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Economy and Society June 21, 2022: SEC Goldman Sachs probe causing ripples

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.

Goldman Sachs investigation is causing ripples

The Securities and Exchange Commission (SEC)’s ESG probe aimed at Goldman Sachs reportedly has retail investors concerned, according to Bloomberg:

“Retail investors are slowly starting to look under the hood of the $40 trillion environmental, social and governance industry that’s increasingly steering their savings, and many aren’t liking what they see. What’s more, some of the biggest names in finance are facing probes of their ESG businesses, with Goldman Sachs Asset Management and the investment arm of Deutsche Bank AG among the most prominent.

The cracks in the ESG firmament appear to be widening elsewhere, too. After attracting huge amounts of money for three straight years, demand for ESG is cooling. Flows into ESG funds globally slumped 36% in the first quarter, according to data provided by Morningstar Inc. It’s the worst showing since before the pandemic began and was followed by another decline in April, Bank of America analysts reported. In May, investors made the biggest-ever monthly redemptions from US exchange-traded ESG funds, Bloomberg Intelligence estimates….

[P]erhaps more importantly, doubts about how much good ESG actually does risk becoming a more lasting turn-off for regular people….

While ESG fund managers may have good reasons for building their portfolios the way they do, the gap between the complex strategies they’re applying and the expectations regular people have of what ESG should do is starting to be a problem that’s playing out in real life. For example, the investment arm of Danske Bank A/S this year adjusted an ESG portfolio amid complaints from consumer advocates about the presence of fossil-fuel stocks. Danske initially pointed out it was playing by the rules, but eventually removed the assets in question. 

Financial professionals that deal directly with retail clients are starting to speak out about the disillusionment they’re seeing. For non-institutional investors trying to navigate ESG, “there’s confusion across the board,” said Dan Lane, a senior analyst at UK-based online retail broker Freetrade Ltd….

[British construction worker Neil] Baker ended up ditching ESG altogether and going with a broad index fund. He might be among the few who even bothered to look into ESG in the first place, according to a recent survey by Charles Schwab. It found that 66% of UK retail savers don’t care whether their allocations are sustainable, and instead only want to maximize returns. 

If those survey results play out in real life, the ESG industry could be facing an abrupt halt to a party that Bloomberg Intelligence estimates has inflated to roughly a third of the global total for assets under management….

Against that backdrop of confusion, disillusionment and outright anger, regulators are sharpening their teeth. In Germany, the authorities stunned the ESG asset management world on May 31 by launching a raid on the headquarters of Deutsche Bank and its fund unit, DWS Group, amid allegations of greenwashing. Over the weekend, it emerged that the US Securities and Exchange Commission is investigating potentially dubious ESG claims at the investment management unit of Goldman Sachs Group Inc.”

Are Goldman and DWS just the tip of iceberg?

On June 14, The Financial Times reported that many in the ESG investment movement are concerned that the companies that have already been targetedor that are, at least, under investigationfor alleged deceptive ESG marketing may be the tip of the proverbial iceberg:

“When about 50 German police officers raided the Frankfurt office of fund manager DWS last month as part of an investigation into greenwashing, the move marked the beginning of what many believe will be a long legal reckoning for the asset management industry.

Interest in sustainable investing has taken off in recent years, with assets managed in ESG-labelled funds globally ballooning to some $2.7tn, but the industry has also been hit by claims its green credentials are inflated.

DWS, whose chief executive Asoka Woehrmann resigned the day after the police arrived to gather materials and question staff, has been in the sights of regulators in Germany and the US since former executive turned whistleblower Desiree Fixler accused the firm of greenwashing last year.

But with regulatory scrutiny growing on both sides of the Atlantic — and an army of lawyers primed to pursue allegations of mis-selling — few believe the shakeout will end with DWS.

“There’s nothing to suggest DWS is a one off,” said Fiona Huntriss, a partner at legal firm Pallas who specialises in financial litigation. “I think it’s almost inevitable litigation will be brought in lots of different jurisdictions.”

“Where you’ve got statements and documents that are highly regulated [that have been given] to a group of investors who can then work together to litigate against that, that is prime territory for mis-selling claims,” she said….

Rumblings that an industry-wide mis-selling scandal may be brewing began when Fixler made her allegations about DWS public, and former BlackRock sustainability executive Tariq Fancy said ESG investing was little more than “marketing hype”.

The debate was given fresh impetus when Stuart Kirk, HSBC’s head of responsible investing, gave a controversial speech last month in which he claimed central banks and policymakers had overstated the financial risks of climate change.

ESG “has become a bureaucratic tax and we need to get it back on track”, Fixler told the Financial Times. The DWS raid “is the real wake-up call for all ESG practitioners to back up statements and products with substance and data.””

On Wall Street and in the private sector

Meet BlackRock’s stewardship team

Ever since Larry Fink put his company, BlackRock, in the ESG driver’s seat, opponents have argued that, in their view, it’s unfair and unethical for the firm (and others like it, who specialize in index and exchange-traded funds) to utilize ordinary investors’ wealth to advance what they view could be considered non-pecuniary goals. At BlackRock, a group of 70 analysts decide where and how this wealth will be invested and what sort of ends it will be used to pursue, in part by deciding how the firm will vote on various ballot proposals.

On June 18, The Wall Street Journal took a crack at explaining who these 70 analysts are and how they approach the massive responsibility they shoulder:

“BlackRock, Inc. casts votes on tens of thousands of proxy proposals a year. The responsibility rests with a team of about 70.

Millions of people are invested in the stock market through BlackRock’s index-tracking funds. As these passive investments have grown in popularity, so have the firm’s stakes in 13,000 companies world-wide. And so has the clout of BlackRock’s investment stewardship team.

The tiny group of analysts—BlackRock has around 18,400 employees all told—looks after the interests of investors in the firm’s $4.6 trillion worth of passive funds. That means weighing in on matters as varied as executive compensation, climate change and abortion access. Chief executives jockey for time on analysts’ calendars. They have the power to unseat directors and upend corporate decision-making. 

The team last year engaged with 2,300 companies via emails, phone calls and meetings and ultimately voted on 165,000 proposals at 17,000 shareholder meetings. 

“It can feel like a lot of power sometimes,” said a former investment stewardship team analyst….

BlackRock’s growth and the way it has sought to wield its influence has rankled corporate executives, particularly those in the oil-and-gas industry. BlackRock’s stewardship team voted in favor of 47% of environmental and social shareholder proposals last year. Its support helped an activist investor win board seats at oil giant Exxon Mobil Corp.

“We have a new bunch of emperors, and they’re the people who vote the shares in the index funds,” Charlie Munger, the vice chairman of Berkshire Hathaway Inc. and Warren Buffett’s business partner, said earlier this year….

Vanguard Group and State Street Corp. , BlackRock’s two biggest rivals, also have small stewardship teams. Vanguard has around 60 analysts focused on stewardship. State Street doesn’t disclose the size of its stewardship team, but a 2020 Columbia Law Review article on corporate governance estimated its head count at 12. The team has grown since then, a company spokesman said. 

BlackRock Chief Executive Larry Fink has said he wants to get to a place where all individual investors can vote their own shares. The firm has given that option to institutional investors that control some $2.3 trillion in assets. Investors representing about a quarter of that sum have taken the company up on the offer. 

For now, the stewardship team is looking out for those who can’t, or aren’t ready to, vote their own shares….

The investment stewardship team is led by Sandy Boss, who spent two decades at McKinsey & Co. before joining BlackRock in April 2020. 

Its analysts range in seniority—their average tenure is 15 years—and some are fresh out of college, a BlackRock executive said. The team includes climate scientists, engineers and corporate-governance specialists. They speak a total of 20 languages and work in 10 countries.

Each stewardship analyst is assigned to cover a specific industry. They dissect company proxy reports and third-party research, including ESG ratings from MSCI Inc. and corporate-governance transparency scores from the nonpartisan nonprofit Center for Political Accountability. Analysts also conduct their own research.

The team subscribes to research from Institutional Shareholder Services Inc. and Glass Lewis but doesn’t “blindly follow” the proxy-advisory firms’ voting recommendations, BlackRock said in a recent report.”

In the spotlight

Is ESG Anti-Israel?

A memo published last week by the Foundation for Defending Democracies warned that the ESG investment businessthrough its ratings servicesmay, in its view, be supporting anti-Israel activists, even if unwittingly. The memo begins:

“Last year, Morningstar, Inc. hired outside law firm White & Case LLP to conduct an investigation into allegations that: 1) Morningstar’s environmental, social, and governance (ESG) research subsidiary, Sustainalytics, negatively rates companies doing business in Israel, based on politically biased information; and 2) Sustainalytics at times serves as a conduit for the Boycott, Divestment, Sanctions (BDS) campaign targeting Israel. On June 2, following the conclusion of that investigation, Morningstar Executive Chairman Joe Mansueto and Chief Executive Officer Kunal Kapoor released White & Case’s final, 117-page investigative report (the “Report”).

In the introduction to its Report, White & Case presents three core conclusions of its investigation:

“Morningstar’s Sustainalytics products do not recommend or encourage divestment” from Israel or from companies connected to Israel.

“The investigation found neither pervasive nor systemic bias against Israel in Sustainalytics’ products or services.”

“[T]he independent investigation did find scattered instances of processes and procedures which can be improved.”

Mansueto and Kapoor have touted these findings, including in a June 2 public statement, as evidence supporting Morningstar’s prior assertions that “[n]either Morningstar nor Sustainalytics supports the anti-Israel BDS campaign.”

Yet, notwithstanding the conclusions set forth at the beginning of the Report, the evidence collected and presented in the Report tells a different story. On a full reading of the Report, rather than exonerating Morningstar, the White & Case investigation instead demonstrates conclusively that Sustainalytics’ processes and products — including its flagship ESG Risk Ratings product — are infected by systemic bias against Israel. Specifically, the Report conclusively demonstrates that:

Sustainalytics relies heavily, if not quite exclusively, on deeply flawed, anti-Israel sources, including anti-Israel non-governmental organizations (NGOs) such as Who Profits, Human Rights Watch, and Amnesty International.

Companies that are in any way involved in the Israeli economy are automatically identified as complicit in human rights abuses in all Sustainalytics’ core products and are thus disproportionately punished in Sustainalytics ratings compared to companies doing business in any other country.

In response to the Report, Morningstar announced that it would implement minor remedial measures to enhance the transparency and reliability of its ESG products.”



Economy and Society: Passive fund ownership of US stocks overtakes active—for first time

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.

Goldman Sachs in the SEC’s crosshairs?

As the Securities and Exchange Commission (SEC) begins to ramp up its ESG-fund enforcement in earnest, it appears to have a major Wall Street player in its sights. According to a Wall Street Journal report published June 10, sources have indicated that the SEC’s year-long plan to enforce ESG claims among ETFs and other mutual funds is entering a new phase with the investigation of Goldman Sachs​​SEC Commissioner Gary Gensler’s one-time employer:

“The Securities and Exchange Commission is investigating Goldman Sachs GS Group Inc.’s asset-management arm over its funds that aim to invest based on environmental, social and governance standards, according to people familiar with the matter.

The SEC’s probe is the latest known instance of regulators’ scrutiny of ESG investing, which has been a boon for asset managers that struggled in recent years to compete with low-fee index funds.

The SEC’s civil investigation is focused on Goldman’s mutual-funds business, the people said, and the firm manages at least four funds that have clean-energy or ESG in their names. The probe could end without formal enforcement action….

The SEC last year warned investors that it found some fund holdings “predominated” by companies with low ESG scores, despite the fund manager’s advertised commitment to picking companies that performed well on ESG screening tests. Data vendors such as S&P Global and London Stock Exchange Group’s Refinitiv score public companies on ESG standards, but the grades can vary widely between ratings firms.

Goldman renamed its Blue Chip Fund as the U.S. Equity ESG Fund in June 2020. The fund’s top three holdings—Microsoft Corp., Apple Inc., and Alphabet Inc.—-have remained the same since then, according to regulatory filings. The U.S. Equity ESG fund’s other top holdings currently include Bristol-Myers Squibb Co., Eli Lilly & Co., and JPMorgan Chase & Co., according to its website. It is a relatively small fund, with $17.8 million in assets under management, according to Morningstar data.

In early 2021, the SEC launched an enforcement task force that sifts through public data and tips for potential enforcement cases related to greenwashing—making deceptive or empty claims about environmental or social values—or similar misleading statements related to ESG practices….

