 and 2 emissions may be more likely to face sharp declines in cash flows, either from greater costs of emissions or the need to scale back on high-emitting activities, among other reasons, as compared to firms with lower amounts of such emissions.” Therefore, transition risk can be thought of as another type of firm-specific financial risk.

The problem with this argument is that transition risk, as defined by the SEC, is not material for most companies and their investors, including companies that focus on the production and refinement of fossil fuels. The materiality of transition risk rests on the false premise that the world is rapidly moving to net-zero carbon emissions and therefore presumably presenting all public companies with a significant amount of such risk.”

Response to proposed Biden administration ESG rule and its potential impact on retirement plans 

On July 19, Vivek Ramaswamy, the author, entrepreneur, and executive chairman of Strive Asset Management, and Alex Acosta, the former Trump administration Secretary of Labor wrote a piece for the Wall Street Journal in which they made the case that the Biden Administration’s plans for the new rule on ESG investments in retirement plans are likely, in their view, to be problematic for investors and will create a new tax on retirement accounts. The two wrote the following:

“BlackRock CEO Larry Fink wrote in 2020 that “sustainable investing is the strongest foundation for client portfolios.” Al Gore said in 2021 that “you don’t have to trade values for value. Green can enhance returns.” These claims haven’t aged well: ESG (environmental, social and governance) funds have trailed the market since the beginning of the year and are badly underperforming the sectors they shun, including oil, gas and coal.

That may spur retirement fund managers to reconsider their commitments to ESG funds. But new ESG-favoring regulations may come to the rescue. Last year the U.S. Labor Department proposed a regulation that would tell retirement-fund managers to consider ESG factors such as “climate change” and “collateral benefits other than investment returns” when investing employees’ money.

This would encourage America’s perpetually underfunded pension plans to invest in politically correct but unproven ESG strategies. It would also violate retirees’ basic right to have their money invested solely to advance their financial interests.

Retirement and pension-fund managers are fiduciaries, legally required to make every investment decision with one purpose—maximizing retirees’ financial interests. The Uniform Prudent Investor Act, a model law adopted by 44 states, makes clear that “no form of so-called ‘social investing’ ” is lawful “if the investment activity entails sacrificing the interests of . . . beneficiaries . . . in favor of the interests . . . supposedly benefitted by pursuing the particular social cause.” This principle is built into the Employee Retirement Income Security Act itself, as the Supreme Court held in Fifth Third Bancorp v. Dudenhoeffer (2014). The Biden administration can’t change that by regulation….

The new rule suggests that fund managers weigh factors such as “climate change,” “board composition” and “workforce practices.” While the drafters were smart enough not to mandate consideration of ESG factors explicitly, the draft rule’s one-sided list of examples tilts the scale in favor of ESG-linked investment selection, proxy voting and shareholder engagement.

The rule states not only that ESG factors can be considered, but that prudent investing “may often require” it. The proposed regulation thus transforms ESG from one factor that may be considered when it has a material effect on the investment to a factor that should be considered in all instances.

The new regulation may also expose fiduciaries who don’t consider ESG factors to lawsuits. Already, activist shareholders are pursuing litigation against public companies that don’t take ESG-approved steps.

Washington should remember that the law governing retirement accounts already spells out the ESG goal that fiduciaries must honor: “Providing a secure retirement for American workers is the paramount and eminently worthy social goal of ERISA plans.” The Labor Department should scrap the rule now.”

The ‘S’ in ESG

The British government has come to the conclusion that pension fund managers can and should be doing a great deal to manage the ‘S’ portion of the ESG equation, that is, the social portion–and if they’re not, then they are not performing their duties:

“The U.K. government wants to make sure that pension fund trustees are giving enough attention to social factors that could have financial implications, and is setting up a task force to help.

“The ‘S’ of ESG is one area in which the risk management of pension schemes can be strengthened,” said Pensions Minister Guy Opperman, the longest serving parliamentary undersecretary of state for pensions and financial inclusion, in a statement on the Department for Work and Pensions website.

“In my view, trustees who do not factor in financially material social factors are at risk of not fulfilling their fiduciary duty,” said Mr. Opperman, responding to the results from a Department for Work and Pensions consultation with the pension community on how they approach social risks and opportunities.”

Opperman’s concerns about social matters could, at least in theory, according to some analysts, draw pension managers into conflict over which is most important, social or environmental concerns:

“While some pension funds and service providers reported managing social factors through engagement with companies and others in the investment chain, “there is clearly more to do,” Mr. Opperman said.

One issue raised by trustees was modern slavery within supply chains, which could be exacerbated by global events like the war in Ukraine. The war has also shifted the conversation about investing in defense and nuclear industries, he said.

“This time last year, industries such as defence and nuclear (both civil and defence) were seen as no-go areas for ESG funds but the situation has changed and ESG investing should change with it,” he said. “Recent events have reminded us — if such a reminder were needed — how vital these sectors are to the safety and security of our society.” Pension fund trustees should join the Occupational Pensions Stewardship Council to collaborate on collective engagement and best practices, and when they delegate stewardship, they should “ensure that asset managers do not leave social factors off the agenda,” Mr. Opperman said.”

On Wall Street and in the private sector 

Bloomberg: ESG Fund Closures Pile Up as Do-Good Investing Takes Back Seat

According to Bloomberg, many ESG funds are not weathering the downturn in the equities markets well:

“A deluge of do-good ETFs once flooded US exchanges and drew in billions. But as investors contend with fears of a recession, the trend is reversing and more of these funds are closing up. 

Cathie Wood’s Ark Transparency ETF (ticker CTRU) is the latest ESG exchange-traded fund set to shutter, bringing the total to seven this year. While do-good funds were popular during the post-pandemic bull market when virtually every strategy surged, they now account for 15% of all US ETF closures this year, according to data compiled by Bloomberg. They only made up about 4% of the funds in the industry at the start of the year.

It’s been a brutal turnaround for an investment strategy that grew in popularity as investors sought to finance companies that battle climate change or focus on diversity in their management. An unforgiving year for markets has put do-good investing firmly in the back seat, with investors fleeing ESG funds as portfolio protection becomes a priority.

