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Economy and Society: Opposition to Federal Reserve nominee continues

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

ESG Developments This Week

In Washington, D.C.

ESG-related opposition to Federal Reserve nominee continues

Responses to President Biden’s nomination of Sarah Bloom Raskin to serve as the Federal Reserve’s vice chairman for supervision continued last week. On February 1, the Competitive Enterprise Institute joined the American Energy Association to write a letter to Chairman Sherrod Brown (D, OH) and Ranking Member Pat Toomey (R, PA) of the Senate Banking Committee opposing Raskin’s confirmation. The letter–signed by Thomas J. Pyle of the AEA and Myron Ebel and John Berlau of CEI–noted the following:

“Ms. Raskin endorses using the powers of the Federal Reserve outside of its statutorily-defined role. Anyone confirmed by the Senate should be committed to executing the law, rather than to pursuing a personal vendetta against certain types of energy.

“As noted above, nearly 80 percent of America’s energy currently comes from natural gas, oil, and coal. Precipitous action to end financing for these industries would have dire economic consequences such as we are currently seeing in Europe.

“We urge President Biden to withdraw the nomination of Ms. Raskin, and if he does not do so, we urge the committee to vote against her confirmation. Congress has charged the Federal Reserve with maintaining a stable environment for the effective operation of the financial system, but this is very different from actually directing the flow of capital as Ms. Raskin would like to do. Ms. Raskin’s confirmation would be a recipe for financial instability.”

CEI also issued a news release offering further comment from its policy analysts:

Director of CEI’s Center for Energy and Environment Myron Ebell said:

“The Senate should not confirm Ms. Raskin to the Federal Reserve, where she appears eager to misuse the Fed’s considerable authority to try to destroy the coal, oil, and gas industries.”

CEI Director of Financial Policy John Berlau said:

“As late as 2020, Sarah Bloom Raskin called for the Fed to actively discriminate against oil, gas, and coal firms in its lending programs. If confirmed as Vice Chair for Supervision, she could force banks to deprive these sectors of financial services to the detriment of the economy as a whole. The Senate must reject her nomination and stand up for ordinary American consumers, investors, and entrepreneurs still reeling from the pandemic and the onslaught of inflation.”

On Thursday, The Wall Street Journal’s editorial board weighed in, joining those opposing Raskin’s nomination with an editorial suggesting that, in its views, the nominee is a risk to the economy:

“Markets and businesses have many risks to consider, but President Biden is giving them another: Sarah Bloom Raskin. His nominee for the Federal Reserve’s bank supervision job wants to use regulation to politically allocate credit in a way that would create political and systemic financial risks.

At her Senate confirmation hearing on Thursday, Ms. Raskin tried to walk back her public statements supporting climate financial regulation. “It is inappropriate for the Fed to make credit decisions and allocations based on choosing winners and losers,” she told the Banking Committee. Her denial isn’t credible given her long-time views….

Her statements underline her distorted view of the Fed’s mandate, which is to maintain stable prices and aim for full employment. She thinks it should include the political allocation of credit steered by regulatory policy and even emergency financial tools….

Ms. Raskin justifies punishing fossil fuels by saying she’s trying to reduce systemic financial risk. But the regulation she’s urging could be a leading cause of such risk. It would force banks to write down and liquidate fossil-fuel assets. It would starve companies of capital, which would increase the risk that they and their creditors fail. And it would push banks to make riskier green-energy investments so they could hold less capital and pay out higher dividends….

The Senate should send Mr. Biden a message that it doesn’t want a Fed that punishes industries employing millions of Americans because they’re unpopular on the left. Ms. Raskin is a danger to the economy and the Fed itself.”

ESG-related criticism of BlackRock’s Larry Fink 

On February 7, three weeks after BlackRock chief Larry Fink released his annual letter to CEOs, The Wall Street Journal published an op-ed by Vivek Ramaswamy, the author of Woke, Inc., in which he criticized Fink for, in his view, substituting his political purpose for those that should be the purposes of publicly traded corporations.

“Mr. Fink claims he wants CEOs to stay true to the purposes of the companies they run, while also demanding that they advance the corporate purposes that BlackRock favors. He can’t have it both ways….

Mr. Fink argues that he doesn’t foist BlackRock’s own values onto anyone, but simply encourages portfolio companies to adapt to the way the world is already heading: “Every company and every industry will be transformed by the transition to a net zero world. The question is, will you lead, or will you be led. . . . Will you go the way of the dodo, or will you be a phoenix?”

Yet Mr. Fink’s argument is circular. BlackRock is now the world’s largest asset manager, with $10 trillion under management. President Biden’s climate policies are heavily influenced by recent BlackRock alumni. Brian Deese, the firm’s former global head of sustainable investing, is now the director of the National Economic Council. Michael Pyle, BlackRock’s former global chief investment strategist, is Vice President Kamala Harris’s chief economic adviser. Wally Adeyemo, Mr. Fink’s former chief of staff, is deputy Treasury secretary. Mr. Fink’s claim that he is merely responding to the “transition to a net zero world” obscures his own firm’s role in catalyzing that transition….

If stakeholder capitalism is capitalism, as Mr. Fink says, then the public deserves to know why he’s so adamant on drawing the distinction. He should be honest about whether he wants BlackRock’s portfolio companies to pursue their own corporate purposes or the purposes that BlackRock favors.”