Because the SEC doesn’t yet have rules that dictate what ESG investing means or requires, any enforcement action would need to focus on a fund’s past disclosure, and whether its investing practices materially deviated from what it advertised to shareholders.”

The Index Act and its critics

For at least two years, opponents of ESG have made the case that one of the biggest problems with the investment tactic is that, in their view, it is, almost by definition, undemocratic. Large asset management firms, they argue, create various types of mutual funds into which small investors (individuals and institutions) can buy. But while the investors own shares of the fund, the fund and its manager own the underlying securities (i.e. the stocks). In turn, the argument goes, this gives the managers/shareholders the power to exercise the attendant shareholder rightsincluding the power to vote the shares at annual meetingsimplicit in the securities, at the expense of the fund owners’ presumed rights. That allows large fund managers to accumulate and exercise power using other people’s money.

With the rise of ESG, however, critics have noted what they view as a disparity between the desires and intentions of the managers and those of their customers, leading to the perception that fund managers may not always be acting as fiduciaries and may, in fact, be usurping the customers’ rights for their own personal or political ends.

Recently, this purported discrepancy has become policy fodder, as some in Congress have taken an interest in removing voting rights from fund managers and returning them to fund owners through the introduction of a proposed bill known as the Investor Democracy Is Expected Act, also styled the Index Act. 

But even this may not solve any of the fundamental perceived problems with ESG, at least according to Vivek Ramaswamy, the author of Woke, Inc. and the founder of Strive Asset Management, and Riley Moore, the Treasurer of West Virginia, who, last week, penned an op-ed on the subject for The Wall Street Journal:

“Senate Republicans recently introduced the Investor Democracy Is Expected Act, also styled the Index Act, which would require passive investment-fund managers that own more than 1% of a public company to collect instructions from their clients on how to vote their shares. The senators are right to focus on a major problem: The three largest passive asset managers control more than $20 trillion and vote nearly one-quarter of all shares cast at corporate annual meetings to support social agendas disfavored by many Americans whose money they manage.

But as long as BlackRock, Vanguard and State Street represent the largest shareholders of America’s public companies, they will disproportionately influence the behavior of those companies, regardless of whether their clients regain the power to vote their shares.

As a practical matter, most individual investors in index funds can’t cast informed votes at the shareholder meetings of portfolio companies. An individual investor in Vanguard’s total stock-market index fund would have to cast tens of thousands of votes each spring for the stocks held in that fund alone.

Further, the capital managed by BlackRock, State Street and Vanguard is often allocated to these firms not by individuals but by intermediaries such as state and employee pension funds. These institutions generally take their voting directions from two firms, Institutional Shareholder Services and Glass Lewis, which openly embrace the same political orthodoxies as the big three asset managers.

Certain states have already regained voting power from the big three, yet early evidence suggests they have performed poorly on voting in accord with their citizens’ wishes. According to Insight ESG Energy, a governance watchdog that grades the fiduciary performance and energy literacy of fund managers, BlackRock, State Street and Vanguard earned grades of C-minus, C and C-plus, respectively, for their 2021 voting behavior. Pension funds in Georgia earned an A, but Florida, Texas and Idaho earned grades of D-minus, D and D, respectively.

That’s in part because Florida and two large Texas pension funds last year joined the big three to elect three dissident directors to Exxon Mobil’s board to implement a more aggressive climate-change strategy, after which Exxon Mobil reduced its oil-production targets through 2025 from its earlier forecasts. One of the Texas pension funds also voted for shareholder resolutions requiring banks to restrict financing to new fossil-fuel projects. As Texas’ democratically elected Lt. Gov. Dan Patrick has observed, it strains credulity to believe that the votes accurately represent the intentions of Texans and Floridians whose money is invested in these pension funds.

Most importantly, shareholder voting itself represents only the tip of the iceberg in shareholder-led social advocacy, because very few corporate decisions require a shareholder vote. BlackRock boasts that in the first quarter of 2022 alone, it “engaged” 719 public companies on topics including “climate risk management, environmental impact management, human capital management, and social risks and opportunities.” BlackRock CEO Larry Fink writes an annual letter to America’s CEOs. In this year’s letter, he demanded that they set “short-, medium-, and long-term targets for greenhouse gas reductions” and “issue reports consistent with the Task Force on Climate-related Financial Disclosures.” In his 2020 letter, he told portfolio companies to publish disclosures in accordance with the Sustainability Accounting Standards Board.

These informal yet heavy-handed forms of advocacy are often more influential than shareholder votes. 

The aggregation of capital in the hands of three firms—and the associated power to shape corporate America’s social agendas—is an anticompetitive problem that demands a competitive market solution. One of us (Mr. Moore) is a state treasurer who has taken steps to cut ties with large asset managers that fail to advance the interests of his state’s citizens. This is a type of market response: State treasurers aren’t market regulators, but they are market participants who allocate capital on behalf of their constituents. Moving money has a greater impact than reclaiming voting power.

A key limitation remains: the absence of large asset managers that take different approaches to shareholder advocacy. Invesco, the fourth-largest U.S. provider of exchange-traded funds, now makes declarations resembling those of BlackRock: “Asset managers have a crucial role to play in supporting investment aligned with global efforts to reduce the impact of climate change on our planet”; ESG—an acronym for environmental, social and governance—“is something that’s fundamental to investing”; “we’re well down the path of embedding ESG in everything we do.” The big three may soon become the big four.

That’s why one of us (Mr. Ramaswamy) recently created an asset manager that guides companies to focus exclusively on product excellence, not politics. More competitors are needed.”

On Wall Street and in the private sector

Financial Times: “Passive fund ownership of US stocks overtakes active for first time”

As noted above, most ESG investment is handled through various mutual funds, including index trackers and Exchange Traded Funds (ETFs), which are both passive investment vehicles. The major passive investment playersBlackRock, State Street, and Vanguardare the three firms most often cited by opponents of ESG for what they deem their undue influence on the investment process and the centralization of capital in too few hands. Vivek Ramaswamy and Riley Moore, for example, critique these three specific firms for their stranglehold on the market.

Despite the rise of what some label as the massive passives over the last decade, most investment in U.S. capital markets has remained in the hands of active investorsuntil now.  The Financial Times reports:

“Passively managed index funds have overtaken actively managed funds’ ownership of the US stock market for the first time, data show.

Passive funds accounted for 16 per cent of US stock market capitalisation at the end of 2021, surpassing the 14 per cent held by active funds, according to the Investment Company Institute, an industry body.

The pattern represents a sharp reversal of the picture 10 years ago, when active funds held 20 per cent of Wall Street stocks and passive ones just 8 per cent.

Since then, the US has seen a cumulative net flow of more than $2tn from actively managed domestic equity funds to passive ones, primarily ETFs….

The seemingly unstoppable rise of index-tracking funds has in turn helped fuel an unprecedented concentration of ownership — and thus voting power.

The five largest mutual fund and exchange traded fund sponsors — out of 825 in all — accounted for 54 per cent of the industry’s total assets last year, the ICI found, a record high and up from just 35 per cent in 2005.

The 10 largest control 66 per cent of assets (against 46 per cent in 2005) and the top 25 as much as 83 per cent, up from 67 per cent. The proportion of assets held by the many hundreds of managers outside the elite 25 has thus halved over the period.”

In the spotlight

MSN: “Edelman CEO advice to other top execs: Beware of the ‘pushback against wokeness’”

Richard Edelman, CEO of Edelman (a public relations company), recently issued a warning to companies and their executives about taking too prominent a role in politics, suggesting that getting too involved often leads to negative impacts for the company.

“With an ongoing war in Europe, an ongoing public health crisis, and various social issues gripping America, corporate executives increasingly find themselves facing questions from employees about whether or not they plan to take a stand. 

But if CEOs were to take a stand against this backdrop, according to Edelman CEO Richard Edelman, it shouldn’t be representing the company.

“They should speak out as citizens, but they shouldn’t speak out as CEOs,” Edelman recently told Yahoo Finance at the World Economic Forum in Davos, Switzerland (video above). “And the CEO position, again, this remit of issues can expand beyond the long length of my arm. And we better be careful here because there’s starting to be a pushback against wokeness.”…

“You have to put priority on those [issues] that are directly affecting your business,” Edelman said. “Again, supply chain or health of your employee base. But on ones where it’s a matter of personal choice, leave that for your personal politics and donations to senators. But your mandate as the CEO is to stand up and speak up only on those issues where you actually can add value.””



Economy and Society: SEC’s disclosure proposal and the costs of compliance

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’s disclosure proposal and the costs of compliance

Last week, Richard Morrison, a senior fellow at the Competitive Enterprise Institute (CEI), published a detailed examination of what he sees as some of the unresolved issues with the Securities and Exchange Commission’s (SEC) mandatory climate-change disclosure proposal, focusing heavily on the costs associated with the planned rule:

“The SEC admits that the costs associated with complying with the proposed rule would be “significant,” but tries to downplay the burden by pointing to the large volume of information that some companies already voluntarily disclose. That may count in the agency’s favor in terms of relative costs incurred, but it also cuts against the agency’s claims of benefits generated.

The SEC cannot credit the proposed rule for all of the climate-related information disclosed in the future by public firms. At best, the rule can only take credit for the additional increment of information that would have gone undisclosed in its absence. The agency acknowledges that voluntary climate disclosure is widespread and increasing, so future compliance costs can only be spread across the small additional benefit conveyed by the new rule. Given the trajectory of climate disclosure over the past few years, the difference between voluntary and mandatory disclosure will be far too small to justify the costs involved in the current proposal.

But even this stance—that companies that already disclose climate-related risks will only face a small burden—fundamentally misunderstands the incentive structure that firms would face under the rule going forward. The legal and reputational threat of being officially found non-compliant dramatically increases the amount of time, money, and professional expertise required, compared to voluntary disclosures. Even when it comes to specific quantitative requirements like measuring greenhouse gas emissions, the agency’s proposal states, “we are unable to fully and accurately quantify these costs.”[xviii] The fact that the SEC staff is forced to admit this after more than a year working on this proposal signals that they are not taking the rule’s cost-benefit analysis seriously….

The Competitive Enterprise Institute’s Wayne Crews estimates that the current total cost burden of U.S. federal regulation comes to nearly $2 trillion per year.[xxi] That accumulated burden also harms innovation, kills jobs, and slows economic growth, resulting in a smaller economy and lower investment returns. [xxii] The SEC’s own estimates suggest that the overall cost of disclosure and compliance for public companies will rise from approximately $3.8 billion per year to over $10.2 billion—a more than 250 percent increase, based on this rule alone.[xxiii] The agency has in no way demonstrated that the massive burden it is seeking to impose would generate equivalent benefits.”

On Wall Street and in the private sector

The Telegraph: “BlackRock will not be the ‘environmental police’ in ethical investing U-turn”

In ESG investing circles, Larry Fink is arguably the mover and shaker, the man who made ESG the hottest market trend in decades. Stephen Soukup, the author of The Dictatorship of Woke Capital, a work critical of ESG, described Fink as “a born-again ‘fundamentalist,’” preaching sustainability to Wall Street.

Only now, it appears that Fink is having a crisis of faith:

“BlackRock’s chief executive has warned it will not act as “the environmental police” in the latest sign the asset manager is shying away from green activism.

Larry Fink, head of the world’s largest money manager, said that it is wrong to ask the private sector to ensure that the companies they invest in are doing their part to combat climate change.

In an interview with Bloomberg TV, he said: “I don’t want to be the environmental police.”

Mr Fink’s comments represent a significant u-turn for BlackRock which has been at the forefront of Wall Street’s push to focus on environmental, social and governance (ESG) investing.

It comes after the asset manager warned last month that it will vote against most shareholder resolutions on climate change this year as they are too extreme….

The decision to distance itself from “prescriptive” climate change policies comes as institutional investors face criticism for allegedly pushing political agendas.

However, BlackRock has been a target of criticism from both climate activists and those who promote a more gradual transition to green energy….

BlackRock’s latest stewardship report also stated that the company will not support proposals that could lead to companies being “micromanaged”. 

It said: “We are not likely to support those [shareholder proposals] that in our assessment, implicitly are intended to micromanage companies. 

“This includes those that are unduly prescriptive and constraining on the decision-making of the board or management, call for changes to a company’s strategy or business model or address matters that are not material to how a company delivers long-term shareholder value.””


ESG outflows hit record

After years of record inflows to ESG funds, 2022 has been the year of record outflows, and, as Bloomberg notes, May was no exception:

“This year’s weak performance by US stocks has forced many investors to recalibrate their portfolios. And they’re fleeing do-good strategies.