“This is a really difficult market — I think people tend to go back to the basics,” said Cinthia Murphy, director of research at ETF Think Thank. “We all just want to survive this market and not lose everything we’ve built so far.” 

“The ESG ETF space is already over-saturated,” said Nate Geraci, president of The ETF Store, an advisory firm. “We’re going to continue to see an uptick in ESG ETF closures.””

BlackRock – a leader of the ESG investment movement – closed one ESG fund in March and has been leading the market much lower, losing more in the first half of 2022 than any firm in the history of the markets, largely because of its focus on ETFs:

“BlackRock Inc. is used to breaking records. The world’s largest asset manager was the first firm to break through $10 trillion of assets under management. But the bigger they are the harder they fall. And this year BlackRock chalked up another record: the largest amount of money lost by a single firm over a six-month period. In the first half of this year, it lost $1.7 trillion of clients’ money.

BlackRock management was quick to invoke the first-half market carnage when revealing the investment performance last week. “2022 ranks as the worst start in 50 years for both stocks and bonds,” Chairman and Chief Executive Officer Larry Fink said on his earnings call.

While few firms are able to avoid what the market throws at them, some at least try to overcome it. BlackRock is increasingly giving up: At the end of June, only about a quarter of its assets were actively managed to beat a benchmark — rather than track it seamlessly as passive strategies are designed to do. That’s down from a third when BlackRock acquired Barclays Global Investors in 2009 to become the leading player in exchange-traded funds.”



Economy and Society: July 19, 2022- Missouri Treasurer challenges ESG impact on public pensions

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.

The SEC undoes Trump administration rules on proxy advisory services

On July 13, the Securities and Exchange Commission (SEC) voted to undo rules placed on proxy advisory services during the Trump administration. The advisory services – and especially the two dominant services, Institutional Shareholder Services (ISS) and Glass-Lewis – have long been considered among the key players in the ESG universe. The SEC agreed with the advisory services that the rules were, in their view, unduly burdensome and inhibited their ability to act independently. Reuters reported as follows:

“The U.S. securities regulator voted on Wednesday to rescind rules introduced under former President Donald Trump that critics said impeded the independence of firms that advise investors on how to vote in corporate elections.

The move is the latest installment in a long-running battle over how to regulate proxy advisers like Institutional Shareholder Services and Glass Lewis, which advise investors how to cast their ballot on issues including the election of directors, merger transactions and shareholder proposals….

In 2020, the SEC introduced rules that increased proxy advisers’ legal liability and required them to share recommendations early on with corporate executives. Investor advocates said the changes tilted the scales in favor of corporate bosses over investors.

Wednesday’s rules specifically rescind two exemptions, including a requirement that proxy advisers provide a first look to corporations of the advice to be placed on the agenda. It also removes a requirement that allowed clients of proxy firms to be notified of any written responses to their advice from companies.

The SEC, whose composition has changed under President Joe Biden, first proposed these rule changes in November and said investors had expressed concerns that the conditions created increased compliance costs for proxy advisers and impaired the independence and timeliness of their advice….

“While we applaud the Commission for removing some of the 2020 rule’s more draconian provisions, the rule should have been rescinded in its entirety,” ISS said in a statement.

Not everyone welcomed the changes.

“The SEC has offered no justification for abandoning a decade’s worth of bipartisan, consensus-driven policymaking,” said Jay Timmons, chief executive of the National Association of Manufacturers, adding that his group would be filing a lawsuit in the coming weeks to “protect manufacturers from proxy advisory firms’ outsized influence.””

An SEC proposal aims to make it easier for activists to weigh in

Also on July 13, the SEC proposed a rule that would make it more difficult to keep shareholder proposals off their proxy statements. If enacted, the rule would strengthen activists’ positions, making it more difficult for corporations to dismiss them and their proposals. And while the new rule would apply to all proposals, not just to those introduced by ESG-inspired activists, analysts nevertheless view this as a victory for ESG:

“The Securities and Exchange Commission on Wednesday proposed expanding investors’ ability to resubmit proposals on environmental, social and governance issues as the 2022 proxy season sees record levels of votes and Republicans ramp up criticisms of the agency.

The agency voted 3-2 to propose amending a provision known as Rule 14a-8, to require companies to jump through additional hoops when seeking to prevent shareholders from voting on corporate proposals.

If finalized, the changes would likely make it much harder for companies to avoid votes on ESG matters in the future.

The rule as currently written allows shareholder proposals to be excluded if companies say they have been “already substantially implemented,” that they “substantially duplicate” another current proposal, or that they substantially duplicate a proposal that was previously submitted at the company’s prior shareholder meetings, according to the agency.

The SEC proposed amending each of these options so that companies would have to meet a higher bar….

During an open meeting Wednesday, SEC Chairman Gary Gensler said the amendments would provide much-needed clarity. The SEC received more than 700 requests to block shareholder resolutions in the last three proxy seasons, according to the agency. Nearly half of those requests used at least one of the three arguments.

“I believe these proposed amendments would provide a clearer framework for the application of this rule, which market participants have sought,” Gensler said. “They also would help shareholders exercise their rights to submit proposals for consideration by their fellow shareholders.”

Republican commissioners Hester Peirce and Mark Uyeda, who was sworn into the agency last month, voted against the change. Both said the move is another example of regulatory whiplash as the SEC unwinds or mitigates actions taken during the Trump administration.

Peirce said the proposal would force executives to rehash old issues year-after-year, “narrowing companies’ ability to exclude proposals.””

WSJ: “SEC’s Gensler Casts Doubt on Prospects for China Audit Deal” 

Lastly, on July 13, SEC Chairman Gary Gensler sounded pessimistic about reaching a deal with the People’s Republic of China on company audits. For years, according to analysts, American capital markets have questioned the validity of self-reported corporate data from China and have argued that the lack of a substantive, verifiable audit process gives Chinese companies an unfair advantage over those from other nations.

In 2020, Congress passed and President Trump signed the Holding Foreign Companies Accountable Act, which will require American exchanges to de-list companies that do not permit their audits to be checked by external authorities.

