Vanguard announces exit from net zero climate investment alliance

ESG Developments This Week

In Washington, D.C.

The Fed and ESG

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

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

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

One governor, Christopher Waller, dissented.

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

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

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

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

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

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

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

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

Not everyone shares that enthusiasm.

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

Waller cast the lone dissenting vote.

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

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

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

In the states

Arizona divests from BlackRock over firm’s ESG policies

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

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

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

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

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

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

Texas legislators subpoena BlackRock and other financial firms in ESG investigation

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

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

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

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

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

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

North Carolina treasurer asks BlackRock CEO to resign over ESG commitments

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

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

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

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

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

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

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

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

On Wall Street and in the private sector

Vanguard announces exit from net zero climate investment alliance

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

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

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

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

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

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

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

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

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

Midterm results could strengthen state opposition to ESG

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ESG Developments This Week

In the States

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

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

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

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

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

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

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

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

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

BlackRock facing political pressure from state officials of both parties 

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

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

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

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

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

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

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

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

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

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

On Wall Street and in the private sector 

ESG engagement in practice

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

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

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

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

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

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

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

Canadian bank will soon track personal ESG metrics for individuals

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

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

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

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

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

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

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

In the spotlight

FTX Founder Sam Bankman-Fried criticizes ESG

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

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

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

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

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

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

Former Vice President Pence takes on ESG

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ESG Developments This Week

In Washington, D.C.

Pence takes on ESG

On May 10, ESG investing was the topic of discussion at an event in Houston, where former Vice President Mike Pence (R), critiqued the ESG role in changing the composition of the board of directors at Exxon-Mobil in 2021 and asked state-level officials to enlist in an effort to push back against politicizing business. The Los Angeles Times reports:

“Former Vice President Mike Pence criticized investor-activist campaigns to force companies such as Exxon Mobil Corp. to follow socially conscious investing principles, saying they elevate left-wing goals over the interests of businesses and their employees.

Pence, a potential 2024 Republican presidential candidate, delivered an energy policy speech Tuesday in Houston and called for states such as Texas to “rein in” the push for employee pension funds to use environmental, social and governance principles in investing.

The former vice president cited activist investor Engine No. 1, which was backed by firms including BlackRock Inc. last year as it mounted a successful proxy campaign that led to the replacement of three directors on Exxon’s board. “Those three are now working to undermine the company from the inside,” Pence said.

ESG investing — the use of environmental, social and governance factors in decision making — has become one of the hottest areas in finance in recent years, with the global market adding as much as $40 trillion in assets, according to estimates from Bloomberg Intelligence.

Yet the strategy has drawn the ire of lawmakers in some states….

Finance was always meant to facilitate investment and spur economic growth that benefits the entire U.S., Pence said. But President Biden and government regulators are “weaponizing the financial system to do the exact opposite,” including through “capricious new ESG regulations that allow left-wing radicals to destroy American energy producers from within.”

Similar accusations have been circulating in Texas for some time, but Pence’s comments are among the most aggressive yet. The growth of ESG investing has pushed some of Wall Street’s biggest investors to become much more active in proxy campaigns….

GOP lawmakers and powerful industry groups, including the U.S. Chamber of Commerce, have opposed increased activity by financial watchdogs on ESG issues during the Biden administration, even as the White House has called for increased oil and gas production to help reduce fuel prices.

Biden has also made fighting climate change a centerpiece of his presidency, and last year ordered regulators to develop stronger plans for measuring and mitigating the risks climate change poses to the financial system.”

In the States

Judge strikes down California diversity law

On May 16, a California state judge handed down a rebuke of ESG/DEI efforts on the part of state lawmakers, the second such rebuke in several months:

“A state judge struck down a California law requiring companies in the state put female directors on their boards, the second legal setback in as many months for efforts to mandate board diversity.

Judge Maureen Duffy-Lewis of the Superior Court of California in Los Angeles ruled that the 2018 law was unconstitutional because it violated the equal protection clause of the state’s constitution, according to a copy of the verdict.

The California law mandated that public companies with headquarters in the state have at least two or three women on their boards by 2021, depending on the size of the board. Those that didn’t faced financial penalties.”