After more than three years of inflows, investors are now pulling cash out of US equity exchange-traded funds with higher environmental, social and governance standards. May saw $2 billion of outflows from ESG equity funds, according to data from Bloomberg Intelligence — the biggest monthly cash pullback ever.

“There’s no way to know for certain why the outflows were so extreme,” said Bloomberg Intelligence analyst James Seyffart, who noted that the funds had started from a high-asset base after years of inflows. “But also ESG ETFs may be finding that people care a lot more about them in bull markets.”…

Do-good investing boomed during the pandemic, with more than $68 billion flowing into ESG equity funds in the past two years. Many believed that this momentum would continue into 2022. But the spike in oil prices since Russia invaded Ukraine has lifted fossil-fuel shares, driving the S&P 500 Energy Index to gain 59% this year even as the benchmark overall has dropped 14%. 

This has made do-good investing more of a sacrifice. RBC Wealth Management recently surveyed over 900 of its US-based clients and 49% said that performance and returns were a higher priority than ESG impact, up from 42% last year. 

“The story has been told that you don’t have to give up returns in order to do ESG, but everyone assumed that you would get the same exact return profile as a traditional benchmark, which is absolutely not true….”

In the States

Kentucky joins the list of states pushing back on ESG

On June 2, Allison Ball, the Treasurer of Kentucky, took to the pages of RealClearMarkets to make the case against ESG and what is described by opponents as woke capital and to explain what she and others in her state are aiming to do about it. She wrote:

“There currently exists in America a worrying coordination of federal executive branch agencies and private companies to bypass democracy in order to push progressive, woke ideologies. Unelected bureaucrats are abusing their delegated authority from Congress. These people frequently pass through a revolving door between government and business making them adept at bending the administrative state to their ends. This has created a leftist business class that is obsessed with virtue signaling for the purpose of their own personal self-promotion. They live in their own echo chamber.

In the private sector, the rise of proxy voting by large asset managers has removed accountability from corporations in the same way that administrative agencies have removed accountability from the legislative process. This problem has grown so troublesome, that large asset managers have gone as far as to foist activists on to corporate boards to “force behaviors.” 

I am not in favor of government picking winners and losers. I believe free markets allow the best ideas and inventions to thrive while lesser ideas perish. But the market becomes drastically less free as federal agencies join at the hip with select corporations to promote policies that kill other American industries and would not be supported by the populace as a whole. Suddenly, our market’s capability to promote innovation and American needs decreases in favor of the political agenda of those in charge. In Kentucky, this is especially concerning as these efforts seek to kill one of Kentucky’s signature industries—fossil fuels. Once this economic tampering begins, state leaders are left with no choice but to speak and act in defense of the economic well-being of our states.

This is why I recently championed the passage of SB 205 in Kentucky, which was signed into law earlier this year. The law directs the Commonwealth, through the guidance of the State Treasurer, to divest from companies that engage in energy company boycotts. It also prohibits governmental entities from entering into contracts with companies that engage in energy company boycotts. My message has been clear: the Commonwealth of Kentucky will not do business with those companies that seek to squelch the lifeblood of our economy. The tax dollars of Kentucky citizens should not be used to cripple our own livelihood….

Earlier this month, I took another approach, asking Kentucky Attorney General Daniel Cameron, to render an opinion on whether “stakeholder capitalism,” a term favored by BlackRock CEO Larry Fink, and ESG investment practices connected to public pension funds are consistent with Kentucky law governing fiduciary duties. That opinion, rendered on Wednesday, makes it clear that considerations external to a fiduciary’s “single-minded purpose in their beneficiaries’ investments,” prioritize “activist goals over the interests of their public and state employee clients” and, therefore, are inconsistent with Kentucky law.”

In the spotlight: State treasurers share pushback efforts against ESG

The Daily Wire recently ran an interview with a handful of state treasurers about their individual and collective efforts pushing back against ESG on behalf of their constituents. The group included Treasurers Marlo Oaks (Utah), John Murante (Nebraska), Scott Fitzpatrick (Missouri), and Riley Moore (West Virginia):

“Many Americans have a distaste for wokeness — but few may realize that the ideology may soon be invading their retirement accounts and siphoning their taxpayer dollars.

As Utah State Treasurer Marlo Oaks pointed out in a recent op-ed for The Wall Street Journal, S&P Global Ratings — the nation’s largest credit rating firm — began applying an Environmental, Social, and Governance (ESG) rating system to states’ finances in a manner divorced from their true budgetary conditions.

Though the system purports to be objective, Oaks and other Republican state treasurers contend that progressive ESG metrics are giving investment funds an excuse to discriminate against states with conservative values.

“They are calling attention to political factors that are subjective — and that opens the door to being able to borrow in the capital markets at a less advantageous rate than would be indicated by the credit rating by itself,” Oaks told The Daily Wire.

Common ESG objectives pursued by corporations may involve setting certain green energy commitments or tapping a certain number of women to serve as executives. In essence, ESG conforms the nation’s most influential companies to a progressive agenda — even if political or social activism has nothing to do with their brand identities or corporate missions.

“It has the potential to increase the bond costs for states that don’t align with the underlying ESG ideology,” Oaks added. Utah has a AAA bond rating from ratings agencies S&P, Moody’s, and Fitch.

For states like West Virginia — which ranked among the top six states for energy production as of 2019, according to the U.S. Energy Information Administration — ESG funds pushing green power are particularly threatening to employment and public finances.

“They’re trying to punish us based on our culture, our economy, and our industries, making it more expensive for us to do things like build schools, build roads, build hospitals — all those types of projects that get bonds floated out there for them,” West Virginia State Treasurer Riley Moore told The Daily Wire. “They’re trying to coerce us into conforming to their agenda, and they’re doing that by trying to financially punish us.”…

Nebraska State Treasurer John Murante told The Daily Wire that the American people are undergoing a “Great Awakening” to the dangers of woke investing due to criticism from high-profile business leaders like Elon Musk, who has called ESG “fraudulent” and argued that its standards “have been twisted into insanity.”

“People do not want their retirement accounts invested for political purposes,” Murante said. “They want it invested in a way that will achieve the best return for their investment.””



Economy and Society: SEC proposes additional disclosure rules for ESG Funds

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.

Former Vice President Pence continues opposition to ESG

Former Vice President Mike Pence (R), who, three weeks ago, gave a speech critiquing ESG, continued his opposition on May 26 with an op-ed for The Wall Street Journal:

“[I]n 2022 the woke left is poised to conquer corporate America and has set in motion a strategy to enforce their radical environmental and social agenda on publicly traded corporations.

A sudden abundance of liberal shareholders isn’t what’s driving this new trend of woke capitalism, and it certainly isn’t a reflection of consumer demand. Rather, the shift is entirely manufactured by a handful of very large and powerful Wall Street financiers promoting left-wing environmental, social and governance goals (ESG), and ignoring the interests of businesses and their employees.

ESG is a pernicious strategy, because it allows the left to accomplish what it could never hope to achieve at the ballot box or through competition in the free market. ESG empowers an unelected cabal of bureaucrats, regulators and activist investors to rate companies based on their adherence to left-wing values. Like the social credit scores issued by the Chinese Communist Party, a low ESG score can be devastating, making it virtually impossible for a company to raise capital—and that is exactly the point….

Without government intervention, the ESG craze will only get worse.

Mastercard recently announced that it will begin “linking employee compensation to ESG goals.” In other words, paychecks will no longer be based on an employee’s performance but on how well they conform to the woke political opinions of their supervisors.

In April, a California court struck down state laws requiring corporations to select board members based on race and sex, delivering a victory for the right to equal treatment guaranteed by the Constitution. States, cities and Congress should follow suit by adopting measures to discourage the use of ESG principles.

States with large employee pension funds invested in the stock market would be well advised to rein in massive investment firms like BlackRock, State Street and Vanguard, which manage a combined $22 trillion in assets and are pushing a radical ESG agenda. State and local governments should entrust their money to managers that don’t work against their residents’ best interests. States should also pass model legislation developed by the American Legislative Exchange Council requiring government pension-fund managers to vote the state’s shares, rather than delegating that authority to huge Wall Street firms.

Most important, the next Republican president and GOP Congress should work to end the use of ESG principles nationwide. For the free market to thrive, it must be truly free.”


Former Senator Graham op-ed opposes stakeholder capitalism 

On May 23, The Wall Street Journal ran an op-ed from former Senator Phil Gramm (R) (currently a non-resident fellow at the American Enterprise Institute) and Mike Solon, a partner at US Policy Metrics, in opposition to the emerging idea of what proponents call stakeholder capitalism:

“The 18th-century Enlightenment liberated mind, soul and property, empowering people to think their own thoughts and ultimately have a voice in their government, worship as they chose, and own the fruits of their own labor and thrift. As Enlightenment economist Adam Smith put it, “the property which every man has in his own labor, as it is the original foundation of all property, so it is the most sacred and inviolable.”

The British Parliament repealed royal charters, permitted businesses to incorporate simply by meeting preset capital requirements, and established the rules of law governing private competition. Most important, laws were made through a process of open deliberation with public votes. This democratic process replaced the intimidation of medieval stakeholders, who under the communal concept of labor and capital took a share of what others produced….

In the post-Enlightenment world, people were empowered to pursue their own private interests. Private interests and free markets accomplished what no benevolent king’s redistribution, no loving bishop’s charity, no mercantilistic protectionism, and no powerful guild ever did—deliver broad, unending prosperity.

Remarkably, amid the recorded successes of capitalism and failures of socialism rooted in Marxism, pre-enlightenment socialism is re-emerging in the name of stakeholder capitalism. These stakeholders claim that “you did not build your business” and that your labor and thrift should serve their definition of the public interest.

The initial target of this extortion is corporate America. Stakeholders argue that rich capitalists who own big businesses already get more than they deserve. But since roughly 70% of corporate revenues go to labor, the biggest losers in stakeholder capitalism are workers, whose wages will be cannibalized. And of course, the idea that rich capitalists own corporate America is largely a progressive myth. Some 72% of the value of publicly traded companies in America is owned by pensions, 401(k)s, individual retirement accounts, charitable organizations, and insurance companies funding life insurance policies and annuities. The overwhelming majority of involuntary sharers in stakeholder capitalism will be workers and retirees.

The mantra that private wealth must serve the public interest has been boosted by one of capitalism’s great innovations, the index fund. What investors gained in the efficiency of the index fund’s low fees, they are now losing as index funds use the extraordinary voting power they possess in voting other people’s shares. Whether their motives are promoting the marketing of their index funds, doing “good” with other people’s money, or, as Warren Buffett’s longtime partner Charlie Munger claimed, playing “emperor,” they have empowered the environmental, social and governance (ESG) agenda. Other stakeholders are sure to pile on, as evidenced by Sens. Bernie Sanders and Elizabeth Warren’s effort to get BlackRock to use its share-voting power to pressure a private company to yield to union demands.

Stakeholder capitalism imperils more than prosperity, it imperils democracy itself. Self-proclaimed stakeholders demand that workers and investors serve their interests even though no law has been enacted imposing the ESG agenda.”


SEC proposes additional disclosure rules for ESG Funds

Last week, the Securities and Exchange Commission (SEC) proposed new rules for funds that profess to be compliant with Environmental, Social, and Corporate Governance principles.  Since the start of the Biden administration, the SEC has argued that many purported ESG investment products are playing fast and loose with the term and are providing investors something less than what they promise. The SEC’s enforcement division has been investigating some such products for more than a year, and now the full Commission has proposed a new disclosure scheme to promote transparency:

“Regulators proposed new disclosure and naming requirements for investment funds that tap into public angst regarding climate change or social justice, in an effort to address concerns about “greenwashing” by asset managers seeking higher fees.

The Securities and Exchange Commission voted Wednesday to issue two proposals that aim to give investors more information about mutual funds, exchange-traded funds and similar vehicles that take into account ESG—or environmental, social and corporate-governance—factors. One of the proposed rules, if adopted, would broaden the SEC’s rules governing fund names, while the other would increase disclosure requirements for funds with an ESG focus.

The financial industry is split—between asset managers and those who buy their products—on the need for more SEC oversight of ESG funds. The Investment Company Institute, which lobbies Washington on behalf of asset managers, said it planned to review the proposals with its members closely but had a number of concerns, including about costs that it said investors will ultimately bear….

“What we’re trying to address is truth in advertising,” SEC Chairman Gary Gensler told reporters in a virtual press conference after the commission’s vote.