On February 4, RealClear Politics published a piece co-authored by Andy Puzder–the former CEO of CKE Restaurants, chairman of the board of 2ndVote Advisers, and a visiting fellow at the Heritage Foundation–and Stephen Soukup–the author of The Dictatorship of Woke Capital, a book critical of ESG. In the op-ed, the two argue that Fink’s perspective concerning stakeholders betrays an intention to, in their view, politicize capital markets and note that the BlackRock CEO has stirred anti-ESG sentiment among some state-government officials:

“The tone of [Fink’s] 2022 letter to CEOs is very different from his previous two, both of which pushed Environmental, Social and Governance (ESG) investment criteria and “stakeholder capitalism” relentlessly. As far as Fink was concerned, ESG, “sustainability,” and the agenda for what we have termed “woke capital” would dominate the markets for years, while he and his $10 trillion asset management behemoth would, in turn, dominate them. Fink was to be king of the stakeholder world.

But then something fascinating happened.

Shortly after Fink’s triumphant 2021 letter, Encounter Books published “The Dictatorship of Woke Capital.” The book turned out to be the tip of the proverbial iceberg, heralding a massive backlash that was already building against ESG, woke capital, and the hubris that animates top-down, anti-democratic efforts to undermine free-market capitalism for partisan ideological ends.

By year’s end, the resistance to ESG and woke capital had increased in size and variety. Everyone from shareholder activists to U.S. senators, state treasurers, legislators, and governors, as well as the former director of “sustainable investing” for BlackRock itself – were charting various forms of pushback against the newly woke masters of the financial universe….

Texas has enacted legislation banning companies that engage in political vendettas against oil and gas or gun companies from doing business with the state. Lt. Gov. Dan Patrick has asked the state’s comptroller to place BlackRock on this list of banned companies. West Virginia Treasurer Riley Moore announced that the Board of Treasury Investments, which manages the state’s roughly $8 billion operating funds, will cease doing business with BlackRock because it embraces “‘net zero’ investment strategies” that harm the energy sector, “while increasing investments in Chinese companies.”

“[T]o combat woke corporate ideology,” Florida Gov. Ron DeSantis and the trustees for the State Board of Administration voted to “clarify the state’s expectation that all fund managers should act solely in the financial interest of the state’s funds” and revoked “all proxy voting authority of outside fund managers,” including BlackRock. The board also voted to conduct a survey “to determine how many assets the state has in Chinese companies.”…

It’s certainly a positive development that some states are reacting to this attack on free market capitalism. But while necessary, none of these state actions is ideal. The better idea would be to get politics out of business, not to turn capital markets into a partisan or ideological battleground. Nevertheless, only by imposing real financial costs on Fink and his ilk is it possible to force the changes needed.”

On Wall Street and in the private sector

Will ESG suffer as markets grow volatile?

On February 3, Bloomberg reported that ESG funds have taken a hit from this year’s market volatility and might be in for even greater turmoil if the markets continue to be unsettled:

“Investors’ desires to do good are melting away in the market downturn. 

Inflows into U.S. exchange-traded funds with higher environmental, social and governance standards have dropped sharply in the past two months. ESG equity ETFs added about $1.2 billion in December and January combined, compared with roughly $10.8 billion in the same period one year earlier — an 89% drop-off.

Volatility has whipsawed markets as investors reprice stocks in the face of inflation risks and Federal Reserve hawkishness. The benchmark S&P 500 Index had its worst month in January since the beginning of the pandemic and the technology-heavy Nasdaq 100 has tumbled 11% from its November peak.

In such periods of turmoil, ESG investing can end up taking “a back seat,” said Victoria Greene, chief investment officer at G Squared Private Wealth. 

“It’s all well and good to be an ESG investor until you start losing money,” Greene said. “Your first priority is protecting your portfolio, then your second priority is your investment strategy, including ESG.”

Overall interest in ESG topics tend to taper off when markets face steep declines, as investors turn their attention to performance. Alongside each recent drop for the S&P 500, media mentions of ESG have tumbled….

Ultimately, consistent outperformance from ESG funds will be needed to sustain inflows, said Athanasios Psarofagis, ETF analyst for Bloomberg Intelligence. Just 29% of ESG ETFs beat the performance of the S&P 500 in 2021, compared with 57% in 2020, according to data compiled by BI. 

If the ESG sector “doesn’t as least keep pace with the market, investors might get fed up with it,” he said.”

Tighter monetary policy may well exacerbate ESG’s current woes, although Bloomberg tries to conclude on a more positive note:

“[I]n the long term, it’s right to be optimistic about the transition to clean energy because 80% of governments have made decarbonization commitments, up from less than 10% five years ago, said Marina Severinovsky, head of sustainability at Schroders North America. More companies are announcing voluntary net-zero pledges, regulatory pressures are increasing and consumer awareness is rising.

“This suggests a dominant investment theme for the coming decades, with capital moving at an unprecedented scale to fund innovations and renewable technologies,” she said.”



Economy and Society: ESG-related opposition to Federal Reserve nominee

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

ESG Developments This Week

In Washington, D.C.

ESG-related opposition to Federal Reserve nominee 

On January 14, President Biden nominated Sarah Bloom Raskin to be the Federal Reserve’s vice chairman for supervision and, thus, the Fed’s chief regulator. Several business-affiliated groups have responded in opposition to the nomination over their perception of her views about climate change and the need to use the Fed to promote energy transition.

Among the first groups to take a public stance in opposition to Raskin was the U.S. Chamber of Commerce, which published the letter it sent to the Members of the Senate Committee on Banking, Housing, and Urban Affairs:

“The Chamber urges the Committee to raise several important issues with Sarah Bloom Raskin when considering her nomination to serve as Vice Chair for Supervision of the Board of Governors of the Federal Reserve System. This position enforces and helps develop the regulations that are the bedrock of competitive financial markets. Some of Ms. Raskin’s past actions and statements have raised concerns among the U.S. business community and merit the Committee’s scrutiny….