According to proponents, the urgency of validating foreign corporate audits will take on far greater pertinence when the SEC issues its final rule on climate disclosures. If investors and legislators feel that U.S. companies are disadvantaged by traditional financial audit discrepancies, then that sentiment is likely to grow when U.S. companies are forced to conduct environmental audits as well, they argue. The Wall Street Journal reported:

“Securities and Exchange Commission Chairman Gary Gensler expressed doubt Wednesday that negotiators in Washington and Beijing will reach an agreement over audits that is necessary to prevent Chinese companies from being delisted by U.S. stock exchanges.

Talks between the two countries had intensified in recent months ahead of a looming deadline for American regulators to gain access to Chinese companies’ audit papers as required under U.S. law. Chinese authorities had become vocal in recent months about their desire to avoid the delisting consequence of missing the deadline….

“It’s quite possible that there’s no deal here,” Mr. Gensler told reporters after an SEC rule-making meeting. “I’m not particularly confident.”

The HFCAA took effect in 2021 and bans U.S. trading of securities of companies whose auditors can’t be inspected by the American audit watchdog for three consecutive years. That gives Chinese companies until spring 2024 to comply, though Congress is weighing bipartisan legislation that would shorten the deadline by a year.

The SEC has identified about 150 companies as noncompliant following the release of their latest annual reports, including Chinese e-commerce giants JD.com Inc. and Pinduoduo Inc. and restaurant operator Yum China Holdings Inc.

Chinese authorities have long cited national-security concerns as the basis for declining to allow the U.S. Public Company Accounting Oversight Board, or PCAOB, full access to company audit papers.

At the heart of the dispute are profound differences in the two countries’ understanding of what information threatens national security. U.S. officials say company audit papers should not contain anything sensitive. But for China’s authoritarian government, uncensored information of any sort is a risk. Data from large Chinese companies could, for instance, provide insights into the nation’s economy that aren’t available in tightly controlled government reports.

Officials at the SEC and PCAOB have repeatedly said they have little wiggle room under the law to make accommodations for Chinese firms….

In anticipation of the potential delisting from U.S. exchanges, many U.S.-listed Chinese companies have pursued alternative listings in Hong Kong, but their trading volumes in the Asian financial hub still trail their American counterparts.”

In the States

Missouri Treasurer asks the legislature to address ESG influence on public pensions

Last week, Missouri Treasurer Scott Fitzpatrick (R) – who is currently campaigning to be the state’s next auditor – pled with state legislators to address ESG, which he argues has harmful consequences for the state:

“The Missouri legislature needs to examine who is making investments of taxpayer funds held in public pensions, according to the state treasurer.

Scott Fitzpatrick, a candidate for the Republican nomination for state auditor, highlighted his concern during a recent visit to St. Louis. He believes a top legislative priority should be acting on the state’s investment relationships with any Environmental, Social and Governance (ESG) Funds through public pension systems.

“I think the legislators should work on legislation to address the impacts of ESG investing and make sure that state pension plans are not allowing their assets to be voted by asset managers that are advancing a woke political agenda,” Fitzpatrick, who was elected to a full term as treasurer in November 2020, said in an interview with The Center Square. “We’re seeing that in companies like Black Rock.”

Last month, Fitzpatrick distributed a media release in an effort to protect the Missouri State Employees’ Retirement System’s investments “from being used by activist investment managers to advance left-wing social and political causes, which are harmful to shareholders and violated their fiduciary obligations to Missourians.”

Fitzpatrick said state government must take back control of how funds are being managed and proxy votes cast….

Fitzpatrick predicted the federal government will embrace more ESG initiatives through the Federal Deposit Insurance Corp., SEC, the Department of Labor, the Environmental Protection Agency and other rule-making organizations.”

On Wall Street and in the private sector 

Best-returning ESG fund is cautious and contrarian

The top-returning emerging-markets ESG fund managed to outperform its competitors by a wide margin over the last six months by adopting an unusual strategyavoiding the hot tech names:

“The top-performing ESG fund for emerging markets surpassed its peers in the first half of 2022 by adopting a low-risk strategy that rejected tech companies Tencent Holdings Ltd., Alibaba Group Holding Ltd. and Taiwan Semiconductor Manufacturing Co. Ltd.

The Robeco QI Emerging Conservative Equities fund declined 4.9% this year, while the 15 largest actively managed ESG-labeled emerging market equity funds plunged about 23% on average, according to data compiled by Bloomberg.,,,

Top holdings in Robeco’s $2.2 billion fund are Samsung Electronics Co. Ltd., Infosys Ltd. and Bank of China Ltd. By comparison, TSMC ranks as the largest investment for all of the other biggest ESG emerging markets funds, which also have sizable stakes in Tencent and Alibaba. Shares of TSMC, Tencent and Alibaba have fallen as much as 26% this year amid rising global concerns about inflation and slowing economies.

Tech and financials are the biggest holdings in all of the biggest 15 funds, which also focus on four countries — China, Taiwan, South Korea and India. The funds largely avoid markets in Latin America, Africa and other emerging regions. This bias can divert greener capital that poorer countries need to decarbonize their economies and raise living standards….

Rotterdam-based Robeco said its fund’s success reflects a strategy of hand-picking stocks that are considered low risk and perform well over longer time horizons, and a willingness to deviate from its benchmark — the MSCI Emerging Markets Index — by as much as 10%.”



Economy and Society- July 12, 2022: ESG pulling Europe in opposite directions

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

ESG pulling EU and the European Central Bank in opposite directions

While farmers in the Netherlands continue protests against new energy and fertilizer protocols, European Union regulators in Brussels and Frankfurt, respectively, appear to be moving in opposite directions on ESG-related matters.

On July 6, the European Union accepted the pleas made most notably by Germany and agreed to keep natural gas and nuclear energy in its green or sustainable energy classification – much to the chagrin of many in the Union. The EU decision was frustrating to many in the coalition:

“The European Union voted on Wednesday to keep some specific uses of natural gas and nuclear energy in its taxonomy of sustainable sources of energy.

Europe’s taxonomy is its classification system for defining “environmentally sustainable economic activities” for investors, policymakers and companies. This official opinion of the EU matters because it affects funding for projects as the region charts its path to address climate change. In theory, the taxonomy “aims to boost green investments and prevent ‘greenwashing,’” according to the EU’s parliament.