Last month, the same court invalidated the California law requiring publicly traded companies to have a minimum number of underrepresented racial or sexual minorities on their boards of directors.

On Wall Street and in the private sector

Financial Times: “BlackRock says it will not support most of this year’s shareholder resolutions on climate change”

Over the past several weeks, BlackRock, the world’s largest asset management firm and one of the driving forces behind the ESG movement, conceded that its sustainability strategy might be more complicated than it had let on. Although the firm reiterated its long-term sustainability goals and insisted that its strategy has not officially changed, its actions tell a different story, according to a piece in the Financial Times:

“Power without responsibility? The passive fund industry wields substantial clout on the corporate landscape: $16tn of it, according to Morningstar. Now BlackRock, the biggest of them all, has given itself a pass on the knotty issue of climate change.

Pinpointing factors including the timeframe for transitioning from fossil fuels and war-inflated energy costs, the US-based fund manager says it will not support most of this year’s shareholder resolutions on the subject. Such proposals, the $10tn money manager reckons, are too extreme, too prescriptive or entail too much micromanaging.

This is quite the turnround for a firm that has been criticised — by the opposite camp — for its meddling stakeholder capitalism. Boss Larry Fink, a besuited eco-warrior, has long beat the drum for sustainability. This, he explained in his annual letter to chief executives, is “not because we are environmentalists, but because we are capitalists and fiduciaries to our clients”….

Whether or not BlackRock’s rationale is disingenuous is beside the point. For many investors, the one-time climate champion’s abdication represents a big step back. It in effect grants permission to other investors to relax their grip. More worrying still, it puts corporate boards on notice that they can breathe a little easier when irksome proposals appear on the slate.”

On Twitter, Vivek Ramaswamy, the biotech entrepreneur and author of Woke, Inc., argued that BlackRock’s actions and change in tone were, in his view, akin to the asset-management giant trying “to put the toothpaste back in the tube.” 

Biotech entrepreneur puts his assets where his mouth is

On May 10, The Wall Street Journal broke an exclusive story detailing a plan by Vivek Ramaswamy, in conjunction with a handful of prominent investors, to push back against BlackRock, its CEO Larry Fink, and the ESG and sustainability investment trend:

“An upstart financial firm backed by Peter Thiel and Bill Ackman has a message for American corporations: Focus on making money, not taking stands.

Vivek Ramaswamy, who made his fortune in pharmaceutical startups before writing a book last year called “Woke, Inc.,” says he has raised $20 million to start a fund manager that would urge companies not to wade into hot-button social or environmental issues. Mr. Thiel invested both personally and through his Founders Fund, joined by Palantir Technologies Inc. PLTR -21.31% co[1]founder Joe Lonsdale and other venture investors.

Mr. Ramaswamy’s ambitions speak to the culture wars nipping at U.S. corporate executives. Under growing pressure from employees, investors and customers, many have taken public positions on political issues only to face criticism from the other side….

The firm, called Strive, will be based far from Wall Street in Mr. Ramaswamy’s home state of Ohio. In an interview Monday, the 36-year-old dubbed his approach “excellence capitalism,” focused on letting companies do what they do best—and nothing else—and inveighed against what he sees as a creeping liberal bias inside BlackRock Inc. BLK -3.67% and its peers, Vanguard Group and State Street Corp., which he called an “ideological cartel.”

Those three firms in recent years have become almost unimaginably large, managing $20 trillion of assets. They have pushed companies to improve diversity, cut their climate emissions, and embrace other changes—largely under the banner of “stakeholder capitalism,” which considers other outcomes, not just profits, when assessing corporate behavior….

Mr. Ramaswamy’s project began under cover months ago, code-named “Whitestone” to capture its aim of being the anti-Blackrock, people familiar with the matter said. It isn’t known what products it will offer, and it has a long way to go to rival the combined market power of the financial giants it seeks to challenge.

“A majority of Americans want companies to stay out of politics,” he said. “They want to have a separate space for where they shop, where they work, and where they invest from the places where they cast their ballots or engage in their political debates.””