Hester Peirce, the lone Republican on the four-person commission, voted against both proposals, saying they would impose undue burdens on asset managers and nudge them toward capital-allocation decisions that only some investors favor….

The American Securities Association, a lobbying group that represents regional brokerages and financial-services firms, applauded the SEC’s proposals, saying it is appropriate to scrutinize ESG funds’ advertising, performance and fees.

“ASA supports efforts by the SEC to stop misleading and deceptive marketing gimmicks surrounding ESG funds,” the group’s chief executive, Chris Iacovella, said in an emailed statement….

Earlier this week, the SEC fined the investment-management arm of Bank of New York Mellon Corp. $1.5 million for misleading claims about the criteria it used to pick ESG stocks. BNY Mellon neither admitted nor denied wrongdoing.

Authorities are also probing Deutsche Bank AG’s asset-management arm after The Wall Street Journal reported last year that DWS Group overstated its sustainable-investing efforts. At the time, a DWS spokesman said the firm doesn’t comment on questions related to litigation or regulatory matters. A spokesman for Deutsche Bank declined to comment.”

In the States

Kentucky’s Attorney General describes ESG as inconsistent with Kentucky law

Kentucky Treasurer Allison Ball (R) recently asked her state’s Attorney General, Daniel Cameron (R), about ESG, specifically, “Whether “stakeholder capitalism” and “environmental, social, and governance” investment practices in connection with the investment of public pensions funds are consistent with Kentucky law governing fiduciary duties.” On May 26, the Attorney General’s office replied:

“There is an increasing trend among some investment management firms to use money in public and state employee pension plans—that is, other people’s money—to push their own political agendas and force social change. State Treasurer Allison Ball asks whether those asset management practices are consistent with Kentucky law. For the reasons below, it is the opinion of this Office that they are not….

[W]hile the public pension plans administered by the Kentucky Public Pension Authority has shown year-over-year improvement in funding, there is a concern that this trajectory may be threatened by extreme approaches to investment management—particularly those that put ancillary interests before investment returns for the benefit of public pensioners and state employees.

One such approach is “stakeholder capitalism.” According to its advocates, “[s]takeholder capitalism is an expansion of corporate management fealty beyond shareholders to include the workforce, supply chain, customers, communities, societies, and the environment.” What this means in reality is that investment management firms who embrace stakeholder capitalism propose prioritizing activist goals over the interests of their public and state employee clients.

To achieve this version of “capitalism,” investment management firms are adopting “environmental, social, and governance”—or “ESG”—investment practices. ESG investing is an “umbrella term that refers to an investment strategy that emphasizes a firm’s governance structure or the environmental or social impacts of the firm’s products or practices.”

American economist Milton Friedman once criticized an earlier version of this trend whereby one set of stockholders sought to convince another set of stockholders that business should have a “social conscience.” As he explained, “what is in effect involved is some stockholders trying to get other stockholders (or customers or employees) to contribute against their will to ‘social’ causes favored by activists. Insofar as they succeed, they are again imposing taxes and spending the proceeds.” Friedman found this problematic because “the great virtue of private competitive enterprise” is that it “forces people to be responsible for their own actions and makes it difficult for them to ‘exploit’ other people for either selfish or unselfish purposes. They can do good—but only at their own expense.”

Today, in perhaps an even more pernicious version of the trend, the debate is no longer left to stockholders. In fact, there is little-to-no debate. Investment management firms in some corporate suites now use the assets they manage—that is, other people’s money—to enforce their preferred partisan sensibilities and to seek their desired societal and political changes. Investment management firms have publicly committed to coordinating joint action for ESG purposes, such as reducing climate change….

Whether these ancillary purposes are societally beneficial is beside the point when speaking of the duty of fiduciaries. Fiduciaries must have a single-minded purpose in the returns on their beneficiaries’ investments….

While asset owners may pursue a social purpose or “sacrifice some performance on their investments to achieve an ESG goal,” investment managers entrusted to make financial investments for Kentucky’s public pension systems must be single-minded in their motivation and actions and their decisions must be “[s]olely in the interest of the members and beneficiaries [and for] the exclusive purpose of providing benefits to members and beneficiaries….””



Elon Musk continues push back against ESG

ESG Developments This Week

In Washington, D.C.

Documenting ESG pushback

On May 19, The Wall Street Journal carried an op-ed by Jonathan Berry, a Trump administration Labor Department official, and Boyden Gray, former White House Counsel to President George H. W. Bush. The piece focuses on index funds/ETFs, highlighting efforts made in the states in opposition to ESG, and suggesting that there may, in the near future, be federal efforts following the same tack. The two wrote the following:

“Passive investing through index funds lets ordinary Americans own the market. Those funds and similar vehicles spread risk and keep fees low. The resulting rates of return have triggered seismic shifts from active to passive funds.

The problem is that there’s been an equally seismic power shift to those passive funds’ investment managers. They’re trying to remake corporate America to suit their personal politics.

In truth, it’s the Big Three investment managers who now own the market. BlackRock, Vanguard and State Street control more than $20 trillion in assets. In 90% of public companies, one of the Big Three is the largest shareholder. More money means more votes: At S&P 500 companies, the Big Three cast about 20% to 25% of all shareholder votes. And that vote bloc will only grow as more Americans move their savings into passive funds.

That concentration of voting power in three like-minded investment companies, given the diversity of all other voting interests, means the Big Three can often direct the outcome of board elections and shareholder proposals….

Fortunately, it looks as if more of our elected representatives are waking up. West Virginia’s state treasurer recently fired BlackRock from a state investment board over its China ties and hostility to fossil fuels. Florida’s top officials have moved to claw back proxy voting power from outside fund managers over Chinese entanglements and politicized investment decisions. Texas (with other states to follow) has gone so far as to demand fair treatment in financing for industries that don’t fit the politics of Mr. Fink et al.—think fracking, guns and oil.

Congress is joining the conversation. This week, the Senate took up a major bill, the Investor Democracy is Expected Act. The Index Act requires passive investment managers to cast funds’ most important votes in accord with the wishes of actual investors. This kind of reform dissipates the political power amassed by the Big Three as an incident to the rise of passive investing. It would push America’s public companies to respond to the desires of ultimate investors—i.e., regular people.

Happily, the writing is already on the wall. Facing pushback, Mr. Fink has lately muted the imperious tone from his annual letter to CEOs, and BlackRock has started extending “proxy voting choice” to larger clients, representing 40% of index equity assets under management. So why not finish the job and send the rest of the power back?

American corporations are supposed to work for their shareholders. An ideal, yes, but requiring asset managers to pass voting power back to investors would bring it closer to reality.”

On Wall Street and in the private sector

Documenting the pushback against the pushback to ESG

Throughout May, numerous defenses against efforts in opposition to the ESG investment movement have appeared. Bloomberg ran two columns (one reprinted at The Washington Post) which argued that, in the view of the pieces, pushback efforts in opposition to ESG are somewhat less than they are cracked up to be. The first of these, by Liam Denning, ran May 19:

“Recently, it may feel as if your 401K is just a mathematical distillation of every wrong decision you’ve ever made. Even worse, though, what if your investments are nothing less than the means by which a shallow and divisive agenda is foisted on millions of unsuspecting Americans by an “ideological cartel”?

That choice phrase comes from Vivek Ramaswamy, a former biotech executive, author and now cofounder of a new investment firm seeded by, among others, the billionaire Peter Thiel. Strive Asset Management seeks to take on the Big Three — BlackRock Inc., State Street Corp. and Vanguard Group Inc. — accusing them of coordinating a campaign to push political objectives that are at odds with their clients’ best interests. In essence, BlackRock CEO Larry Fink et al. decide that they want to prioritize tackling climate change or systemic racism or whatnot and then use the trillions of passive dollars they invest to force companies to prioritize that, too. Strive will do the opposite, pushing instead “excellence capitalism” — that is, nudging companies to ditch the political stuff and focus on delivering good products and services….

Ramaswamy’s core argument is a warning about the growing power of passive money managers. This has merit. The Big Three own, on their clients’ behalf, about one-fifth of each S&P 500 member, on average, with potentially negative implications for governance and competition. There is already lively debate and a body of academic literature about this. 

Still, it remains a leap to conclude that there now exists a cartel — a loaded term — that effectively forces certain political stances on US companies and Americans in general. It is far from clear that corporations set the pace on social issues rather than take their cues from below. For example, plenty of people — indeed, a majority in the US — are concerned about climate change, and that didn’t require the imprimatur of any corporate executive….

Google articles about Strive and you will find terms like “ESG,” “SRI” — socially responsible investing — and stakeholder capitalism used interchangeably. Similarly, Ramaswamy’s book uses the catch-all term “woke”:

Basically, being woke means obsessing about race, gender, and sexual orientation. Maybe climate change too. That’s the best definition I can give.

If you say so. Dismissing climate change as just another activist obsession speaks to the logical disconnect of exhorting Exxon to focus on delivering a high-quality product without acknowledging that said product carries an inherent, climate-related flaw that requires a strategic response. One person’s liberal hobby horse is another’s systemic risk….

Strive’s timing is impeccable, effectively taking the opposite side of what has become a crowded trade.

That timing also makes it suspect. Strive launches amid a gathering Republican campaign against companies taking positions that oppose the party line on wedge issues. The day after Strive’s announcement, former Vice President Mike Pence gave a speech in Texas attacking ESG and socially minded investing, making a wild claim that Exxon’s new directors were “now working to undermine the company from the inside.” As much as Strive touts itself as “depoliticizing corporate America,” I’m afraid you don’t get to do that credibly while also boasting about seed money from Thiel.”

The argument that pushback against ESG is politically tinged is an argument reiterated in the second Bloomberg pieceby Jeff Green and Saijel Kishanpublished the following day, May 20:

“Heading into the hotly contested midterm elections, the American political right has a new rallying cry: Down with ESG.

Conservatives have identified the popular investing strategy, which accounts for environmental, social and governance risks, as part of a broader narrative about left-wing overreach and “ wokeness” run amok. Utah Treasurer Marlo Oaks calls it “corporate cancel culture.” Behind the rhetoric lie policies designed to sap the momentum of one of Wall Street’s most successful initiatives in recent years, now worth $35 trillion globally. If it works, it will firmly ensconce ESG in the culture wars, galvanize voters and weaken the resolve of big asset managers to act on climate change and other big, societal issues.

West Virginians are already all too familiar with ESG, according to state treasurer Riley Moore. He’s preparing a list of banks that, he says, will lose the state’s business unless they declare they aren’t boycotting the coal industry and other fossil fuels. “Certainly ‘woke capitalism’ is something they are very familiar with,” he said. “We’re facing threats from that in my state, right now.”

The attacks on ESG escalated last week when former Vice President Mike Pence made the strategy a key theme in an energy-policy speech in Houston. A potential candidate for the 2024 Republican presidential nomination, Pence said large investment firms are pushing a “radical ESG agenda” and took aim at BlackRock Inc., whose Chief Executive Officer Larry Fink is a champion of sustainable investing, and others who have pressed for progress on climate change….

With gas prices rising and energy a key factor in Russia’s invasion of Ukraine, it’s becoming easier for Republicans to tie ESG to pocketbook issues of their constituents. Just as Critical Race Theory grew from a catchall for parents unhappy or worried about what their children were learning in public schools to successful efforts to seize control of local school boards, ESG opponents see an opportunity to aim voters’ fears of inflation at the finance industry’s efforts to combat global warming and other social ills. 

It’s also a new front in a longstanding battle against further restrictions on fossil-fuel industries, which give generously to Republican party candidates, and more corporate accountability. At the state level, Republican governors and other officials are finding new ways to block major Wall Street firms from state business, including managing pension funds and bond issues, if they apply ESG principles to other parts of their portfolios.

Nationally, the broadsides against ESG bolster calls to abandon, or at least relax, environmental standards in favor of “energy independence.” It’s also a partisan issue at the US Securities and Exchange Commission, which is trying to require companies to report on their greenhouse gas emissions. In a virtual meeting on the plan in March, the agency’s only Republican commissioner, Hester Peirce, turned off her camera in protest, saying that she was trying to reduce her carbon footprint.