Ms. Raskin has been critical of the Federal Reserve for allowing oil and gas companies to access the emergency 13(3) facilities during the COVID-19 pandemic. She has also advocated for federal regulators to transition financing away from the fossil fuel industry in her writings and public comments.

·       Is it the role of the Federal Reserve to direct capital away from certain industries that are politically disfavored or direct capital towards industries that are politically favored?

·       Please explain her statements proposing to deny oil and gas companies access to the Federal Reserve’s 13(3) emergency lending facilities, including those explicitly authorized by Congress via the CARES Act?…

The Federal Reserve is designed to adhere to its statutory mandate and remain independent from political influence. Governors have a long history of collegiality and professionalism in how they interact with each other and of deferring to the Chair on setting the agenda for the Board. After the recent push by Board members at the Federal Deposit Insurance Corporation (FDIC) to usurp the Chair’s authority, we have serious concerns about similar politicization at the Federal Reserve. We encourage you to secure a commitment from Ms. Raskin to maintain the political independence of the Board and stay committed to its statutory mission.”

The day after the Chamber published its letter, the Western Energy Alliance also wrote the Senate Banking Committee opposing Raskin’s nomination:

“We are 41 trade associations representing millions of workers all across the country. We provide 70% of the nation’s energy that supports life-sustaining functions such as keeping Americans warm in the winter, getting them to work and school to better their lives, powering ICUs and enabling medical devices, and delivering food to the dinner table. Oil and natural gas provide the feedstock for thousands of products used every day, from anything with a computer chip to the COVID vaccines that have saved millions of lives across the globe. American oil and natural gas is developed under strict environmental controls with industry-driven technologies that make it the most sustainably produced in the world. Natural gas electricity generation is the number one reason our country has reduced more greenhouse gas emissions than any other over more than a decade. The world would truly be less healthy, safe, and environmentally protected without the energy we provide.

We strongly oppose President Biden’s nomination of Sarah Bloom Raskin as Vice Chairwoman for Supervision at the Federal Reserve, the government’s most influential overseer of the American banking system. She is a strong advocate for debanking the very industry that powers America. Her multiple public statements indicate an agenda at odds with the President’s goal of providing Americans with reliable, affordable energy….

Ms. Bloom Raskin’s favored policies would wreak havoc with the economy, as financial systems would be reoriented around subjective, political factors rather than firm principles of maximizing returns and capitalizing productive human endeavors that create value in the marketplace. A free market is the correct arbiter of value to real people, not activism. The fact that oil and natural gas are used in just about every facet of modern life speaks to their intrinsic value, and hence, their investment worthiness. Further, activists pressure investors and banks to make financial decisions that reflect a political agenda which they have been unable to achieve through the normal democratic process. Activists have been able to convince neither the American people nor the majority of their representatives in Congress to stop using oil and natural gas in the absence of a viable, reliable alternative, as it would mean fundamentally altering Americans’ healthy, safe, and prosperous lifestyles. As they are unable to convince Congress to pass laws that prevent Americans from using or producing oil and natural gas, activists such as Ms. Bloom Raskin are simply inappropriate for the Federal Reserve.”

As of January 31, twenty-four state financial officers released their own letter, addressed to the White House, expressing their concerns about Raskin and her environmental beliefs:

“A coalition of Republican state financial officers is pushing back against Sarah Bloom Raskin, President Biden’s nominee to become the Federal Reserve’s top Wall Street regulator, over concerns that her economic views on issues like climate change and the private banking sector are “radical.”

In a Monday letter addressed to the White House, 24 state treasurers, auditors and financial officers urged Biden to withdraw his nomination of Raskin as the Fed’s vice chair of supervision, warning that her past statements indicate she is “willing to place the growth and stability of the U.S. economy at risk to achieve her preferred social outcomes.”

A major point of contention for the state financial officers is Raskin’s stance on climate change and her view that it poses a systemic risk to the U.S. financial system. Raskin has previously argued that all financial institutions should re-evaluate their relationships with energy companies and has advocated for a push toward sustainable investments that do not depend on carbon and fossil fuels. If banks and other financial institutions do not take these steps to distance themselves from fossil-fuel companies, Raskin has said the Fed should penalize them….

Signatories included the financial officers from Nebraska, Arkansas, Missouri, Utah, Louisiana, Arizona, Florida, Georgia, Idaho, Indiana, Kentucky, Mississippi, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, West Virginia and Wyoming.”

Raskin is scheduled to testify before the Senate Banking Committee on February 2.

On Wall Street and in the private sector

ESG pioneer worries about a potential ESG bubble

Jerome Dodson, founder of Parnassus Investments, one of the world’s first ESG-only investment firms, is worried that the strategy he helped create has, in his view, turned into a bubble and laments that it appears to serve as a marketing tactic:

“Few people have benefited more from the boom in ESG investing than Jerome Dodson.

Almost four decades ago, Dodson founded Parnassus Investments — a little known firm outside of ESG circles — and watched it grow into the world’s largest money manager dedicated to environmental, social and governance factors. The 78-year-old retired in October after he and his family sold their stakes in the business.

Dodson lauds how ESG has over the years helped push corporations and investors alike to act on issues such as worker rights and environmental protections. But as more money piles into the strategy, many companies and investors are exaggerating their efforts and impacts, Dodson said.