Among Ramaswamy’s first hires at his new firm, was Justin Danhof, the director of the Free Enterprise Project at the National Center for Public Policy Research. Danhof, a notable ESG opponent, has been profiled in at least two books about the emergence of ideology-based investing.

In the spotlight

Should companies focus on water, not oil?

In a long ESG analysis, Reuters cites a recent study that suggests that executives and asset managers who are concerned about the ways in which the environment can affect corporate success and profits should worry more about water than about oil:

“For something that is so crucial to all aspects of life, including the most fundamental business operations, water risk is a blind spot for many investors and businesses.

There is little understanding of how overuse, pollution and increasingly frequent extreme weather events, such as the years-long drought in California, the recent heatwave in India and Pakistan, and last year’s floods in Europe, are affecting water availability, says Cate Lamb, global director of water security at disclosure not-for-profit CDP.

A third of listed financial institutions do not assess exposure to water risk in their financial activities, although 69% of listed equities told CDP in 2021 that they are exposed to water-related risks.

“A large proportion of businesses still have the mindset that water will always be available to them whenever and wherever they need it, and that they don’t need to manage it like other issues,” Lamb says.

Yet with the United Nations predicting a 40% global shortfall in water supply by 2030 if current consumption and production patterns do not change, it is a mindset that will increasingly open companies up to operational risk, according to a new report from CDP and UK-based non-profit financial think-tank Planet Tracker….

Businesses in key industries are already losing billions of dollars as a result of the global water crisis, CDP and Planet Tracker say in the report, which highlights how changes in regulation, high levels of pollution and community opposition have “stranded” assets, including the Keystone oil pipeline in Canada, a gold mine that straddles the border of Chile and Argentina, an Australian coal mine and a nuclear facility in the United States.

But a host of other sectors also face significant risks around water availability and quality, from fashion to agriculture to chip-making and data centres.

In Chennai, in India’s Tamil Nadu state, one of the world’s fastest growing cities, a devastating drought in 2019 caused it to run out of groundwater. This led to a number of the local tech companies having their licence to operate constrained, or rescinded altogether, Lamb says. In the recent heatwave, India’s largest tributary completely dried up for the first time ever, threatening agricultural production that feeds the vast majority of the country, and huge amounts of energy production, too.

“When events like this happen, we see governments having to make really difficult decisions to ensure water supplies for citizens and food production, at the expense of energy and other businesses,” she adds.”

California corporate diversity law ruled unconstitutional

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ESG Developments This Week

In Washington, D.C.

SEC disclosure proposal means new challenges for auditors

On March 21, the Securities and Exchange Commission (SEC) introduced its proposal on mandatory climate disclosures for publicly traded companies. Ever since, various media and analysts have been combing through the document, trying to figure out what exactly the new proposal will mean and for whom. On March 29, The Wall Street Journal argued the following:

“Professional-services firms are assessing an array of knotty and often subjective information from companies under a new proposal from U.S. securities regulators on climate disclosure.

The Securities and Exchange Commission last week put forward a plan that would require companies to provide information about their greenhouse-gas emissions and climate-change-related risks to their businesses. The proposal, which is now open for public comments, would add to the growing amount of work for auditors around assessing companies’ climate risks.

Under the proposal, climate metrics and disclosures included in the footnotes of companies’ financial statements would be subject to a full audit.

Separately, companies’ estimates of greenhouse-gas emissions from their operations and from the energy they consume—known as Scope 1 and 2 emissions—would require independent assurance, a review typically performed by engineering, consulting or audit firms. The assurance requirement applies to companies with at least $250 million in publicly traded shares.

Auditors would have to consider the additional climate disclosure when opining on the accuracy of the financial statements as a whole.”

As was noted in this newsletter last fall:

“KPMG in October said it planned to spend more than $1.5 billion over the next three years on climate-change-related initiatives, including training on environmental, social and governance issues for all 227,000 employees and efforts to advise businesses on how to meet net-zero emission targets. Ernst & Young in September said it would spend $10 billion over the next three years on audit quality, sustainability and technology. Deloitte, a sponsor of CFO Journal, didn’t respond to a request for comment on its planned climate-change-related investments.