Republicans are increasingly using banks and “woke” companies as cudgels for their base voters, said Reed Galen, a co-founder of the anti-Trump group, The Lincoln Project. “If you’re taking on a company who has environmental and social justice goals, you don’t have to explain ESG to the voters. All you have to do is say ‘woke corporation.’”…

Few expect the Republican attacks on ESG to vaporize the industry. As of now, roughly $3.4 trillion of public retirement money is invested in line with ESG strategies of some sort, according to the sustainable-investing industry group US SIF. Some of the bigger, more liberal states like California and New York are pushing for more restrictive ESG screens for state funds, not less. What’s more, many of the world’s biggest financial institutions have their own goals to cut emissions, which include reducing the amount of business they do with heavy polluters — whether they bill it as ESG or not. Many also have set targets for workforce diversity and elevating women in management, neither of which are politically popular among the right.

Still, the political pressure seems to be taking a toll. BlackRock sent a letter this week to the Texas state comptroller, rebutting the assertion that the firm boycotts the oil and gas industries, and Fink has made it clear he opposes divesting from fossil-fuel companies. The firm also said this year that it won’t back as many shareholder efforts to push companies to reduce their emissions compared with 2021. JPMorgan Chase & Co. is also taking steps to re-establish itself in Texas’s muni-bond market, about eight months after a new law forced that bank out of most deals because of its policies on guns and fossil fuels.”

In the spotlight

Tesla dumped from S&P ESG Index; CEO Elon Musk calls ESG a scam

Over the last several months, this space has documented the paradoxical but serious battle between the ESG gatekeepers and Tesla, the world’s best-known and most valuable maker of automobiles without greenhouse-gas-producing internal combustion engines.  Over the last several weeks, a war of words between ESG advocates and Tesla, a maker of automobiles without greenhouse-gas-producing internal combustion engines, has heated up.

First, Tesla got kicked out of the S&P 500 ESG index:

“This week, S&P Global SPGI +2.51% ’s (SPGI) S&P Dow Jones Indices division said that Tesla (TSLA), which CEO Elon Musk says he founded to put the world on a path to a sustainable-energy future, doesn’t have a comprehensive low-carbon strategy and no longer qualifies for inclusion in the S&P 500 ESG Index (SPXESUP). 

Tesla was “ineligible for index inclusion due to its low S&P DJI ESG Score,” Margaret Dorn, head of ESG Indices, North America, at S&P Dow Jones Indices, wrote in a blog post explaining the decision. “So, while Tesla’s S&P DJI ESG Score has remained fairly stable year-over-year, it was pushed further down the ranks relative to its global industry group peers.””

After that, its CEO Elon Musk called ESG a scam:

“This week, a major move to cut Tesla from a closely followed environmental, social and governance (ESG) index brought anger and relief in nearly equal measure.

Defiance was on display from Standard & Poor’s, which rejected Tesla from its ESG index; annoyance emerged from Tesla TSLA, 1.20% investors, including well-known asset manager and Tesla bull Cathie Wood. There was also a seething snapback from Elon Musk….

“ESG is a scam. It has been weaponized by phony social justice warriors,” tweeted Musk, lamenting that ExxonMobil topped Tesla.

“Ridiculous,” was Wood’s terse response to Tesla’s removal.”



Economy and Society: ESG Task Force issues first enforcement action

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.

Wall Street Journal notes opposition to SEC’s rapid rule-making, including among Democrats        

Two weeks ago, The Wall Street Journal’s editorial board published a piece that highlighted objections to what it described as rapid rule-making at the SEC under Chairman Gary Gensler. It noted that even some Democrats have been frustrated by the tactics Gensler has employed:

“Progressives lobbied President Biden to appoint Gary Gensler as Securities and Exchange Commission Chairman because of his record as a hell-for-leather financial regulator during the Obama days. But now even some House Democrats are asking the Chairman to tap the brakes.

“We write to express concern over some of the Securities and Exchange Commission’s comment periods for complex rulemakings that may hamper the ability for the public to provide effective and meaningful input,” 47 House Members, including 28 Democrats, wrote Mr. Gensler recently. They cite two new proposed rules that would expand SEC control over private markets.

One rule would impose stringent disclosure requirements for fees, expenses and annual independent audits on private fund advisers that are similar to those for public advisers. A second would require private funds to report more information to the SEC about investment losses, among other things, supposedly so the agency can monitor systemic financial risks….

The rule-makings aren’t exactly beach reading and will require teams of lawyers and analysts to sort through their implications. Yet Mr. Gensler provided a mere 30 days for public comment. “This abbreviated period will likely hinder engagement from Congress, investors, and other market participants,” the House Members write.

House Members want Mr. Gensler to extend the public comment period to at least 90 days, which was the norm for highly complicated rules during previous administrations. The Office of the Federal Register suggests that agencies may provide up to 180 or more days for “complex” rule-makings. Mr. Gensler’s drive-by regulation seems to be a pattern.

Energy companies this week also asked Mr. Gensler to extend the 60-day public comment for a proposed 506-page climate disclosure rule, which would require businesses to report their greenhouse gas emissions including those of their suppliers and customers. “SEC should give the public ample time to consider the full impacts of this wide-ranging rule designed to deny financing to the energy sources that meet 80% of global demand now and well into the future,” they write.

Under the Administrative Procedure Act, agencies must take into account public comments. If they disagree with the comments, they have to explain why. A short public comment period will mean fewer detailed comments, which will let the agency finalize the proposals faster with few changes.

The SEC has undertaken more than 50 rule-makings that would affect nearly every investor and public company in America, and many private ones too. Mr. Gensler is rushing to complete as many of them as he can before next January, when Republicans appear likely to take control of the House and could use their appropriations power to rein him in.”

On May 9, the SEC acceded to demands from interested parties and agreed to extend the comment period for the three rules noted above by 30 days each:

“The Securities and Exchange Commission today announced that it has extended the public comment period on the proposed rulemaking to enhance and standardize climate-related disclosures for investors until June 17, 2022. The SEC also announced that it will reopen the comment periods on the proposed rulemaking to enhance private fund investor protection and on the proposed rulemaking to include significant Treasury markets platforms within Regulation ATS for 30 days.

“Today, the Commission acted to provide the public with additional time to comment on three proposed rulemakings that have drawn significant interest from a wide breadth of investors, issuers, market participants, and other stakeholders,” said SEC Chair Gary Gensler. “The SEC benefits greatly from hearing from the public on proposed regulatory changes. Commenters with diverse views have noted that they would benefit from additional time to review these three proposals, and I’m pleased that the public will have additional time to provide thoughtful feedback.””


Some observers are expecting Gensler’s climate disclosures to fail

On May 2, Shivaram Rajgopal and Bruce Usher, two professors at Columbia Business School, penned a piece for Bloomberg Law in which they looked at SEC’s climate disclosure proposal, as well as the possibility that it may be disrupted, and then examined possible alternative means for achieving the same goals. They wrote:

“[E]ven though the ink has barely dried on these newly released SEC climate rules, it’s important to recognize that the 510 pages of regulations may never be enacted. There is no consensus in Congress to act on the climate problem, Republican lawmakers have already urged the SEC to withdraw their proposal, and a more conservative U.S. Supreme Court could view the new rules as an overreach. And, state attorneys are also vowing to challenge the SEC’s proposal.

So if these rules are dead on arrival, where are the areas of promise? There are a few….

Here’s what could happen next.

First, this momentum toward climate disclosure might encourage businesses to change strategy, taking steps to move capital out of fossil fuels and toward renewable technologies and other solutions to climate change….

Second, it’s likely that the need for climate leadership will lead to businesses adding expertise. While companies like Apple, Facebook, Google, and Microsoft already report extensive emissions data, many companies lack the same level of expertise.

The Big Four accounting firms along with other professional-service firms have already started to invest in climate expertise. Ernst & Young announced that it will spend $10 billion over the next three years on audit quality, sustainability, and technology, and KPMG is planning to spend more than $1.5 billion over the next three years on climate-change-related initiatives and training on ESG issues….

Third, increased climate literacy will allow for more scrutiny of green claims, meaning capital will be more likely to flow to truly sustainable projects. As tougher climate policies are proposed and implemented, the days of corporate greenwashing—and investors being misled—could finally come to an end.

That could lead to more money flowing to projects like Apple’s Green bonds which raise capital for projects with environmental benefits, and recently funded over a gigawatt of clean power globally, equivalent to removing 200,000 cars from the road. More companies are likely to follow Apple in investing in truly sustainable projects with more regulation around climate reporting.”

Though not noted in professors Rajgopal and Usherarticle, some analysts in the capital markets and related investment community are expecting publicly traded corporations to comply with disclosure standards whether the SEC passes them or not:

“The International Sustainability Standards Board (ISSB) is rallying regulators from the U.S., Europe, Japan and other jurisdictions around common rules for disclosures about climate risk and other environmental, social and governance (ESG) issues.

The working group of regulators will meet this month and in July to craft a “global baseline” of ESG disclosure standards, according to the ISSB, which in March released for public comment proposed rules on how a company should disclose the ways it gauges and manages ESG risks. A company would also need to publicly describe how sustainability risks, such as drought or flood, affect its total value.

“There is strong public interest in seeking to align where possible the international and jurisdictional requirements for sustainability disclosures,” ISSB Chair Emmanuel Faber said in a statement. 

The ISSB, aiming to bring consistency across borders, intends to urge regulators worldwide to consider adopting its proposals as a foundation for their own domestic sustainability disclosure rules, including those focused on carbon emissions….

The ISSB, backed by the architects for global accounting rules, has asked for public feedback on its proposal by July 29. It plans to complete standard-setting by the end of 2022.

The ISSB was created by the IFRS Foundation, a London-based group that oversees the International Accounting Standards Board (IASB), and launched in November during the COP26 climate conference in Glasgow.

As with IASB rules, companies could voluntarily adopt the ISSB standards or a regulator could endorse the guidelines and require compliance by companies under its jurisdiction.


SEC’s Climate an ESG Task Force issues first enforcement action 

Among other ESG tasks, the Securities and Exchange Commission has promised to keep ESG practitioners honest. To ensure compliance with promises made, the SEC created an ESG enforcement task force in early 2021. That task force has now issued its first enforcement action:

“The SEC’s Climate and ESG Task Force has now issued its first enforcement action.  The SEC has brought a 76-page complaint in federal district court against Vale, S.A., a Brazilian mining company, alleging that Vale “ma[de] false and misleading claims about the safety of its dams.”  Significantly, Vale “regularly misled local governments, communities, and investors about the safety of the Brumadinho dam through its environmental, social, and governance (ESG) disclosures.”…

In essence, the SEC has brought a classic enforcement action against a company for allegedly misleading disclosures–and these disclosures are not just present in typical SEC forms (e.g, 20-F and 6-K), or in investor presentations, but in the separate ESG reports issued by Vale.  As stated in the SEC’s complaint, the “false statements to investors [were] in SEC filings, the 2016 and 2017 Sustainability Reports, and the 2018 ESG Webinar.”  This enforcement action by the SEC demonstrates that statements made in ESG reports should now be considered as ripe for litigation–whether public enforcement actions or private securities litigation–as classic sources of disclosures.    

Notably, the complaint also features allegations concerning corporate governance failures and problems with the auditing process related to the ESG reports and other disclosures.  The presence of these allegations may act to reinforce the SEC’s focus on corporate governance and attestation in its proposed mandatory climate disclosures.”

In the spotlight: Tesla joins Musk in pushing back against ESG 

While Tesla is, by definition, a company that exists specifically to reduce carbon emissions from internal combustion engine vehicles, Elon Musk and others at the company have been reluctant to share ESG-related information with ratings agencies and have, therefore, been given relatively poor ESG scores. Now, Musk and his company are pushing back:

“Tesla Inc., whose Chief Executive Officer Elon Musk has criticized ESG for making little sense, said current ways of measuring environmental, social and governance issues are “fundamentally flawed.”

In a 144-page annual report, the electric vehicle-maker said ESG ratings are based on how corporate profits are affected by ESG-related factors, rather than gauging a company’s real-world impact on society and the environment. The ratings are used by money managers to help decide where to invest. 

In effect, individual investors who park their money in ESG funds managed by large asset managers are unaware that their capital is being used to buy shares of companies that are exacerbating the effects of climate change, rather than mitigating it, Tesla said. 

“We need to create a system that measures and scrutinizes actual positive impact on our planet, so unsuspecting individual investors can choose to support companies that can make and prioritize positive change,” the Austin, Texas-based company said. It added that large investors, ratings agencies, companies and the public need to push for change.” 

Musk has been a recent critic of ESG, and has said its investment principles should be “deleted if not fixed.”



Economy and Society: Academic pushback against SEC climate action

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.