The vote on natural gas and nuclear energy follows one that was passed in February, which amounted to a referendum on what had been a particularly controversial piece of the ruling. Natural gas emits 58.5% as much carbon dioxide as coal, according to the U.S. Energy Information Association. Nuclear power does not generate any emissions, though it draws criticism surrounding the problem of storing radioactive waste….

The EU is still required to reduce greenhouse gas emissions by at least 55% at the end of the decade and to become climate neutral in 2050, in accordance with European Climate Law. But Wednesday’s vote shows that at the same time the EU wants to encourage private investment in natural gas and nuclear as the region makes the transition from fossil fuels, particularly coal, to clean energy….

There was a flurry of opposition to the decision.

Some observers objected to the fact that continuing to use natural gas means an ongoing dependence on Russian energy.

“I’m in shock. Russia’s war against Ukraine is a war paid for by climate-heating fossil fuels and the European Parliament just voted to boost billions of funding to fossil gas from Russia,” Svitlana Krakovska, a Ukrainian scientist on the Intergovernmental Panel on Climate Change, said in a statement shared by the European Climate Foundation, a philanthropic advocacy initiative that fights climate change.

Others say the inclusion of natural gas in the taxonomy undermines its goal to prevent greenwashing.

“With gas in the Taxonomy, the European Union has missed its chance to set a gold standard for sustainable finance. Instead, it has set a dangerous precedent. Politics and vested interests have won over science,” said Laurence Tubiana, CEO of the European Climate Foundation, in a statement.”

Meanwhile, in Frankfurt, the European Central Bank moved in the other direction on green investments, agreeing to clean up its investment portfolio – although it too struggled with criticism leveled by advocates of more aggressive action:

“The European Central Bank will shift the corporate bonds it owns and accepts as collateral away from the most carbon-intensive companies, going further than most big rate-setting authorities but disappointing activists eager to see stronger measures.

Announcing plans to “tilt” its €386bn portfolio of corporate bonds away from companies with “a poorer climate performance”, the ECB said it “aims to gradually decarbonise its corporate bond holdings” in line with the 2015 Paris Agreement to limit global warming.

The central bank said it would also limit the share of non-financial corporate bonds with a “high carbon footprint” it accepts as collateral from individual counterparties, while requiring climate risk disclosure to hit certain levels before an asset or loan is accepted as collateral.

ECB president Christine Lagarde, who has made fighting climate change a key focus of her leadership, said: “Within our mandate, we are taking further concrete steps to incorporate climate change into our monetary policy operations.”

She added “there will be more steps” in future to align the ECB’s activities with the Paris Agreement to limit global warming to 1.5C since pre-industrial times. Temperatures have already risen at least 1.1C….

However, campaigners expressed disappointment that the ECB had not gone further. Greenpeace finance expert Mauricio Vargas said the measures announced on Monday were “overdue”, adding that the ECB “should actively sell the bonds of companies, like the big fossil fuel groups, that are not aligned with the goals of the Paris Agreement”….

The ECB on Monday defended the measures, however, saying they “aim to better take into account climate-related financial risk in the eurosystem balance sheet and, with reference to our secondary objective, support the green transition of the economy in line with the EU’s climate neutrality objectives”.

The shift in its corporate bond portfolio will come into force in October and will only affect how it reinvests the proceeds of maturing bonds it already owns after it stopped expanding its balance sheet last week.”

On Wall Street and in the private sector 

Abortion becomes an ESG issue

In the wake of the Supreme Court’s decision in the Dobbs case, which overturned Roe v. Wade and threw the question of legal abortion back to the states, corporations are also being asked – by employees and activists – to get involved. Some CEOs are eager to do so, while others are much more reluctant:

“Companies are being cautious and deliberative in how they factor abortion into their long-term ESG plans despite demands for swift action from shareholders, employees, and the public after the Supreme Court overturned Roe v. Wade.

Following the ruling in Dobbs v. Jackson Women’s Health Organization, companies including Microsoft Corp., Meta Platforms Inc., and JPMorgan Chase & Co. said they would help cover employees’ travel costs to access an abortion. Other companies have issued more neutral statements, citing their existing health benefits.

Critics on social media were quick to point to big corporations that didn’t immediately voice any statements, including Walmart Inc. In response, company CEO Doug McMillon told employees July 1 that Walmart’s leadership is listening to “many different viewpoints” from its employees and will work “thoughtfully and diligently to figure out the best path forward.”

Most businesses had time to plan an initial statement and response to Roe being overturned, given the draft opinion was leaked in May. But now, behind closed doors, those companies are mulling a mass of questions, including whether to accommodate part-time workers and provide paid sick leave for any travel….

Corporate executives and boards of directors must now plan for what consistent action they will take on reproductive health rights across their business, including responding to thorny investor questions about benefits and political spending, according to environmental, social, and governance (ESG) consultants.”

At the same time, opponents of ESG are weighing in to express their belief that getting involved in the abortion issue is well beyond the role of the corporation, and that executives who use corporate funds to pay for abortion procedures are unfairly and unethically taking from their shareholders. On July 11, Andy Puzder wrote the following:

“Woke capitalism attempts to reorient modern corporations from their traditional responsibility to generate returns for investors to a new mission of supporting leftist political activism. The Left has utilized this approach when advancing radical environmental policies, opposing Georgia’s voter-fraud protections, or challenging Florida’s law restricting instruction on gender identity and sexual orientation through the third grade.  

Now the Left is employing woke capitalism to advance its position on abortion…. President Biden has signed an executive order pushing back against potential state efforts to limit a woman’s ability to cross state lines for an abortion.

Biden’s executive order would protect the efforts of at least 60 U.S. corporations that have announced abortion travel benefits for employees unable to get abortions where they reside.

The monies to pay for these costs could otherwise be used to reduce operating expenses (increasing investors’ returns) or to pay dividends. These woke CEOs are not using their own money to fund this perk – they are using their investors’ monies to advance policies that these investors may well oppose. This is woke capitalism’s cornerstone: using other peoples’ resources to advance political goals.”