The ESG bubble is “a little disconcerting,” Dodson said in an interview. “It’s good that more people are talking about ESG. But if you look at how some money managers determine if a company is socially responsible, it’s not very rigorous and they’re not really strict in their criteria. We have a lot of money coming in and they use ESG as a marketing tactic.”…

To counteract overstated claims, Dodson said investors need to be more rigorous in their analysis of companies by pressing them for specifics on the actions they’re taking on ESG issues, and disregard answers that are too general. Investors themselves should specify what standards they are using in their strategies, while regulators should require fund managers to provide more details about their ESG tactics, he said.

A deluge of money has flowed into ESG in the past several years, making it one of the hottest areas of investing. The enormous growth has prompted other current and former sustainability executives and academics to criticize ESG for having limited impact in tackling systemic environmental and societal issues.”

In education

Financial Times: “Business schools find sustainability is hard to teach” 

Over the last several years, media outlets have covered the increased demand for ESG education at business schools throughout the United States and Europe. Two weeks ago, one of those media outlets, The Financial Times, ran a piece describing some of the difficulties associated with educating about ESG:

“In recent years, there has been a surge in attention in business schools about environmental, social and governance (ESG) issues. This has reflected shifting attitudes among students, faculty and employers who have moved beyond a traditional focus on maximising financial returns for shareholders towards benefiting a wider range of stakeholders.

GIBS, for example, is one of more than 800 schools to sign up to the Principles for Responsible Management Education (PRME). This initiative, supported by the UN, aims to promote the teaching of sustainability in business and management schools so that graduates have the skills to balance economic growth with wider objectives such as the Sustainable Development Goals (SDGs) and climate change.

But despite the increased attention, academic leaders face tough challenges including how to define and prioritise the disparate skills and values associated with ESG; how to integrate them into teaching, research and operations; and the extent to which a failure to do so will undermine the future of business education….

Robert Strand, executive director of the Center for Responsible Business at Berkeley’s Haas business school, has observed growing calls by employers for skills such as analysis of ESG factors.  

The problem, he adds, is that the “faculty at most American business schools . . . need to catch up.”…

Yet there is disagreement and confusion about what constitutes responsible business education. “The words ESG mean different things to different groups. We have to understand how to measure it and hold people accountable,” argues Professor Glenn Hubbard, former dean of Columbia Business School….

Even for those who are more favourable to the new focus on responsibility, there remains strong disagreement about how it is taught and what knowledge will be displaced — if only so that students can successfully find jobs in a world that, in places, remains ambivalent to ESG. Business schools have become a microcosm of the broader debate within companies about how to define ESG and how far it simply represents superficial “greenwashing”.”

In the spotlight

Wall Street Journal three-part series on potential ESG downsides

Between January 24 and 26, the Wall Street Journal’s Streetwise column, written by financial journalist James Mackintosh, ran a three-part series on ESG and what are deemed to be the potential downsides associated with it. Mackintosh says the series will continue in various columns over the next few weeks and months.

In the first column, titled “Why the Sustainable Investment Craze Is Flawed,” Mackintosh noted the following:

“The financial industry has spotted an opportunity to make money by helping people feel good about themselves. Despite claims to the contrary, these investments don’t do much to make the world a better place.

ESG funds, as they are known, promise to invest in companies with better environmental, social and governance attributes, to save the planet, improve worker conditions or, in the case of the U.S. Vegan Climate ETF, prevent animals from being eaten. 

Money has poured into ESG funds as noisy lobby groups push pension funds, university endowments and some central banks to shift their investments. The United Nations-supported Principles for Responsible Investment says signatories have $121 trillion of assets under management; even assuming lots of double-counting, that is most of the world’s managed money.

Over the next few weeks, Streetwise will explore the explosion of ESG investing and why I think it is mostly—but not completely—a waste of time. I will also offer up some solutions and discuss how to use your money to make a difference, while understanding the inevitable trade-offs.”

In the second column–“ESG Investing Can Do Good or Do Well, but Don’t Expect Both”–Mackintosh wrote:

“The biggest and boldest claim of ESG investors is that investing based on environmental, social and governance conditions will not just improve our world, but make you more money. I have problems with both parts of the claim. The burgeoning market for green bonds shows the difficulties clearly, and stocks with a sustainability label aren’t so different….

The claim that investors will make more money investing in green bonds is patently absurd. Green bonds typically have a slightly lower yield than a standard bond from the same issuer. This locks in guaranteed underperformance for taking identical risks that the government or company will fail to pay the bonds back.

Worse, the rapidly expanding sales of sovereign green bonds of developed countries are doing nothing for the environment, and most corporate green bonds achieve nothing either.”

And in his third column–“Sustainable Investing Bubbles Can Change the World—and Sink Your Portfolio”–Mackintosh argued the following:

“If you want a company to do more of what it does, one way to accelerate its expansion is to buy its stock; get all your friends to buy its stock; persuade fund managers, Reddit readers and pension funds to buy its stock; and watch the price soar. Eventually the board will take advantage of the bubble you create to raise what is for the company very cheap money and invest it in the business. Job done.

Something like this happened to clean-energy companies, with a mini-bubble in their stocks that ended in early 2021. Unfortunately, there was a downside: While many of them raised cash to spend on clean-energy projects, investors who stuck with the strategy have watched the stocks plunge 45% from their peak.

A huge trend in global investing is environmental, social and governance investing, a topic that I’m taking a critical look at in a series of columns. One major aim of ESG investing is to starve dirty companies of capital and redirect the money to clean ones. In practice, that’s not happening, much. And if it does, it will probably be a bad investment, as the clean-energy bubble showed….