Academic pushback against SEC climate action 

On April 25, 22 law and finance professors submitted a comment letter to the Securities and Exchange Commission (SEC), questioning the Commission’s proposed climate-change disclosure rule. Professor Lawrence A. Cunningham of George Washington University issued a press release detailing the professors’ motivation and chief complaints. The letter began as follows:

“The enthusiasm of many Commissioners and Staff of the Securities and Exchange Commission (the “SEC”) to participate in the global debate about climate change is understandable. After all, protecting the earth’s sustainability is perhaps the most compelling issue of our time. It’s an issue all must take seriously and everyone must do their part. But each of us, and particularly governmental authorities, must always act in accordance with law and fairness.

The undersigned, a group of professors of law and finance, are concerned that the SEC’s recent proposal to impose extensive mandatory climate-related disclosure rules on public companies (the “Proposal”) exceeds the SEC’s authority. In addition, rather than provide “investor protection,” the Proposal seems to be heavily influenced by a small but powerful cohort of environmental activists and institutional investors, mostly index funds and asset managers, promoting climate consciousness as part of their business models.”

The letter continued, explaining in detail three lines of argument that the group of professors believes demonstrate that the SEC is, in their view, exceeding its authority:

“The following analysis raises concerns that the Proposal is neither necessary nor appropriate for either investor protection or the public interest and will not promote other statutory goals. The SEC would do better to withdraw the Proposal and revisit the subject with a fresh approach focused on America’s ordinary investors rather than an elite global subset. The three parts of this letter address each statutory issue in turn, as follows:

I. “Investor Demand” versus “Investor Protection”

A. Investor Varieties: Diverse Institutions and Individuals

B. Climate Shareholder Proposals: Few Are Made, Most Lose, Many Are Political

C. The Ample Supply of Climate Disclosure

D. Correlation of Climate Practices with Economic Performance Is Not Causation

II. Authority of Others and the “Public Interest”

A. The Environmental Protection Agency’s Statutory Jurisdiction

B. State Corporate Law Prerogatives on Purposes, Powers and Business Judgments

C. Risk of Unconstitutional Compelled Political Speech

III. Other Statutory Considerations

A. Certain High Costs versus Highly Speculative Benefits

B. Impairs Investment Industry Competition

C. Compliance Burdens Discourage Public Company Registrations”

Finally, the professors concluded:

“We respectfully urge the SEC to withdraw the Proposal. We are concerned that the passions of this topic have led the SEC to overzealous rulemaking that exceeds its authority. Governments, above all, must adhere to the rule of law, especially when officials believe honestly and fervently in a specific agenda. The federal securities laws focus on investor protection generally, while the Proposal prioritizes the demands of a subset of the global investment industry. We encourage the SEC to focus on all American investors, not just the most vocal and activist voices.”

State-level ESG pushback gains supporters in Congress

For much of the year, state-level government officials in states including Texas, Florida, and West Virginia have led political opposition to ESG and related investment issues. Last week (as detailed in our last issue) elected officials from Utah responded critically to an ESG rating applied to them by S&P Global. According to Roll Call, some Republican members of Congress have been inspired by state-level action to get involved in an effort against ESG themselves:

“Republican state lawmakers are berating U.S. financial institutions for increased reliance on environmental, social and governance metrics to screen investments and analyze credit risk factors, with some of the critics attracting support in Congress.

Utah state Treasurer Marlo Oaks coordinated a response to S&P Global Inc., blasting the financial services firm’s credit rating division for plans to supplement its analysis of states with a score on certain ESG indicators, such as exposure to climate risk and demographic trends….

Notably, Oaks was joined by Gov. Spencer J. Cox, other state officials, and Utah’s entire congressional delegation: Republican Sens. Mitt Romney and Mike Lee and Reps. John Curtis, Blake D. Moore, Burgess Owens and Chris Stewart.

Stewart said he and his colleagues are encouraging other GOP members to have similar conversations with their state treasurers and financial regulators on the proliferation of ESG metrics.

If Republicans take back control of the House at the midterm elections, they will look to utilize appropriation riders to curb additional ESG regulations. This would be akin to the long-standing rider that prevents the Securities and Exchange Commission from pursuing rulemaking on corporate political spending disclosure, he said in an interview Tuesday.

“We’re going to be able to put some limits on this, precluding the Securities and Exchange Commission, for example, from using their regulatory authority to implement policies that are really out of bounds of their actual authority,” said Stewart, who sits on the House Appropriations Committee. “We’ll have some ability to push back on that starting next winter.”

The letter and Stewart’s remarks underscore the latest effort from Republican politicians who are pushing back against the financial sector’s embrace of ESG metrics in credit analysis and investment decisions.”

In the States

West Virginia joins opposition to S&P ESG indicators

Last week, West Virginia Treasurer Riley Moorewho has waded into the ESG debate beforefollowed his Utah counterpart, Treasure Marlo Oaks, in opposing S&P Global’s new state ESG ratings and calling for them to be scrapped. According to Bloomberg:

“West Virginia’s Republican treasurer called on S&P Global Ratings to scrap a new system scoring U.S. states on their environmental, social and governance efforts, calling the ratings scale a “politically subjective” scheme that will force states to yield to “woke capitalists.”

“This new ESG rating system is just the beginning of a new wave of judging states – and their people – not by valid financial metrics, but by the preferred political views and outcomes of a select global elite,” West Virginia State Treasurer Riley Moore said in a statement released earlier this week. “The ESG movement is nothing but a slippery slope whereby our states and our people will be forced to bend the knee to the woke capitalists or suffer financial harm.”

S&P’s new system scores governments on categories like human rights, social integration, low-carbon strategies, climate measures and sustainable finance. The company released its first scorecard March 31.

S&P declined to comment.

West Virginia, a Republican-controlled state, received a negative social score and a moderately negative environmental score. The vast majority of states’ ratings were neutral. West Virginia has an AA- bond rating from S&P, its fourth-highest.

“So despite our state’s excellent financial position, our taxpayers could now be punished with higher borrowing costs simply because S&P doesn’t like our state’s industries and demographic profile,” Moore said. “This ratings scheme will affect our state and its municipalities, and begs the question: at what point will this stop? Will individuals soon get ESG ratings as part of their credit scores? Where will it end?””

On Wall Street and in the private sector

Declining ESG demand in Europe 

For several years, supporters of ESGincluding those in various government agencieshave pointed to the continually rising inflows into ESG funds as evidence that investment strategy is popular with average investors as well as the large asset managers who promote ESG as part of their broader business strategy. This year, however, that argument has become more difficult to make, as ESG demand has dropped among European investors, according to a story in The Financial Times:

“Flows into exchange traded funds that are focused on better environmental, social and governance (ESG) outcomes amounted to €13bn in the first quarter, less than half of the €27bn that went into them in Q4 2021, Morningstar data for Europe show.

Just 30.4 per cent of total money put into ETFs in Europe in Q1 went into ESG funds, down from the 79 per cent record high in Q4 last year.

Thematic ETFs, like ESG portfolios and other funds that also tend to come with a quality growth bias, have seen demand shrink amid the disastrous performance of recent months. Flows into these types of funds amounted to €0.6bn in Q1 2022, down from €2.1bn in the previous quarter.

Morningstar observes that this was the first quarter since 2019 in which thematic ETFs failed to attract at least €1bn of net inflows.”

In the spotlight

Bonuses tied to ESG performance continue in popularity

Another American company has announced that it has joined a trend previously most popular in Europe and Canada of rewarding executives based on their achievement of ESG-related, rather than purely pecuniary goals. This time, it’s Wendy’s:

“Wendy’s will tie executive compensation to environmental, social and governance performance and is also working to target reductions across Scope 1, 2, and 3 emissions, according to its 2021 corporate responsibility report.

Additionally, the fast-food company reported its 2020 climate data to the CDP for the first time in 2021. Wendy’s is continuing to move toward sustainable packaging and move away from hard-to-recycle single use products, according to the report.

The company’s board of directors made the decision to begin tying executives’ 2022 incentive compensation linked to the company’s achievements with its Food, People and Footprint goals. The company says it believes the move will drive more progress toward achieving its ESG goals.

Wendy’s compensation plan is similar to restaurant chain Chipotle, which is also tying up to 15% of its executives’ annual incentives to ESG progress….

In 2021 Wendy’s says it reduced water usage by 25% in its US restaurants and facilities compared with a 2018 baseline. The company also exclusively grew tomatoes and lettuce in greenhouses last year, which resulted in using 90% less water, and sourced coffee which met standards for protecting natural areas and waterways.”



Economy and Society: Utah pushback against S&P ESG indicators

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 the States

Utah pushback against S&P ESG indicators

In late March, S&P Global released a credit indicator report on the state of Utah that went beyond traditional versions of such reports. This year, S&P, which among other things, rates corporate ESG preparedness, included an ESG component in its reports on each of the 50 states as well. On April 20, Utah Governor Spencer Cox (R), Senators Mike Lee (R) and Mitt Romney (R), all of the state’s congressmen, along with its treasurer and attorney general, sent a letter to S&P, arguing that the ESG component of its report is inherently political and therefore unfair. Bloomberg reported on the letter as follows:

“Utah’s governor and its federal lawmakers are objecting to S&P Global’s move to publish ESG indicators for U.S. states, calling it an undue politicization of the ratings process.

In a letter sent to the firm on Thursday, the politicians — all Republicans — lay out a lengthy rebuke of S&P’s move to release environmental, social and governance assessments, known as ESG. Despite Utah’s results falling in line with many other states, the officials argue S&P should focus strictly on financial fundamentals.

“S&P’s ESG credit indicators politicize what should be a purely financial decision,” reads the letter, which was obtained by Bloomberg News. It was signed by Governor Spencer Cox, Senators Mike Lee and Mitt Romney, all four of the state’s members of the House, as well as its treasurer and attorney general. 

The letter also demands the report is withdrawn, seeks more information from S&P and says the state won’t cooperate in gathering ESG criteria.

S&P has said ESG credit factors are those that “can materially influence the creditworthiness of a rated entity or issue and for which we have sufficient visibility and certainty to include in our credit rating analysis,” and that they are “applied after the credit rating has been determined.””

The Bloomberg piece subsequently explains how and why ESG has become so important to asset managers and corporations but, in the view of some analysts, fails to explain the connection of the corporate ESG trend to the states:

“The row is the latest saga in the emergence of the indicators, which advocates say give a full picture of an entity’s outlook but critics say stray too far from core financial matters. 

Institutional investors like Blackrock Inc. and pension funds are demanding greater clarity from companies on their efforts to diversify their workforces and address a changing climate. Companies seen as under-performing on certain ESG metrics risk challenges to their board from activist investors.

Meanwhile, GOP lawmakers and powerful industry groups, including the U.S. Chamber of Commerce, have opposed increased activity by financial watchdogs on ESG issues. Some Republicans have complained that ESG indicators are skewed to a progressive viewpoint, and have encouraged companies and other organizations to reject the metrics.

S&P’s ESG indicators include categories like human rights, social integration, low-carbon strategies, climate measures and sustainable finance.”

Neither the Bloomberg piece nor S&P addressed the Utah representatives’ concerns or explained why the new ratings are deemed to be relevant and not, in the view of opponents, political. According to Bloomberg, “The ratings agency declined to comment.”

On Wall Street and in the private sector

BlackRock reiterates its commitment to ESG

Over the last several monthswhile energy shortages have gripped Europe and as the Russian war with Ukraine appears to have exacerbated those shortagesBlackRock CEO Larry Fink has, in the view of some analysts, appeared to stray from ESG orthodoxy. Fink has stated that he and his company believe that fossil fuel production is necessary and that it is wise, at this point, to be invested in traditional, fossil-fuel-based energy companies.

Recently, Fink clarified his comments, stating that he still believes firmly in ESG and what he describes as sustainability in particular; however, he simply believes that the path to sustainability is more complicated than many ESG investors have come to believe. Barron’s reports:

“BlackRock CEO Larry Fink, one of Wall Street’s most vocal advocates for sustainable investing, said the transition to greener energy isn’t a straight line, and the past quarter’s lagging performance of environmental, social, and governance, or ESG, funds doesn’t change his long-term outlook for this approach.

“In all my letters, I said an energy transition isn’t a straight line. It’s a 30- to 50-year time frame for us to move that forward. It isn’t today. It isn’t tomorrow,” Fink said in the investment management firm’s first-quarter earnings call.

Fink, who heads the world’s largest asset manager, pointed to first-quarter inflows as evidence of continued interest in sustainable investing, often called ESG investing. 