In the Ivory Tower

MIT research shows that ESG returns might be illusory – or fraudulent

In a press release late last month, the Sloan School of Management at MIT touted a paper (last revised in September 2021) co-authored by the school’s Florian Berg that purports to show that positive ESG return-on-investment is less about actual returns and more about retroactive fiddling with ESG scores:

“A research paper by MIT Sloan School of Management research associate Florian Berg and Kornelia Fabisik and Zacharias Sautner of the Frankfurt School of Finance and Management, validates these concerns, as they discovered “widespread and repeated” changes to the historical ESG scores by a leading vendor of this data.

Is history repeating itself? The (un)repeatable past of ESG ratings” won the John L. Weinberg/IRRCi Research Award from the Weinberg Center at the University of Delaware, which was presented at the 2022 Corporate Governance Symposium by the European Corporate Governance Institute (ECGI).

Berg says, “The incredible growth of sustainable finance has created a billion-dollar market for ESG data. Yet, we found that the data is not reliable or consistent. The changes made in ESG scores at any particular time in history are massive.”

He explains that the data for any specific point in time should remain the same for a firm unless there is a documented reason for a retroactive change. However, their study revealed significant unannounced and unexplained changes to the data provided by Refinitive ESG, which was previously owned by Thomson Reuters. For example, looking at two versions of the same Refinitive ESG data for identical firm years – one from September 2018 and the other from September 2020 – the median overall scores in the rewritten data were 18% lower than in the initial data.

“The score rewriting leads to large changes in what are deemed to be high- or low-ESG firms. This is important because the classification of firms is widely used in ESG research and the investment industry,” says Berg, cofounder and research associate of the MIT Sloan Sustainability Initiative’s Aggregate Confusion Project.

In their paper, the researchers highlight how firms that performed better in a given year experienced upgrades in their E and S scores for that year through the data rewriting. Using predictive regressions, they showed that investing in firms with higher ESG scores in the initial data would not have led to economically or statistically significant performance gains. Yet, in the rewritten data, they found economically large, statistically significant positive effects of the E&S score on the firm’s future stock returns.

“These large differences matter because this performance would not have been possible with the data available to investors when forming their investment strategies,” says Berg.”

Notable quotes

“The Many Reasons ESG Is a Loser,” Andy Kessler, The Wall Street Journal, July 10, 2022:

“Let’s look inside. BlackRock’s ESG Aware MSCI USA ETF has almost the same top holdings as its S&P 500 ETF with Apple, Microsoft, Amazon, Alphabet, Tesla, Nvidia, JP Morgan Chase, Johnson & Johnson and United Healthcare, dropping Berkshire Hathaway and moving Meta and Home Depot to higher weightings. Fees on ESG Aware are 0.15%, or 15 basis points. BlackRock’s plain-vanilla iShares Core S&P 500 ETF index fund charges only 3 basis points. That’s right, BlackRock charges five times as much for juggling a few names and slapping ESG on the name. Capitalists indeed. As of June 30, ESG Aware was down 23.7% vs. down 20% for the S&P 500 index.

Look away if you’re squeamish, but BlackRock helpfully notes that the S&P 500 has investments of 0.92% in controversial weapons, 0.59% in nuclear weapons, 0.68% in tobacco and 0.12% in United Nations Global Compact violators. Yikes. But not the BlackRock Sustainable Advantage Large Cap Core Fund, an actively managed fund with none of that icky stuff. On May 31 its top holdings were similar to the S&P 500 with lower weightings of Berkshire and UnitedHealth and increased weightings of Visa and Exxon. Exxon! Gross fees were 0.74% and net fees of 0.49% as BlackRock chooses to waive some fees. This fund was down 20.6% as of June 30.

So yes, you’re paying someone five to 15 times as much to adjust some weightings and perform worse. For BlackRock, ESG and sustainable investing don’t seem to be about responsible or socially just investing, they are simply a lucrative business model.”



Economy and Society: July 5, 2022- SCOTUS ruling impact on SEC

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.

Did the Supreme Court throw a wrench into the SEC’s plans?

On June 30, the Supreme Court of the United States released its ruling in the case of West Virginia v EPA. Although the Court did not go as far as some observers were expecting by overturning or limiting the doctrine of Chevron deference, by which courts are expected to defer to administrative agencies in their interpretations and enforcement of statutes that are vague, it did strike a blow against agencies’ ability to regulate beyond the scope of their legislative mandates.

SCOTUS restrained the EPA and limited its powers to regulate climate change emissions under the major questions doctrine, which enjoins the agency (and, by extension, other agencies) from attempting to impose new regulatory schemes in the absence of an explicit mandate from Congress. Specifically, the Court said that the Clean Air Act of 1970 did not give the EPA the ability or the mandate to regulate C02. Therefore, neither the EPA nor other agencies not specifically charged with that task are able to undertake that task, unless Congress acts first.

According to some ESG commentators, the ruling raises questions about the Securities and Exchange Commission’s authority to demand corporate disclosure of climate change-related information. Those questions are in addition to existing others analysts have asked about the SEC’s mandate, including many that were expressed in the public comments posted in response to the SEC’s proposed rule. If under the major questions doctrine, some have argued, the EPA is not allowed to regulate C02 without a specific mandate from Congress, then the SEC’s power to do something similar could potentially be questioned. Some observers argue that the ruling will curtail the powers claimed by the SEC in its final rule, while others believe that the Commission will be challenged upon the release of that rule on the grounds that it has exceeded its regulatory authority:

“The U.S. Supreme Court‘s decision to limit the Environmental Protection Agency’s power to regulate greenhouse gas emissions has raised questions about whether the decision could impact the Securities and Exchange Commission (SEC) proposal to force companies to disclose their emissions.

Thursday’s ruling restrained the EPA’s authority to regulate power plant emissions, raising doubts about other federal agencies’ authority under the Biden Administration’s mandate to regulate companies’ greenhouse gas emissions.

That could potentially impact the SEC, which is drafting a controversial new rule requiring public companies to disclose their direct and indirect greenhouse gas emissions.

Former SEC attorney Walé Oriola, counsel at Faegre Drinker, said that “under the principle leaned on by the high court in the EPA case, the SEC should be cautious as it approaches finishing its climate disclosure rules. I think the EPA ruling would influence what requirements makes it into the final version of the rulemaking.”…

Some climate change activists and shareholder rights groups do not believe the Supreme Court ruling will derail the proposal. “We do not think yesterday’s SCOTUS rule on EPA Clean Air Act will have an impact on any court challenge to the SEC proposed rule on climate disclosure,” Andrew Behar, CEO of As You Sow, a Berkley, Calif.-based nonprofit that promotes corporate responsibility through shareholder advocacy, told Financial Advisor magazine.