PricewaterhouseCoopers in June unveiled a five-year, $12 billion plan to train employees on climate-related matters and hire 100,000 new people. “We invested and we’ve gotten the cost side under way because that’s what our clients were asking for from our people,” said Wes Bricker, vice chair at PwC and a former chief accountant at the SEC.

The SEC proposal would require companies to disclose if climate change is expected to affect more than 1% of a line item—such as revenue or debt—and explain the impact….”

“Some audit firms will likely generate higher revenue from clients, outweighing any cost increases stemming from hiring and training, BDO’s Mr. Tower said. “The additional cost that we incur would result in additional service billings,” he said.

Professional-services firms also expect higher demand for their consulting offerings. Those would include advising clients on how to calculate their emissions estimates and working with them on the new disclosure rules, for example identifying what’s needed for reporting, tax planning and operations, said Neil Dhar, co-leader of PwC’s U.S. consulting practice.

“On the consulting side, depending on how much expertise [our clients] need, it will require incremental help that we have to obviously plan for,” Mr. Dhar said.”

In the States

California corporate diversity law ruled unconstitutional 

On September 30, 2020, California Governor Gavin Newsome signed Assembly Bill 979, which added a section to the California Corporate Code. The new section mandated that every corporation in the state have at least one racial or sexual minority on its board of directors by the end of 2021. The law was challenged in court and, as of last Friday, has been ruled unconstitutional:

“A Los Angeles court has found a California law mandating that publicly traded companies include people from underrepresented communities on their boards unconstitutional, ruling in favor of a conservative group seeking an injunction against the measure.

Los Angeles County Superior Court granted summary judgment to Judicial Watch on Friday. The conservative legal group had argued the law violates the equal protection clause of California’s constitution. The ruling did not provide Judge Terry Green’s reasoning behind the decision.

The law, passed in 2020, required that publicly traded companies with a main office in California appoint at least one member of the Asian, Black, Latino, LGBT, Native American, or Pacific Islander communities to their boards by the end of 2021 through either filling a vacant seat or creating a new one….

It passed following the murder of George Floyd, an unarmed Black man, by Derek Chauvin, a white police officer during an arrest, which galvanized a national protest movement against racism and the disproportionate use of police force against Black Americans.”

Analysts foresee subsequent challenges to California Senate Bill 826, which was signed into law in 2018 and which requires that:

“[N]o later than the close of the 2019 calendar year… a domestic general corporation or foreign corporation that is a publicly held corporation, as defined, whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California to have a minimum of one female, as defined, on its board of directors, as specified. No later than the close of the 2021 calendar year, the bill would increase that required minimum number to 2 female directors if the corporation has 5 directors or to 3 female directors if the corporation has 6 or more directors.”

Idaho looks to join states curbing ESG

Idaho is, perhaps, about to join Florida, Texas, and West Virginia in looking to prohibit ESG in state investments, according to KTVT in Twin Falls, Idaho. The station reports:

“Several pieces of legislation aimed at preventing Idaho government entities from investing in companies that choose environmental-friendly paths or follow particular social policies are moving through the Legislature.

The Senate State Affairs Committee on Wednesday sent to the full Senate a bill aimed at prohibiting investments in companies that make commitments to environmental, social, and corporate governance, known as ESG.

The House, meanwhile, is advancing a resolution that would task a committee with identifying such companies.

ESG is increasingly seen as an important way for corporations to tout responsible business credentials. But some Idaho lawmakers say they’re suspicious of companies that appeal to what’s known as sustainable investing.

Republican Sen. Steve Vick says the state should avoid investing in companies whose actions are “counter to the values of Idaho.””

Several other states are reported to have legislation under consideration as well.

In the spotlight

Poll: Should retirement and pension funds consider factors other than ROI?