“We had about $19 billion of sustainable flows,” Fink said.” Obviously that is down from prior quarters, but certainly up from two years ago.”

He added that BlackRock is the largest investor for pension funds and retirements, and has “a long-term responsibility in making sure over the long run that our beneficiaries achieve their long-term aspirations and goals and so there is no question this energy transition is real, but it’s going to be not a straight line.”

Fink also said one of the biggest opportunities in alternatives in the years ahead would be the intersection of infrastructure and sustainability. 

“The interconnectivity between sustainable investing in infrastructure is going to be enormous,” he said.

He noted that, in response to the energy crisis caused by the war, many countries are re-evaluating their energy dependencies and looking for new sources of energy. This may mean increasing production of traditional energy sources in the near term, but longer term, there will be a shift toward greener sources of energy, Fink said.”

Mastercard links all employee bonuses with ESG goals 

Continuingand expanding upona trend that has become more prominent in Europe, Canada, and now the United States, Mastercard has now linked all of its employee bonuses to ESG measures. Previously, ESG-tied performance incentives were largely the purview of management teams. Mastercard, however, has taken the idea one step further:

“Payment processor Mastercard Inc (MA.N) will link all employee bonuses to environmental, social and corporate-governance (ESG)initiatives, expanding an earlier program which was limited to its senior executives, Chief Executive Michael Miebach said on Tuesday.

The move will help Mastercard achieve its goals of cutting carbon usage, improving financial inclusion and gender pay parity. Mastercard in November accelerated its net zero timeline by a decade, to 2040 from 2050.

“We’re tying compensation to emissions, financial inclusion and the gender pay gap because we have a substantial impact in these areas and because they closely align with our vision,” Miebach wrote in a note on the company’s website….

Last March, Mastercard said it would link compensations for executive vice presidents and above to ESG initiatives.”

From the ivory tower

Harvard Business Review: “An Inconvenient Truth About ESG Investing”

In late March, the Harvard Business Review published a piece by Sanjai Bhagat, the Provost Professor of Finance at the University of Colorado. Whereas most finance-derived critiques of ESG have focused on the questionable nature of the investment technique’s promise to deliver better-than-market returns, Professor Bhagat focuses instead on its capacity to effect actual environmental or social change. He writes:

“As of December 2021, assets under management at global exchange-traded “sustainable” funds that publicy set environmental, social, and governance (ESG) investment objectives amounted to more than $2.7 trillion; 81% were in European based funds, and 13% in U.S. based funds. In the fourth quarter of 2021 alone, $143 billion in new capital flowed into these ESG funds.

How have investors fared? Not that well, it seems.

To begin with, ESG funds certainly perform poorly in financial terms. In a recent Journal of Finance paper, University of Chicago researchers analyzed the Morningstar sustainability ratings of more than 20,000 mutual funds representing over $8 trillion of investor savings. Although the highest rated funds in terms of sustainability certainly attracted more capital than the lowest rated funds, none of the high sustainability funds outperformed any of the lowest rated funds….

Unfortunately ESG funds don’t seem to deliver better ESG performance either.

Researchers at Columbia University and London School of Economics compared the ESG record of U.S. companies in 147 ESG fund portfolios and that of U.S. companies in 2,428 non-ESG portfolios. They found that the companies in the ESG portfolios had worse compliance record for both labor and environmental rules. They also found that companies added to ESG portfolios did not subsequently improve compliance with labor or environmental regulations.

This is not an isolated finding. A recent European Corporate Governance Institute paper compared the ESG scores of companies invested in by 684 U.S. institutional investors that signed the United Nation’s Principles of Responsible Investment (PRI) and 6,481 institutional investors that did not sign the PRI during 2013–2017. They did not detect any improvement in the ESG scores of companies held by PRI signatory funds subsequent to their signing . Furthermore, the financial returns were lower and the risk higher for the PRI signatories….

The conclusion to be drawn from this evidence seems pretty clear: funds investing in companies that publicly embrace ESG sacrifice financial returns without gaining much, if anything, in terms of actually furthering ESG interests.”

In the spotlight

A proxy preview from a different perspective

For years, at the start of annual shareholder meeting season, As You Sow, an environmental activist group in the capital markets generally in favor of ESG positions and in favor of making changes to boards and management in order to advance sustainability commitments has issued its annual “Proxy Preview.” This massive publication details all of the ESG-related shareholder proposals on the proxy statements of large, publicly traded companies and advises investors on how to vote on them. 

Over the last couple of years, however, a new proxy preview publication has been issued, specifically to counter the influence of As You Sow’s effort and to give investors a choice in their decision-making process. This previewtitled the “Investor Value Voter Guideis in its third annual edition and is published by the Free Enterprise Project, a program of the National Center for Public Policy Research that describes itself as the “only full-time conservative shareholder activist” organization. The guide offers a different perspective from other such publications and promises its readers a much different investment strategy. It begins as follows:

“The time has come for the center and the right to begin to emulate the left – not, certainly, in worldview, but in tactics. As shareholders, we must begin to sue corporate managers when they forsake their fiduciary duties to us, the company’s owners. And in response to the pretenses of stakeholder capitalism, ESG, wokeism and the rest, we must brace ourselves to new duties:

–  as engaged customers, objecting in person and in writing, in the world and on the Internet;

–  as discerning customers, who, if they decide to abandon a particularly noxious company, let that company know clearly and in certain terms what it is that pushed them away;

–  as community activists, organizing and participating in protests of the worst corporate malefactors, directors and self-appointed masters, at corporate headquarters, annual shareholder meetings and other high-profle locations and occasions;

–  as proud employees, resisting (when possible) corporate racism and sexism regardless of the race or sex of the target (all racism is racism; all sexism is sexism – the standards have to be objective, and uniformly applied), including by litigation;

–  as insistent investors, not only with individual corporations, but with investment houses, demanding exchange-traded funds (ETFs) and other investment options that cater to our moral and ethical concerns and interests, as the ESG funds cater to the left; and

–  as motivated constituents, demanding legislation at the state level that would forbid companies from using monopoly power to deny equal service without discrimination to all customers, regardless of their viewpoints or political participation; that would require investment houses to vote proxies according to the wishes of their own investors, not according to their own personal policy preferences; and other enactments that would help to end this monopolist threat to the Republic.”  



Economy and Society: State pension funds draw scrutiny for ESG

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.

Congress, the SEC, and disclosure

The Competitive Enterprise Institute’s Senior Fellow Richard Morrison published a roundup of congressional pushback against the proposed SEC rule mandating public company disclosure of environmental and sustainability data. The recent update is as follows:

“Skeptical members of Congress have begun weighing in on the Securities and Exchange Commission’s (SEC) recent climate disclosure proposal, and their objections are significant. Earlier this week, letters went out from Republicans in the House and Senate urging the SEC to table or withdraw the new rule, which the agency initially released on March 21. The deadline for the public to submit comments on the proposed rule, “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” is May 20, 2022.

The letters from House and Senate members cover similar territory, and include the following objections:

  • The SEC does not have statutory authority to issue this rule.
  • The rule would violate First Amendment protections against compelled speech.
  • Existing SEC regulation and guidance already cover relevant risk disclosures, including climate-related risks.
  • The rule would change the definition of “materiality” for the worse.
  • The proposed rule is a backdoor attempt at substantive climate legislation.
  •  The SEC does not have the technical expertise to evaluate the required submissions.
  • The rule will be extremely costly to firms and shareholders.
  • Small companies, not normally subject to SEC requirements, will be swept up under this rule.
  • This is the worst possible time for such a regulation, given inflation, high energy prices, and concerns about long-term economic growth….

Our nation’s lawmakers have decided that new laws in this area—and new powers for the SEC—are not needed and should not be approved. Members of Congress did not “forget” to authorize this approach; they made an affirmative decision not to do so….

Individual members of Congress are moving even further along with legislation that would stop the SEC from promulgating this proposal. As I wrote about earlier this week, Rep. Beth Van Duyne (R-TX) and a dozen co-sponsors recently introduced the Stopping Excessive Climate Reporting Act (H.R.7355), which would stop the SEC from requiring climate change and greenhouse gas disclosures, but leave companies free to share whatever such information they believed was material to shareholders and potential investors.

This increasing skepticism in Congress of environment, social, and governance (ESG) investing dovetails perfectly with policies that governors and legislators are advancing at the state level.”

SEC flexes its enforcement muscle

While most of the recent attention on the SEC involves its plans to mandate new disclosures, the rest of the Commission continues its day-to-work, including its enforcement division, which recently laid out its priorities for the rest of the year. Those priorities include stepped-up policing of ESG:

“On 30 March 2022, the Division of Examinations (the Division) of the U.S. Securities and Exchange Commission (SEC) released its examination priorities for the 2022 fiscal year. The Division highlighted five “significant focus areas”: (1) private funds, (2) environmental, social, and governance (ESG) investing, (3) standards of conduct (including satisfaction of fiduciary duty), (4) information security and operational resiliency, and (5) financial technology and crypto-assets. In addition, the Division identified core programmatic areas for registered investment advisers (RIAs) and broker-dealers as cornerstones of its examination program.

Collectively, the priorities reflect the overarching goal of the Division—and the SEC as a whole—to continue to incentivize managers to provide accurate and complete disclosure to investors, and to maintain fulsome and tested compliance programs, particularly with respect to newly emerging approaches to investment management and the risks they may pose….

Consistent with prior pronouncements, task force initiatives, and other recent regulatory actions by the SEC and its staff, the Division will focus on ESG-related advisory services and investment products, highlighting in the priorities the lack of standardization in ESG investing terminology, variability among the approaches to ESG investing, and the extent to which RIAs and funds seek to effectively address legal and compliance issues with new lines of business and products (which RIA and fund efforts, in the Division’s view, may not be sufficient). By reviewing RIAs’ portfolio management processes and practices, the Division will focus on whether RIAs and registered funds are accurately disclosing ESG investing approaches and ensuring continued accuracy of such disclosures. This is again consistent with the SEC’s demonstrated interest in ESG disclosures, including from an enforcement perspective, as indicated by recently reported investigations by the SEC’s Division of Enforcement regarding this issue.

In addition, the Division will examine whether client securities are voted in accordance with proxy voting policies and procedures and with client ESG-related mandates conditioning investments in a company on the strength of its ESG program. Finally, demonstrating the Commission’s concerns over “greenwashing” (i.e., exaggerating the extent to which an investment program marketed as ESG-focused actually invests in assets that achieve ESG goals), the Division will consider whether RIAs have overstated or misrepresented in their marketing materials the extent to which ESG factors are considered in portfolio selection.”

In the States

State pension funds draw scrutiny for ESG

On April 15, The American Conservative published a long piece by Kevin Stocklin, a writer and film director, on the issues of ESG and what analyst Stephen Soukup has described as woke capital in pension funds, specifically state pension funds. Stocklin and the experts he cited make a case against the practice of ESG in pension funds:

“State pension fund managers who have declared that they will include environmental and social justice goals in their investment decisions collectively control more than $3 trillion in retirement assets and include the five largest public pension plans in the U.S. Among them are The California Public Employees Retirement System (CalPERS), California State Teachers Retirement System (CalSTRS), the Teachers Retirement System of Texas, New York City pension funds, New York State Common Retirement Fund, Maryland State Retirement and Pension System, and the New York State Teachers Retirement System.

Perhaps their most high-profile success came in June 2021, when CalSTRS, CalPERS, and NY State Common Retirement Fund joined three of the world’s largest asset managers, BlackRock, Vanguard, and State Street, in voting to elect clean-energy advocates to the board of Exxon and divert its investments away from oil and gas and toward alternative fuels. All of these pension fund and money managers except Vanguard are members of Climate Action 100+, an initiative dedicated to making fossil fuel companies “take necessary action on climate change.”

But state officials are starting to question what they see as a misappropriation of public money, and whether climate and social investing is actually delivering any benefit in return….

“States are recognizing that the financial system is being weaponized against industries that are the life blood of a lot of heartland states,” said Jonathan Berry, former regulatory head at the Department of Labor and a partner at Boyden Gray. “Pension plan proxy votes are often being used against both the economic and political interests of a lot of government workers.”

Derek Kreifels, CEO of the State Financial Officers Foundation, said corporate executives often confide to him that “they hear from folks on the left on a daily basis. Up until the fall of last year, they rarely heard from those of us who were right of center.”

Kreifels said it takes time to explain to people how their retirement money is being used to promote a progressive agenda. “But once you do, frankly people are pretty outraged by it.”