“The new SEC rule that will require corporate disclosure be accurate, verified and included in the audit is the most basic requirement of good governance and commerce. It simply ensures trust between companies and their shareowners,” Behar said.

But John Pendergrass, vice president for programs and publications at the Environmental Law Institute, an independent nonprofit based out of Washington, D.C., disagreed. “Although the court’s decision in West Virginia v. EPA doesn’t directly affect the SEC climate disclosure rule, it certainly suggests the SEC, as well as every other agency, needs to emphasize the clear statutory basis for any new rule. The boundaries of the major questions doctrine are simply unclear at this time,” Pendergrass said.”

BlackRock Investment Institute chairman announced among selections for the U.S. Department of State’s Foreign Affairs Policy Board

On June 22, the Biden State Department announced its “selections for the U.S. Department of State’s Foreign Affairs Policy Board,” which is tasked with providing “independent advice on the conduct of U.S. foreign policy and diplomacy, consistent with each Secretary of State and administration’s evolving priorities for it.” Among those named was the co-chair, Tom Donilan, who is also an employee of BlackRock, the biggest player in the ESG world, and one of the people responsible for a high-profile ESG-related investment recommendation issued last year:

“The Biden administration’s pick to advise the State Department on “strategic competition” with Beijing chairs an investment think tank that urged Americans to triple their investments in China.

Secretary of State Antony Blinken on Friday selected BlackRock Investment Institute chairman and Obama administration national security adviser Tom Donilon to co-chair the Foreign Affairs Policy Board amid the State Department’s pivot to China.

Donilon’s work at BlackRock could pose a conflict of interest for the board, which provides “advice, feedback, and perspectives” to senior State Department officials on foreign policy matters. Under his leadership, the Investment Institute has urged investors to dramatically increase their stakes in Chinese companies. What’s more, BlackRock views “strategic competition” with China as bad for the company’s bottom line.

“Strategic competition between the U.S. and China and resulting tensions have also contributed to uncertainty in the geopolitical and regulatory landscapes,” reads BlackRock’s most recent annual report. The firm listed U.S.-Chinese competition as a factor that could hurt its revenue and profit. BlackRock opened a mutual fund in China in September, making it the first American firm approved to sell financial products there….

Donilon has sided with China in the debate over tariffs imposed during the Trump administration. He chided government officials in 2019 about the tariffs and inaccurately warned that they would cause a global recession.

“Future generations of Americans will judge today’s leaders harshly for squandering this moment,” Donilon wrote in an article touted by China Daily, a mouthpiece for the Chinese Communist Party….”

On Wall Street and in the private sector 

The Federalist: ESG ratings discrepancy favors China over USA

In a June 28 piece published by The Federalist, Chuck Devore, a conservative commentator and the vice president of national initiatives at the Texas Public Policy Foundation, compared ratings issued by ESG giant MSCI for American companies and those issued for Chinese companies. Devore argues that his comparison shows a discrepancy that favors Chinese companies and, in his view, betrays the spirit at the heart of the ESG movement:

“MSCI is one of the world’s largest investment support services firms, with $2.1 billion in revenue. It offers an ESG rating service. I noticed that my Charles Schwab account recently started to display MSCI’s ESG ratings alongside that of the more traditional ratings services — services focused on a company’s profitability.

Curious, I looked into the rating of a firm I own some stock in: Texas-based Brigham Minerals (NYSE: MNRL). Brigham looks for land that could produce oil and gas, and owns mineral and royalty interests in 7,909 oil wells and 688 natural gas wells in West Texas, New Mexico, Oklahoma, Colorado, Wyoming, and North Dakota. MSCI rates Brigham Minerals as a B, the sixth lowest of seven ratings that range from AAA to CCC, labeling it a “laggard” in the industry with an overall score of 2 out of 10….

I looked up three China-based energy companies and compared them to Brigham Minerals. They were Xinyi Solar Holdings (OTC: XISHY), China Resources Gas Group (OTC: CGASY), and China Coal Energy Company (OTC: CCOZF). All three beat the American energy company in their overall rating.

China Coal Energy is 58.36 percent owned by China National Coal Group, a state-owned enterprise. China Coal Energy owns 12 coal mines, 13 coal-processing plants, five coking plants, four coal mining equipment manufacturing plants, and two mine design institutes. They’re really into coal….

China Resources Gas Group mostly invests in natural gas pipelines. It’s a subsidiary of China Resources Holdings Company, a state-owned company….

MSCI generously rates China Resources Gas as an “A” — the third-best of seven grades, with better grades than Brigham in both the environment, 7.7 to 0.8, and social, 7.6 to 3.5….

Xinyi Solar Holdings should be problematic for MSCI — after all, China’s solar power industry, a global juggernaut, is a heavy user of materials produced by slave labor in Xinjiang, a Muslim-majority region formerly known as Turkestan where the Chinese communist government has been engaged in a grinding genocide. MSCI even has a corporate statement against “modern slavery” on its website, claiming that the firm “is committed to protecting human rights globally… Specifically, the Firm strongly opposes slavery and human trafficking and will not knowingly support or conduct business with any organization involved in such activities.”

This is at odds with MSCI’s ESG rating of Xinyi Solar — an “A” — with scores of 8.1 for environment (heavy metal pollution aside, apparently), 5.6 for social, and 2.6 for governance. Overall, Xinyi scores a 6.1 of 10 compared to 2 for the Texas firm.

That a firm in China that relies on slave labor for key portions of its supply chain has a better social score than an American firm that pays landowners who freely sell them their mineral rights betrays an upside-down ethic where freedom is slavery and ignorance is strength.”

Shareholders are less likely to support ESG initiatives than they were last year

For a variety of reasons​​including new SEC rules and an ongoing interest in ESGAmerican companies faced a record number of environmental and social-focused shareholder proposals during the just completed annual-meeting season. But despite the record number of proposalsor, perhaps, because of itshareholders overall were less likely to support such initiatives than they were last year:

“U.S. companies faced a record number of shareholder votes on environmental and social issues this year, but investor support was lukewarm for proposals calling for more ambitious climate targets.