Bubbles give investors too much of what they want. The price then collapses. Investors who don’t flee in time lose big.

Another problem for ESG adherents is that without a bubble, the investing strategy doesn’t in fact encourage companies to do much more of what they want.”



Economy and Society: Responses to BlackRock CEO annual letter

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

On Wall Street and in the private sector

BlackRock CEO Larry Fink on ESG

Last week, BlackRock CEO Larry Fink’s wrote his annual letter to fellow CEOs. This year’s letter was adamant about the importance of ESG, stakeholder capitalism, and sustainable investing but was also something of a response to critics. The CEO of the world’s largest asset management firmnow with officially more than $10 trillion in client assets under managementargued that sustainability is a financial, not political, value and that, in his view, stakeholder capitalism is capitalism at its finest. About stakeholders, he wrote the following:

“Over the past three decades, I’ve had the opportunity to talk with countless CEOs and to learn what distinguishes truly great companies. Time and again, what they all share is that they have a clear sense of purpose; consistent values; and, crucially, they recognize the importance of engaging with and delivering for their key stakeholders. This is the foundation of stakeholder capitalism.

Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not “woke.” It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper. This is the power of capitalism. 

In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders. It is through effective stakeholder capitalism that capital is efficiently allocated, companies achieve durable profitability, and value is created and sustained over the long-term. Make no mistake, the fair pursuit of profit is still what animates markets; and long-term profitability is the measure by which markets will ultimately determine your company’s success.”

About sustainability, Fink wrote the following:

“Most stakeholders – from shareholders, to employees, to customers, to communities, and regulators – now expect companies to play a role in decarbonizing the global economy. Few things will impact capital allocation decisions – and thereby the long-term value of your company – more than how effectively you navigate the global energy transition in the years ahead.

It’s been two years since I wrote that climate risk is investment risk. And in that short period, we have seen a tectonic shift of capital. Sustainable investments have now reached $4 trillion. Actions and ambitions towards decarbonization have also increased. This is just the beginning….

We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients. That requires understanding how companies are adjusting their businesses for the massive changes the economy is undergoing. As part of that focus, we are asking companies to set short-, medium-, and long-term targets for greenhouse gas reductions. These targets, and the quality of plans to meet them, are critical to the long-term economic interests of your shareholders.”

About his position that BlackRock and others must continue investing in fossil fuels and traditional energy companies while the global economy makes the transition to zero-carbon, he argued the following:

“The transition to net zero is already uneven with different parts of the global economy moving at different speeds. It will not happen overnight. We need to pass through shades of brown to shades of green. For example, to ensure continuity of affordable energy supplies during the transition, traditional fossil fuels like natural gas will play an important role both for power generation and heating in certain regions, as well as for the production of hydrogen….

As we pursue these ambitious goals – which will take time – governments and companies must ensure that people continue to have access to reliable and affordable energy sources. This is the only way we will create a green economy that is fair and just and avoid societal discord. And any plan that focuses solely on limiting supply and fails to address demand for hydrocarbons will drive up energy prices for those who can least afford it, resulting in greater polarization around climate change and eroding progress.

Divesting from entire sectors – or simply passing carbon-intensive assets from public markets to private markets – will not get the world to net zero. And BlackRock does not pursue divestment from oil and gas companies as a policy. We do have some clients who choose to divest their assets while other clients reject that approach. Foresighted companies across a wide range of carbon intensive sectors are transforming their businesses, and their actions are a critical part of decarbonization. We believe the companies leading the transition present a vital investment opportunity for our clients and driving capital towards these phoenixes will be essential to achieving a net zero world.”

Finally, in response to critics who charge that Fink’s ESG goals are to advance his own political agenda and, thereby, to disenfranchise voters who might otherwise be expected to make the decisions about the climate and other policy matters, Fink aims to flip the switch, arguing rather that he’s trying to allow every voice to be heard:

“[W]e are pursuing an initiative to use technology to give more of our clients the option to have a say in how proxy votes are cast at companies their money is invested in. We now offer this option to certain institutional clients, including pension funds that support 60 million people. We are working to expand that universe….

We know there are significant regulatory and logistical hurdles to achieving this today, but we believe this could bring more democracy and more voices to capitalism. Every investor deserves the right to be heard. We will continue to pursue innovation and work with other market participants and regulators to help advance this vision toward reality.”

ESG opponent responses

Scott Shepard, the Director of the Free Enterprise Project at the National Center for Public Policy Research, which bills itself as the only full-service shareholder activist group defending traditional shareholder-business relations, wrote the following in response:

“We have reviewed Larry Fink’s 2022 letter to you and your peers, and we have reached two conclusions. Larry Fink doesn’t think that you as CEO or we as shareholders are very bright, or he wouldn’t make so many glaringly false assertions. And because of this, you will lead your company into true mountains of risk – reputational, legal, regulatory, legislative, and more – if you follow his lead.

Over the course of his fairly brief letter, Fink reveals that he doesn’t understand (or pretends not to understand) capitalism. He makes overtly absurd claims about the non-partisan nature of his demands to the corporations in which his clients have invested. He misunderstands his fiduciary duty. And he fails to recognize that his vision for the future is already failing, in the United States and all around the world.

It’s probably not fair to say that your fiduciary duty to your shareholders and your moral duties to other relevant parties require you to reject everything that Larry Fink says. But it is certainly true that you cannot simply rely on anything he says without undertaking your own full, objective, independent investigation.”