In an attempt to de-politicize their pensions, state officials are working to hold fund managers personally liable if they misuse retirees’ money. Last week, a conference of state officials, working through the American Legislative Exchange Council (ALEC), crafted model legislation that compels state pension fund managers to invest solely according to financial considerations. It also prohibits fund managers from voting the shares owned by the pension fund “to further non-pecuniary or non-financial social, political, ideological or other goals.”

If pension fund managers “use politically based investing that costs pensioners their return on investments,” said ALEC Chief Economist Jonathan Williams, “people need to be held accountable.” Maximizing returns becomes more critical in light of what ALEC reports is a $5.8 trillion shortfall in states’ ability to pay their pension obligations.

A study by the Boston College Center for Retirement Research in October 2020 found that for state pensions, ESG investing reduced pensioners’ returns by 0.70 to 0.90 percent per year. It attributed much of this underperformance to ESG fund fees, which were on average 0.80 percent higher than non-managed funds for the same asset type.

“Before this explosion of ESG investing,” said Jean-Pierre Aubry, co-author of the study, “most asset management firms were being squeezed in terms of fees” because investors were opting for low-fee “passive” index funds rather than pay asset managers to try to actively to pick winners and losers. ESG, he said, “just seems like a repackaging of active management.”

In addition, an April 2021 report by researchers at Columbia University and London School of Economics found that companies in ESG funds have “worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds managed by the same financial institutions,” and that ESG ratings are driven more by companies’ public statements than by what they actually do….

Regarding “stakeholder capitalism,” an August 2021 study at the University of South Carolina and the University of Northern Iowa found that “the push for stakeholder-focused objectives provides managers with a convenient excuse that reduces accountability for poor firm performance.” Specifically, the report found a correlation between CEO’s underperformance and how vocal they were in supporting more nebulous, less quantifiable ESG goals.

“The original promise of ESG is that you could do well by doing good; it turns out you do less well, and you’re not doing any good either,” said financial analyst and author Stephen Soukup. “So the basic promise of ESG is a fraud on both ends.””

In the spotlight

Study: Investors know little about ESG, including potential downsides

According to a Barron’s story published on April 12, a recent study shows that despite the attention it has received over the last several years, retail investors still know little about ESG investing:

“Environmental, social, and governance, or ESG, investing is a hot trend, but retail investors are unfamiliar with the approach and have a hard time explaining what it means. About one in four people believes the acronym stands for “earnings, stock, growth,” according to a new study.

“Retail investors don’t understand ESG investing—only 9% say that they have ESG-related investments, and the familiarity with the concept is not as high or as broad as some of the coverage on the topic of ESG investing might suggest,” says Gerri Walsh, president of the FINRA Investor Education Foundation, which conducted the retail investor survey with NORC of the University of Chicago.

Only 24% of the 1,228 investors surveyed could correctly define ESG investing, and just 21% knew what the letters in ESG stood for. 

Walsh says the finding is “both surprising and concerning.”…

Survey respondents indicated that financial factors are the most important consideration when making investment decisions, including whether an investment has the potential to earn high returns, the amount of risk it entails, and the associated fees. Environmental factors were the least important. ESG investors, however, are highly motivated by ESG factors, especially the environment, according to the survey.

Most non-ESG investors don’t hold ESG-specific investments because they are unfamiliar with the concept. “It just doesn’t occur to them,” Walsh says. “There’s an education gap and a knowledge gap about what ESG investing is.”…

When it comes to ESG funds’ performance, a plurality (41%) of investors believe that returns for companies that prioritize their impact on the environment and society will be the same as the broader market while 14% expect ESG investments to outperform the market.”



Economy and Society: SEC disclosure rule continues to attract attention

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.

Panel highlights potential concerns with SEC disclosure rule

Last week, the Bipartisan Policy Center hosted an event discussing the proposed SEC sustainability disclosure rule for public companies and its likely implications. Some observersin this case, the Competitive Enterprise Institute’s Senior Fellow Richard Morrisonwere surprised at how earnestly the matter was discussed, and how honestly the panelists discussed potential problems with the rule:

“The BPC’s Tim Doyle and former SEC Commissioner Troy Paredes discussed the substance of the rule and the concerns many agency observers have already begun to voice about it.

While I was expecting a very middle-of-the-road tone to BPC’s event that basically assumed the legitimacy of the rule, I was pleasantly surprised to hear both Doyle and Paredes highlight some significant concerns with it. The participants didn’t necessarily agree with all of these potential objections, but the fact they flagged them as reasonable concerns was reassuring….[H]ere are a few potential red flags that caught my attention:

  • The SEC may not have the statutory authority to enact this rule in the first place.
  • Enacting affirmative climate policy and expanding corporate disclosure to benefit investors are two different things; the SEC may inappropriately be trying to do both.
  • The agency’s itself admits that it has been “unable to reliably quantify” the cost-benefit impact of the rule.
  • The proposal suggests that basing new regulations on existing voluntary frameworks will reduce burdens, but they underestimate the costs and risks of moving from partial voluntary compliance to legally mandated disclosure.
  • The comment period (60 days) may be too short to properly evaluate a rule with such sweeping implications.
  • The rule moves from a “principles-based” approach to disclosure to a more prescriptive approach that is out of step with the SEC’s usual procedures.
  • Disclosing “scope 3” greenhouse gas emissions is vague and problematic; the promised “safe harbor” from fraud liability may be much less valuable that advertised.

These concerns are similar to the major issues that SEC Commissioner Hester Peirce flagged when she delivered her sternly worded dissent from the Commission’s majority vote to move forward with the proposal….

[F]ormer Commissioner Paredes reassured cynical listeners that the SEC does, in fact, take regulatory comment letters seriously and encouraged the audience to participate in the proceeding. You have until May 20 to do so.”

Senator Joe Manchin (D) argues rule will harm energy industry

Meanwhile, West Virginia Senator Joe Manchin (D) wrote a letter to the SEC Chairman Gary Gensler expressing his unease with the proposed rule, which he argues will harm the energy industry. Politico reported:

“In a letter Monday to SEC Chair Gary Gensler, Manchin questioned the need for the measures released for public comment last month. The West Virginia Democrat suggested that making firms measure and track greenhouse gas emissions could chill investment in fossil fuel businesses while imposing costs on all affected companies.

“[T]he proposed rule has the potential to run counter to the SEC’s long-standing commitment to its mission by adding undue burdens on companies, while simultaneously sending a signal of opposition to the all-of-the-above energy policy that is critical to our country right now,” wrote Manchin, who leads the Senate’s Energy and Natural Resources Committee….

Manchin’s criticism comes on the heels of his opposition to Sarah Bloom Raskin, President Joe Biden’s one-time pick to lead the Federal Reserve’s Wall Street oversight. Manchin effectively killed Raskin’s nomination over concerns about her calls for the financial system to insulate itself against climate change-driven shocks. He raised similar concerns in his critique of the SEC’s proposal.

“The most concerning piece of the proposed rule is what appears to be the targeting of our nation’s fossil fuel companies,” Manchin wrote. “Not only will these companies face heightened reporting requirements on account of their operations, but they will also be subjected to additional scrutiny for the Scope 3 emission disclosures of other companies that utilize their services and products.”…

Manchin claimed the rule would “seemingly politicize a process aimed at assessing the financial health and compliance of a public company.””

The SEC is not, however, a one-hit ESG wonder

In a piece published last Thursday, April 7, The National Law Review suggested that those who expect the SEC’s ESG efforts this year to be limited to its new disclosure rule haven’t, in their view, been paying attention. The SEC has additional plans as well:

“As part of the focus on ESG investment issues, the SEC made clear that it will scrutinize disclosures by registered investment advisors (“RIA”) that advertise ESG strategies or that allege that they take into consideration ESG criteria. The goal of the SEC’s efforts is to ensure that false, inaccurate or misleading statements are not made to the public about investment options. The SEC recognized that due to the current lack of uniformity in ESG investment metrics or factors, there is risk to investors due to firms using a wide array of ESG measuring techniques….

The SEC indicated that its focus in 2022 will be to ensure that RIAs are “(1) accurately disclosing their ESG investing approaches and have adopted and implemented policies, procedures, and practices designed to prevent violations of the federal securities laws in connection with their ESG-related disclosures, including review of their portfolio management processes and practices; (2) voting client securities in accordance with proxy voting policies and procedures and whether the votes align with their ESG-related disclosures and mandates; or (3) overstating or misrepresenting the ESG factors considered or incorporated into portfolio selection (e.g., greenwashing), such as in their performance advertising and marketing.”

The SEC’s examination priorities will place a heightened level of scrutiny on RIAs, many of which already use ESG statements in their marketing of investments.”

On Wall Street and in the private sector

Financial Times: “Punishing start to the year for ESG investment”

On April 8, The Financial Times carried a long piece noting the poor performance of ESG investments this calendar year, and also that many investors are not interested in what they see as a tired and poorly supported investment play:

“Reports are starting to show it was a punishing start to the year for the environmental, social and governance (ESG) investment sector. Cash into ESG funds fell to $75bn, the lowest level since the third quarter of 2020, according to a report published by the Institute of International Finance on Thursday. The inflows in March, $15bn, were at their weakest since March 2020. The paltry sum stemmed from concern about technology stocks, which were heavily favoured by ESG funds, the IIF said. And higher oil prices tempted investors to shelve their eco-enthusiasm for energy stocks.

The figures again raise the question: Did ESG peak in the first quarter of 2021?…

As questions around energy security take the main stage, there are whispers over whether ESG will be “cancelled”. And they’re coming from former ESG advocates themselves.

After 11 years in the world of pension funds, Anne Simpson entered the private capital world in January as Franklin Templeton’s global head of sustainability. Since then, she’s been beating a new drum: RIP to ESG.

“This marks the end of looking at financial markets through ESG,” Simpson said on Tuesday at a private capital conference in New York. “We cannot capture the true risks of what’s going on simply by this cute little acronym that has gotten popular.”

Privately, other ESG proponents have also begun to groan that the language of the financial movement has become mere fluff — and that Simpson is just taking on the mantle as spokesperson. They say it’s time to get serious, forget the acronyms, the myriad task forces and the soggy alphabet soup that the ESG world has become stuck in over the past years….

A realistic, just transition is going to require some trade-offs — a point that many are keen to dismiss, Simpson said. But, short-term trade-offs are needed to uphold investors’ long-term duty to stakeholders….

As even ESG’s backers start to turn on their own industry, many are wondering what the future of corporate sustainability will look like — especially in the face of a global crisis. Industry veterans have started to shout the answer: drop the aesthetics of ESG and start answering the hard questions.”

In the spotlight

CEOs, incentives, and ESG metrics

As has been noted occasionally in this section of this newsletter, one of the most significant management trends of the past several years is the move to ESG-based payment incentives. In Canada, the United States, and various spots in Europe, more and more companies are rewarding CEOs not for profits or stock performance but for meeting various ESG criteria in their management of the business. On April 11, The Irish Times reported that the trend has taken hold in Ireland as well:

“Three-quarters of top 20 companies on the Irish stock market are now linking executive bonuses in some way to environment, social and governance (ESG) targets, as international investors increasingly demand that publicly-quoted groups adopt these non-financial goals as part of remuneration packages.

The move, from an almost standstill position two years ago, has been accelerated in the latest slew of annual reports in recent months, as companies prepare to hold in-person annual general meetings (agms) for the first time since the onset of the Covid-19 pandemic….

Building materials giant CRH, whose chief executive Albert Manifold received an Iseq-record remuneration of €13.9 million last year, said in its annual report that it is proposing that 15 per cent of awards under its executive performance share programme for 2022 be tied to ESG targets. These include measures on driving the company towards carbon neutrality, inclusion and diversity and revenue from products “with enhanced sustainable attributes”.

Paddy Power owner Flutter said it included “extremely challenging” safer gambling targets for two of its four divisions in its management bonus plans last year and will widen these out to all divisions in 2022. The company is also “actively considering” using remuneration to “support and incentivise our wider ESG agenda”.

A fifth of Kerry Group’s executive long-term incentive plan since last year was tied to the company achieving milestones against its targets of reducing carbon emissions by 55 per cent and food waste by 50 per cent by the end of the decade….

European companies are ahead of US peers in terms of climate-related financial disclosures.

A quarter of US companies included some form of ESG metric as part of their executive incentives last year, according to Glass Lewis, a proxy advisory company that makes recommendations to institutional investors on corporate governance matters and agm votes.”