Shareholder proposals called on companies to stop financing fossil fuels, reduce plastic waste and assess their positions on racial justice, among other issues, according to a review of the filings by The Wall Street Journal….

Shareholders have so far voted on a record 274 sustainability-related proposals this year, up 41% from last year, according to the Sustainable Investments Institute, a nonprofit that tracks such activities. About three dozen more votes are expected by the end of the year.

But overall support was muted. Despite the record number of proposals going to a vote, average support fell to 27% from 32% last year, the Sustainable Investments Institute said….

The drop in overall approval for ESG-related proposals partly reflects low support for a wave of new anti-ESG proposals from conservative groups, which are also included in the data, said Heidi Welsh, executive director of the Sustainable Investments Institute.

For instance, 10 votes asked companies, including AT&T Inc. and Levi Strauss & Co., to report on risks arising from efforts to tackle racial inequality. The proposal at AT&T drew the most support, with nearly 4%.

Ms. Welsh said requests that were more ambitious also contributed to the overall decline. “New proposals always get less support,” she said.

Proposals are increasingly asking companies to hit goals in specific ways, rather than merely calling for targets or disclosures. Ms. Welsh pointed to nine first-time votes calling on major U.S. banks and insurers to stop financing fossil fuels. They earned an average of 12% support, and none passed….

Mark van Baal, founder of shareholder advocacy group Follow This, which filed the resolutions, said the meager support shows concerns over energy security are trumping climate.”



Economy and Society, June 28, 2022: SEC climate disclosure rule comments submitted

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.

SEC climate disclosure rule comments submitted; BlackRock, others, pushing back on key areas

The Securities and Exchange Commission’s (SEC) deadline for submitting comments on its proposed climate change disclosure rule passed on June 17. During the extended comment period, the Commission received several thousand comments, many of which were supportive but a significant number of which were not. Among those who filed public comments opposing the rule were the following:

  • BlackRock, Inc. 

Although BlackRock is seen as the key asset management driver in the sustainability and ESG spaces, the company and its CEO have long been opposed to federal government intervention in such matters, believing that the markets are better equipped to handle these disclosures. In 2021 Fink appeared at a Brookings Institution event, at which he argued that the SEC should leave the disclosure issues for publicly traded companies to the professionals and that the government should, instead, focus on forcing similar disclosures from privately held companies.

Last week, BlackRock reemphasized those ideas:

“BlackRock Inc. is pushing back on key parts of the US Securities and Exchange Commission’s bid to get publicly traded companies to track and disclose their greenhouse gas emissions.

The agency’s approach threatens to increase compliance costs for firms and may unintentionally make it harder for investors to discern information that’s significant to a company’s bottom line, BlackRock said in a letter to SEC. The firm, among the leading advocates for sustainable investing, said it supports the overarching goal of having public companies disclose climate-related information….

While Republican lawmakers and businesses groups have submitted letters to the SEC rejecting parts or all of the proposal, the pushback from BlackRock is notable because its the world’s biggest asset manager.

Parts of the proposal “will decrease the effectiveness of the commission’s overarching goal of providing reliable, comparable, and consistent climate-related information to investors,” a group of BlackRock executives led by Paul Bodnar, global head of sustainable investing, wrote in the letter.

If the SEC goes beyond international efforts, the changes could “obscure what information is material, have limited value to investors, heighten compliance costs and reduce the ability to compare across companies and regions,” BlackRock said in the June 17 letter that it disclosed on its website Tuesday….

BlackRock urged the SEC to revamp its proposal to provide more flexibility to companies in how they report the information and to better align with global efforts. Without the changes, the asset manager said the plan could harm capital markets and even discourage private firms from going public.”

  • NASDAQ

Over the past year, Nasdaq has aimed to become a leader in ESG, going so far as to issue a requirement last year mandating board diversity for all companies trading on its exchange. Nevertheless, it too opposes the SEC’s new rules:

“Nasdaq Inc. is pushing back against the US Securities and Exchange Commission’s plans to make publicly traded companies reveal detailed information about their greenhouse gas pollution.

The stock-exchange operator urged the SEC to shelve its plans to require businesses to outline risks that a warming planet poses to operations in registration statements, annual reports or other documents. The mandatory disclosures that the agency proposed in March would place undue burdens on companies and ultimately cost investors, Nasdaq said on Wednesday….

“We are concerned that the proposal would impose additional complexity, costs and burdens on issuers, suppliers, and ultimately, investors, and thereby undermine the commission’s core goals,” Nasdaq said in the letter reviewed by Bloomberg News. The SEC, instead, should consider letting firms take a more voluntary approach….

Nasdaq specifically asked the regulator not to require larger companies to disclose so-called Scope 3 emissions, which are generated by other firms in their supply chain or customers using their products. Business groups say that information is particularly hard to quantify. 

In addition, the exchange operator also wants the regulator to offer companies legal safe harbors and exemptions for special purpose acquisition companies.”

  • The Business Roundtable

Not quite three years ago, the Business Roundtable put itself at the center of the ESG and stakeholder capitalism debate by issuing a document whereby its signers proposed to, in its view, redefine the purpose of a corporation. The idea behind the statement was to put stakeholders, including the environment, on an even footing with shareholders and thus alter both the function and the public perception of large corporations.

Nevertheless, on comment deadline day, the Roundtable urged the SEC to go back to the proverbial drawing board:

“Business Roundtable today filed comments in response to the U.S. Securities and Exchange Commission (SEC) “Enhancement and Standardization of Climate-Related Disclosures for Investors” proposed rule.

“Business Roundtable members, who are industry leaders in climate change action and disclosure, have serious concerns with the SEC’s proposal,” said Business Roundtable CEO Joshua Bolten. “Key provisions of the current proposal are unworkable and would not produce information that is comparable, reliable or meaningful for investors. We urge the SEC to revise and repropose the rule.”