At National Review’s “Capital Matters” newsletter/online section, Andrew Stuttaford picks up the theme of misunderstanding or adopting what is referred to in the piece as the “wrong kind of capitalism”:

“CEOs clearly know how to talk the talk to an important investor. There’s nothing wrong with that. What is worrying is that more and more of them have actually come to believe in its more malign aspects. Why? They, and many of their colleagues in the C-suite, have realized that, in a regime where stakeholder, rather than shareholder, capitalism is the dominant ethos in the “private” sector, their rewards will be less dependent on delivering value to shareholders (who can be a demanding bunch) than in the past. Rather, they will be expected to pay increased attention to the somewhat nebulously defined aspirations of their almost as nebulously defined stakeholders. In practice, that means putting “their” companies’ capital, and the power that comes with it, behind a social, political, and economic agenda set by the state, various interest groups (unions, say, or NGOs, to take two examples), and, yes, business, a set-up that may not only offer them a pathway to (in many cases, even more) wealth but also to a degree of political power. And the latter comes with the advantage that it is largely free of conventional democratic control. That’s how corporatism works — and stakeholder capitalism is, as I have argued many (!) times before, a form of corporatism.”

At the Competitive Enterprise Institute, Richard Morrison wonders if Fink might be attempting to walk-back some of his previous rhetoric:

Larry Fink and his team at BlackRock seem to have heard the growing roar of opposition to politicized investing that is emerging in the United States. While his 2022 public letter to CEOs features a heavy focus on climate change and decarbonization (as in years past), it opens with a defensive insistence that the company’s approach to stakeholder capitalism is not political or “woke.” Such a statement would not be necessary if Fink and his allies were not feeling the heat from shareholder activists opposed to the embrace of progressive-left social policies that, contra Fink’s insistence, are inherently political. 

The rhetorical backpedaling is even apparent on Fink’s own favorite topic—climate. Over the past year, skeptics of climate policy (including the policy of a net-zero target for greenhouse gas emissions), have highlighted the problems with the aggressive policy path we see in, for example, the European Union. Energy reliability is falling and energy prices are skyrocketing. Traditional energy sources are being phased out without sufficient baseload capacity being developed to replace them.

This year’s letter—which seems like a response to such criticisms—contains several caveats that climate activists generally prefer not to acknowledge. Fink writes that, “green products often come at a higher cost today,” and acknowledges that “traditional fossil fuels like natural gas will play an important role” during the future energy transition, and that “governments and companies must ensure that people continue to have access to reliable and affordable energy sources.” Refusing to address continuing demand for fossil fuels “will drive up energy prices for those who can least afford it.” That’s a far more reasonable approach than the investing public has generally seen from institutions that place climate change at the top of their list of priorities.

In the States

Pushback against ESG in the states

In last week’s edition of this newsletter, we covered issues facing banks in Texas, some of whom claim, for marketing purposes, to be against investing in oil and guns but also claim, for the purposes of compliance with a new state law, that they do not discriminate in lending arrangements against oil and gas.

The aforementioned Texas law is not the only move being taken by governments against asset managers and banks that are, in their view, allegedly playing politics. Most notably, West Virginia State Treasurer Riley Moore announced last week that the state will no longer use a BlackRock investment fund “based on recent reports that BlackRock has urged companies to embrace “net zero” investment strategies”:

“State Treasurer Riley Moore on Monday announced the Board of Treasury Investments, which manages the state’s roughly $8 billion operating funds, will no longer use a BlackRock Inc. investment fund as part of its banking transactions.

Treasurer Moore said the decision was based on recent reports that BlackRock has urged companies to embrace “net zero” investment strategies that would harm the coal, oil and natural gas industries.

“As the state’s chief financial officer and chairman of the Board of Treasury Investments, I have a duty to ensure that taxpayer dollars are managed in a responsible, financially sound fashion which reflects the best interests of our state and country, and I believe doing business with BlackRock runs contrary to that duty,” Treasurer Moore said.

Treasurer Moore said this action is consistent with his belief that the state should not do business with firms whose corporate policies directly threaten West Virginians’ interests and livelihoods.

“BlackRock CEO Larry Fink has been outspoken in pressuring corporate leaders to commit to investment goals that will undermine reliable energy sources like coal, natural gas and oil under the guise of helping the planet,” Treasurer Moore said.”



Economy and Society: Shareholder group study argues ESG fund labels misleading

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

ESG Developments This Week

In Washington, D.C.

ESG advocacy group releases its recommendations for federal regulatory action

Ceres, one of the largest nonprofit groups advocating for capital markets to take an active role in urging businesses to be what it deems more environmentally conscious, released its list of recommendations for federal agencies. The organization noted that the members of its investor networkto whom Ceres offers investment direction and guidance on climate change and other mattershave some $32 trillion in assets under management. Roll Call provided the details:

“Ceres last week publicly disclosed its recommendations to the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the U.S. Treasury Department, calling on the regulators to incorporate climate risk into their rule-making and policy frameworks….

Ceres urged the Fed to issue supervision letters on climate risk to banks and bank holding companies to acknowledge that climate change poses risks to the financial system and provide guidance to financial institutions on identifying and monitoring the risks. The group also calls on the U.S. central bank to review the largest bank holding companies to gain an understanding of how they are identifying and managing climate risk and coordinate a study with the OCC and FDIC, as well as New York and Massachusetts’ state financial regulators.

“These recommendations build on that momentum by identifying practical and familiar steps that these agencies can take within their existing authorities to make good on their commitments to take action on climate financial risk,” said Steven M. Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets.