On March 31, Scott Rasmussen’s “Number of the Day” columnpublished by Ballotpediaaddressed the question of “other factors” in pension investingfactors like political issues, ESG, etc. This question was, presumably, inspired by the Labor Department’s efforts to establish a new rule in which ESG can be included in ERISA-governed retirement funds, overturning a Trump-era rule to the contrary. Rasmussen’s results were as follows:

“Forty-eight percent (48%) of voters believe that firms managing pension funds should focus only on earning the best possible return. A Scott Rasmussen national survey found that, among current investors, 59% hold that view. Thirty-seven percent (37%) believe they should also consider other factors, such as diversity, equity, and inclusion requirements.

When we asked a follow-up question about which other factors should be considered very important, the top choice was earning the best possible return on investment. Overall, 74% of voters say either that return on investment is the only thing that should be considered or that returns are a very important consideration. That figure jumps to 84% of investors.”See the column, including the survey methodology here.

Responses to the SEC’s disclosure rule announcement

Economy and Society - Email Header (2021).png

ESG Developments This Week

In Washington, D.C.

Responses to the SEC’s sustainability disclosure rule announcement

In the week since the Securities and Exchange Commission (SEC) announced its plans to require sustainability disclosures from publicly traded companies, the reactions have been both manifold and diverse. Some support the idea, while others don’t. In any case, the new disclosure rules have many in Washington newly interested in ESG, including Rep. Byron Donalds (R-Fla.) who wrote the following for The Hill last week:

“President Biden has his sights set on the next tool to push his destructive climate agenda: Environmental Social Governance. ESG scores are based on a host of woke factors such as a company’s carbon emissions, energy consumption, and board diversity, among others. The more woke the company is, the higher the ESG score. The higher the ESG score, the more “investable” the company is said to be. While this Chinese Communist Party-style social credit score was once limited to a few virtue-signaling companies, there is growing effort from the Biden administration to make ESG a mandatory part of doing business in America. 

The president is attempting another “ultimate workaround” by again legislating through federal agency regulation. Knowing these Green New Deal policies could never pass the democratically elected Congress, the Biden administration is trying to shove their radical agenda down the throats of Americans everywhere through unelected and unaccountable bureaucrats. Worse yet, they are doing it with our hard-earned money.  

The Department of Labor has expressly disregarded any “anti-sustainable investing rules.” When presented the opportunity to demonstrate increased investment returns because of ESG, the DOL failed to do so and simply refused to enforce the Trump-era rule, which sought to prioritize pecuniary interests ahead of non-pecuniary for fiduciaries. The Securities and Exchange Commission is in the process of proposing ESG rules for securities issuers and exchanges as well as establishing an SEC ESG Task Force, designed to investigate and enforce ESG rules. The Office of the Comptroller of the Currency has supported ESG initiatives among private banks and is composing an ESG regulatory framework focused on climate impact.

As Black Rock CEO Larry Fink, laid out in a January 2020 letter, “the goal [of ESG] cannot be transparency for transparency’s sake. Disclosure should be a means to achieving a more sustainable and inclusive capitalism.” In a 2020 New York Times op-ed, former Federal Reserve nominee Sarah Bloom Raskin called for a number of energy companies to be excluded from COVID-19 relief because they generated too many carbon emissions. This is the terrifying business future ESG proponents are trying to create.”

Richard Morrison, a research fellow at the Competitive Enterprise Institute, a Washington, D.C. free-market think-tank, penned a piece for National Review Online’s “Capital Matters” in which he spelled out some of the likely consequences of the SEC’s new proposed rule. He wrote:

“The SEC’s proposal would be difficult, on any reasonable interpretation, to square with the exercise of its normal authority over financial markets, and is yet another troubling example of regulatory mission creep. It is also a disappointing and alarming development for those who care about property rights and a competitive, growing economy….

The SEC has always required firms to disclose financially material information about their structure, operations, and plans for the future. Something doesn’t — and shouldn’t have to — fall into a topic-specific bucket such as climate to be worthy of such attention. The SEC has traditionally used a “principles-based” approach to materiality, under which a company’s management draws attention to the risks and opportunities that it considers most important to that particular company. This allows for, as the SEC’s Walter Hinman described in a 2019 speech, a disclosure regime that “keeps pace with emerging issues . . . without the need for the Commission to continuously add to or update the underlying disclosure rules as new issues arise.” The new proposals foolishly go in the opposite direction.