In the submission, Business Roundtable said:

“While Business Roundtable supports efforts to enhance climate-related disclosure, we believe a number of key provisions in the Proposal, as drafted, are unworkable and would impose requirements that could not be satisfied in the manner and timeframe proposed, and may not result in decision-useful information for investors. Among other concerns, the Proposal would require registrants to produce overwhelming amounts of information that would not be comparable, reliable or meaningful, much less material, for investors. The Proposal would also subject registrants to significant liability for disclosures that inherently involve a high degree of uncertainty. For these reasons, as well as those laid out below, we urge the SEC to publish a revised proposal addressing these concerns for further comment.”…

Business Roundtable identified the following key concerns:

–          The Proposal fails to acknowledge or address the increased liability risk the new disclosure requirements would generate;

–          The proposed Regulation S-X financial reporting requirements are unworkable;

–          The proposed Scope 3 GHG emissions disclosure requirements are overly burdensome and unlikely to result in comparable, investor-useful information;

–          The Proposal would require an overwhelming amount of disclosure that is not tied to materiality, would not provide useful information for investors, and could result in disclosure of sensitive information and/or could chill development of best practices;

–          The Proposal presents significant implementation challenges; and

–          The Proposal’s cost-benefit analysis is fundamentally flawed and significantly understates the ultimate compliance costs of the rules.”

  • General Motors and Goldman Sachs  

According to Bloomberg Law, the CEOs of GM and Goldman went above and beyond writing comment letters and actually met with SEC Chairman Gary Gensler to express their concerns about the new disclosure regime in person:

“Goldman Sachs CEO David Solomon and General Motors CEO Mary Barra are among the top executives who’ve met with SEC Chair Gary Gensler over his agency’s plan to make companies disclose indirect greenhouse gas emissions as part of new climate reporting rules.

Gensler has met with dozens of senior corporate leaders at least once, and some more often, since the Securities and Exchange Commission issued a sweeping proposal in March intended to help investors evaluate the risks public companies face from climate change, according to agency records….

Barra met with Gensler both on her own and as part of a larger group, according to SEC records….

Goldman Sachs executives met with Gensler or members of his staff at least three times about the climate disclosure proposal.”

  • The Michigan Farm Bureau 

As has been noted in these pages and elsewhere, many farmers have reported concern about how the SEC’s disclosure proposal would affect them, as they are likely to be included among the Scope 3 emissions requirement for three dozen or more S&P 500 companies. The Michigan Farm Bureau has specifically asked the SEC to reconsider its proposal based on this concern:

“Michigan Farm Bureau is weighing in on a controversial proposal by the Securities and Exchange Commission (SEC) that would have a devastating impact on agriculture and open farmers to intrusive data-mining practices.

The 510-page Enhancement and Standardization of Climate-Related Disclosures for Investors would require public companies to report on emissions — including Scope 3 greenhouse gas emissions — which are the result of activities from assets not owned or controlled by a publicly traded company but contribute to its value chain, which is how this rule impacts farmers.

While farmers wouldn’t be required to report directly to the SEC, they provide almost every raw product that goes into the food supply chain.

In comments submitted to the SEC, MFB Conservation and Regulatory Relations Specialist Tess Van Gorder noted that farmers in Michigan have a history of participating in voluntary programs, from Farm Bill Conservation programs to the Michigan Agriculture Environmental Assurance Program….

In the comments, MFB encouraged the SEC to consider changes to the proposal, including:

–          Removing the “value-chain” concept from the Proposed Rules.

–          Removing or substantially revising the Scope 3 emissions disclosure requirement to include a carveout for the agricultural industry.

–          Removing the requirement that registrants provide disclosures pertaining to their climate-related targets and goals.

–          Providing guidance with respect to the Consolidated Appropriations Act’s (2022) (the “CAA”) prohibition on mandatory GHG emissions reporting for manure management systems.

–          Revising the Proposed Rules so that disclosures of GHG emissions operate in unison with existing federal emissions reporting programs.

–          Ensuring the Final Rules do not include location data disclosures for GHG emissions, which may inadvertently disclose the private information of farmers.

“Without changes and clarifications, the Proposed Rules would be wildly burdensome and expensive if not altogether impossible for many small and mid-sized farmers to comply with, as they require reporting of climate data at the local level,” MFB’s letter states.”

Notable quotes

George Will weighs in on ESG

On June 22, conservative newspaper columnist George Will used his Washington Post column to address ESG and stakeholder capitalism:

“Semantic infiltration is the tactic by which political objectives are smuggled into discourse that is ostensibly, but not actually, politically neutral. People who adopt a political faction’s vocabulary also adopt — perhaps inadvertently, but inevitably — the faction’s agenda. So, everyone who values economic dynamism, and the freedom that enables this, should recoil from the toxic noun “stakeholder.”

The Oxford Reference definition is “all those with interests in an organization,” including “shareholders, employees, suppliers, customers, or members of the wider community (who could be affected by environmental consequences of an organization’s activities).” Which means: everyone. “All” in the “wider community” who claim an “interest.” Anyone can make such claims; no one can refute them.

A former governor of the Bank of England (Mark Carney), the head of the world’s largest investment firm (Larry Fink of BlackRock) and the CEO of the largest U.S. bank (Jamie Dimonof JPMorgan Chase) have joined forces to make capitalism “sustainable” through “ESG” (environmental, social and governance) investing. Although fashionable, this is of dubious legality. (See below: fiduciary duty.) The Economist’s “Schumpeter” columnist notes that sanctimony accompanies such “financial do-goodery.” Of course: ESG appeals to people for whom mere business — the creation of wealth and opportunity — lacks the cachet of politics….

Stakeholder capitalism violates fiduciary laws that require those entrusted with investors’ money to employ it “solely in the interest of” and “for the exclusive purpose of providing benefits to” the investors. (Emphasis added.)…

In a dynamic society, resources are efficiently disposed by corporate managements whose primary duty, which other corporate activities do not compromise, is to maximize shareholder value by profitably supplying the demand for goods and services. Furthermore, in a congenial society, boundaries are respected: Most people say about most things, “This is none of my business.”

Self-proclaimed stakeholders, parasitic off others’ labor and accumulation, assert that everything is their business. Actually, although everyone has a right to advocate progressivism, no one has a right to insist on a stake in deploying others’ property for the stakeholders’ political ends.”