Federal Reserve Chairman Jerome Powell told the Senate Banking Committee this week that it is “very likely” that the agency will use “climate stress scenarios” to ensure financial institutions understand the potential material risks from global warming. 

That said, Ceres stressed the need for the agencies to work together and pursue interagency initiatives to optimize the regulatory response to climate change. 

“Short-term actions by each of the Financial Stability Oversight Council members individually is critical to address the risks to the financial system from climate change,” the organization said. 

“While individual agency actions are important, collective action can sometimes send a more powerful and consistent message to the financial services industry. The benefits from the government acting on a joint or interagency basis are clear. Such joint actions avoid conflicting or duplicative messages which create burden for industry and they can result in a more efficient allocation of resources by the agencies.””

Shareholder advocacy group’s ESG study reveals ESG fund labels confusing, misleading 

As You Sow, a nonprofit organization that aims, according to its website, to “promote environmental and social corporate responsibility through shareholder advocacy, coalition building, and innovative legal strategies,” recently shared with the Securities and Exchange Commission (SEC) a study that it sponsored and that purportedly shows that the ESG landscape at present is confusing, misleading, and in need of federal regulatory action. According to Bloomberg Green:

“Investing in ESG funds is like trying to navigate “the Wild West” as both regulations and enforcement fall short, according to Andrew Behar, the chief executive of As You Sow.

The shareholder advocacy group spearheaded a study that found 60 of 94 ESG funds failed to adhere closely to the principles of environmental, social and governance investing. The findings, which have been shared with the U.S. Securities and Exchange Commission, indicate that “one can’t tell the difference between a prospectus for true ESG offerings vs. greenwashing mutual funds and ETFs,” the nonprofit said Tuesday.

The researchers — a group of graduate students from University of California, San Diego — used data-analytic tools to establish that language in many funds’ prospectuses lacked clarity when disclosing why they held stakes in companies involved in areas such as fossil fuels, deforestation, firearms and weapons, prisons and tobacco. 

“We see funds with ESG in their names getting F’s on our screening tools because they hold dozens of fossil-fuel extraction companies and coal-fired utilities,” Behar said….

Representatives from As You Sow met with the SEC last week to share their analysis and make recommendations. The SEC has previously said it’s investigating potential misconduct related to flawed sustainability claims….

As You Sow wants the SEC to require that all prospectuses be produced in a “machine-readable” format to enable easy automated comparisons of the documents’ wording. If the regulator fails to do so, “we may be forced to file a petition,” Behar said.”

SEC in Texas probes banks over disclosures on ESG-related issues

According to a report published by Reuters on January 5, the Fort Worth, Texas office of the SEC is currently investigating disclosures made by banks in the state regarding their ESG policies. The banks in question do business with the Texas state government, which has laws on the books forbidding state entities from using banks that adhere too closely to ESG principles. According to the report, the Commission is looking for discrepancies between public statements and faithful compliance with state laws. As the wire reported: 

“The inquiry appears to relate to two Texas laws, enacted last year, banning state entities from working with companies that discriminate against firearms or fossil fuel companies, the sources said.

Amid pressure from investors and employees, banks have become active on environmental, social, and governance (ESG) issues, eschewing gunmakers, backing racial equity projects and pledging to phase out fossil fuel lending, sparking a backlash from Republican lawmakers who worry sectors of the economy may lose access to credit.

The SEC’s new Democratic leadership, meanwhile, has pledged to crack down on public companies that may be inflating their ESG credentials to attract investors and burnish their reputation, or which may be underplaying related risks.

In recent weeks, enforcement staff in the SEC’s Fort Worth, Texas, office sent letters to a number of banks that have acted as underwriters in the Republican-led state, asking them to substantiate ESG policies they have outlined in public disclosures, the same people said.

The SEC seems to be scrutinizing potential conflicts between what the underwriters have told investors versus Texas regulators about their policies on doing business with gunmakers and fossil fuel companies, the sources said….

Lenders who want to underwrite offerings of securities issued by Texas state and local governments have had to sign public certifications saying they do not “boycott” energy companies or have a practice, policy, or directive that discriminates against a firearm entity or firearm trade association.

Thirty-six companies have filed such certifications, according to the Municipal Advisory Council of Texas, a trade association which compiles and publishes the documents.

Among them are Barclays (BARC.L), Citigroup Inc (C.N), RBC Capital Markets (RY.TO), TD Securities (TD.TO), UBS Financial Services (UBSG.S) and Wells Fargo, according to certifications filed between September and November.

These lenders have pledged to cut their carbon footprints and achieve net zero greenhouse gas emissions by 2050, which will affect the companies they finance.”

On Wall Street and in the private sector

Survey shows Americans think workers, not climate, the number one ESG issue 

Just Capital, a nonprofit advocacy group that aims to influence capital markets, recently released the results of a survey it conducted assessing the issues that the American people think are in most desperate need of fixing in business. According to the advocacy group, the issue that most concerns peopleand that thus deserves a higher place in the ESG hierarchy of issuesis not climate change or zero-carbon transitioning, but the worker. CNBC reported the survey as follows:

“In the annual ranking of top U.S. companies on ESG metrics conducted by research nonprofit Just Capital, there were some major moves in 2022, both up and down the list. Meta Platforms dropped 691 spots due to concerns about spread of misinformation on Facebook and Instagram’s negative social influence, while Uber Technologies rose 825 places, to No. 41. Both were unusual circumstances, but Uber’s ranking may say more about the most important issue to the American public when it comes to environmental, social and governance issues: treatment of workers.

It is the No. 1 issue, but that’s not revealed in the fact that Uber vaulted into the JUST 100 — it’s because Just Capital took the unusual step of denying Uber the “seal” that the top 100 companies usually get.

Uber, along with Lyft and DoorDash — though neither made the top 100 overall like Uber — were placed “under review” by the ESG research firm in this year’s rankings because the data does not capture the fact that a significant proportion of their workforce is classified as independent contractors….

Martin Whittaker, CEO of Just Capital, says when the firm sets out to create the annual list of America’s “most just” companies, it wants to get it “as right as you can,” and it’s not confident that ESG is there yet with the contingent workforce model.

“When you have a whole business model built around contingent workers it’s hard to get data,” Whittaker said. “The full-time employees I’m sure are paid very well and get great benefits. And you get data on that. But we know its whole business model is based on a different relationship with workers, and we didn’t feel like we had enough data to accurately reflect that story. It’s the same for Doordash and Lyft,” he said. “We felt like it is an emerging systemic story and we didn’t feel like we really had a sufficiently strong handle on what it meant and how to measure it.”

Just Capital knows for sure that workers are the No. 1 ESG issue to the American public because each year it polls the public to create the weightings for its annual ranking, and for 2022′s list, worker issues were weighted at nearly 40%, compared to 10% for climate. A fair, living wage was the No. 1 issue overall. The second-highest weighted area, Communities (20%), is partially a workforce metric because it includes job creation.”

In the spotlight

Crypto vs. ESG, again

A longstanding perceived battle between supporters of cryptocurrencies and advocates of ESG and sustainability has erupted in fighting once again, this time on the battlefield of Wikipedia. At present, Wikipedia accepts donations made in a handful of cryptocurrencies, most notably, Bitcoin. Because of the energy used in the cryptocurrency mining process, some ESG advocates consider cryptocurrency, in their view, environmentally damaging. As a result, Wikipedia, which has promised to be environmentally sustainable, is being pressured by its own contributors to stop accepting crypto donations:

“Wikipedia is facing increasing internal pressure to stop accepting crypto donations. The site which was launched in 2001 has grown throughout the years to become the number 1 encyclopedia site on the internet, all the while remaining a free resource for anyone with access to the internet, and the reason it has been able to do this was because it relies on donations.

Wikipedia currently accepts donations in a number of cryptocurrencies, which began in 2014, but as these digital assets have grown and come under increased scrutiny due to its environmental impacts, there have been calls for it to discontinue crypto donations which “may not align with the foundation’s commitment to environmental sustainability.”…

The impact of bitcoin and other crypto mining on the environment remains a big debate to this day. It is estimated that crypto mining is the 33rd largest consumer of power in the world, ahead of a lot of countries. This has caused the rally against mining activities that are said to be damaging to the environment….

The proposal…calls into question the proof-of-work mechanism utilized by bitcoin and other cryptocurrencies which is a computationally expensive process and Wikipedia accepting crypto donations adds to the environmental burden levied by these transactions.

[The] proposal has sparked discussions across the Wiki community. Some have cosigned the message being passed by the contributor, although the debates around crypto donations continue.”



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

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

ESG Developments This Week

In Washington, D.C.

Predictions for the future of ESG

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

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

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

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

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

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

As for the SEC:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In the spotlight

Stanford paper describes the “Seven Myths of ESG”

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

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


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

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

ESG Developments This Week

Lawsuit challenges California’s board diversity mandate  

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

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

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

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

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

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

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

Congressman pushes for mandatory disclosures

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

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

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

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

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

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

Exxon-Mobil faces new wave of ESG activism 

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

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

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

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

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

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

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

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

It has all become so very tiresome and predictable.”

ESG: no better, but no worse?

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

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

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

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

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

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

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

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

In the spotlight

Best Books of 2021

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

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



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

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


ESG Developments This Week

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

SEC preps businesses for new ESG disclosure standards

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

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

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

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

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

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

ESG in theory and practice

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

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

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

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

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

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

In the States

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

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

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

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

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

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

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

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

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

In the spotlight

ESG and business schools, again

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

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

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

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

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

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

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

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

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



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

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

ESG Developments This Week

In Washington, D.C.

Multinational regulatory agency crack down on overstated environmental credentials 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

On Wall Street and in the private sector

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

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

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

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

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

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

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

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

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

In the spotlight

Professors argue supply chains potential ESG blind spot

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

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

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

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

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

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

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

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

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



Economy and Society: Responses to ESG-disclosure rules

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

ESG Developments This Week

In Washington, D.C.

Responses to ESG-disclosure rules 

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

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

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

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

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

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

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

Will an emphasis on ESG compromise future retirements?

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

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

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

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

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

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

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

In education

The rise of ESG in business schools

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

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

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

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

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

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

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

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

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

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

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

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

On Wall Street and in the private sector

Will the Labor ERISA rule further empower proxy advisory services?

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

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

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

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

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

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

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

In the spotlight

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

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

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

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

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

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

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



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

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

ESG Developments This Week

In Washington, D.C.

FINRA Chair joins the regulatory chorus

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

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

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

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

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

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

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

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

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

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

But not everyone thinks more regulation will help

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

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

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

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

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

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

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

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

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

On Wall Street and in the private sector

Effects of ESG investing driving inflation 

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

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

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

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

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

New tools for private company ESG disclosure

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

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

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

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

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

But is a new tool necessary?

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

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

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

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

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

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

In the spotlight

Professor Luigi Zingales argues “Democracy before ESG”

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

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

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

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

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

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

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