Similarly, the concept of materiality itself gets a problematic twist. By introducing specific, prescriptive requirements rather than ones based on general financial principles, the agency is trying to put its thumb on the scale and suggest that anything climate-related should be considered presumptively material. This is not an honest attempt to protect investors; it is climate activism in finance-regulation drag. The goal is to force firms to disclose information about greenhouse gases and carbon intensity on the assumption that future investors will penalize them because of it. The one silver lining in this case is that investors — if they are left to make up their own minds — are unlikely to consider “climate exposure” nearly as much of a poison pill as the climate campaigners are hoping….

Much of the specialized reporting and audit assurance called for would need to be outsourced to consultants, accountants, and law firms with climate-focused practices. The world of ESG business services is already salivating over such increased demand stemming from this and similar initiatives. Big Four accounting powerhouse PwC announced last year that it was planning to hire 100,000 new staff to deal with climate and diversity issues over the next five years alone. Additionally, the proposed rule acknowledges that the change may result in heightened litigation risk and the revelation of trade secrets.”

On Wall Street and in the private sector

While ESG has tough year, investors grow impatient

On March 27, Barron’s posted a story citing an investment research report, noting that ESG has, so far, been having an exceptionally difficult year, particularly for those funds that have little or no exposure to energy. Moreover, for the first time, investors are seeming to notice, according to the story:

“Inflation and the war in Ukraine have jolted the U.S. economy—and weighed on the performance and investment flows of environmental, social, and governance, or ESG, funds. That’s especially true of funds underweight energy and defense stocks, according to a recent report from Bernstein.

“ESG funds and indices have underperformed this year across regions,” the authors noted. “While ESG funds have experienced positive inflows this year, the first week of March marked a rare outflow from ESG funds, the largest weekly outflow in the 30-year history of the EPFR database.”

Sarah McCarthy, head of European equity strategy research at Bernstein and co-author of the report, says the outflows and poor performance challenge the conventional wisdom about ESG investing and shed “some light on the fact that ESG funds have been forced almost to take on huge macro risk.” That’s because many ESG funds tend to exclude stocks in sectors such as defense and tobacco, which typically underperform as inflation expectations rise, and energy, which typically outperforms in an inflationary environment….

According to Bernstein, global and U.S. ESG funds both underperformed non-ESG funds in January by 120 basis points. (A basis point is one hundredth of a percentage point.) In the same month, European Union ESG funds underperformed by 50 basis points.

Year to date, the Morningstar US Sustainability TR USD index has fallen 8.7%, while the Morninstar Global Markets Sustainability NR USD index is down 8%. The Morningstar Europe Sustainability NR USD index has lost nearly 13%, according to Morningstar Direct. All three indexes have underperformed non-ESG indexes.

Net outflows from ESG funds, meanwhile, totaled a record $1.3 billion in the first week of March. ESG funds have seen net inflows of $31.4 billion so far this year, according to EPFR.”

Meanwhile, in Canada, the country’s largest pension fund is unhappy with recent ESG results and insisting that directors resign. Interestingly, the results that most concern the company are not returns but the effective application of ESG values:

“Canada Pension Plan Investment Board, the country’s biggest pension fund, said on Thursday that directors of its portfolio companies presiding material environmental, social and corporate governance (ESG) failures should be asked to resign immediately.

The change is part of revised proxy voting rules for the fund, known as CPP Investments, which will allow it to vote against a director seeking re-election following failures of oversight, along with voting against the director deemed most responsible for failing to remove them from the board.

CPP Investments, with C$550.4 billion ($431 billion) in assets, will also consider voting against all directors at portfolio companies with classified boards where ESG oversight failures have occurred. Classified boards are companies in which only a subset of directors are up for election.

“While this structure can provide enhanced continuity and stability … classified boards actively inhibit the rights of shareholders to hold specific directors to account annually,” CPP Investments said in a statement.

The move is aimed at ensuring that CPP’s portfolio companies are compliant with climate change, board gender diversity and corporate governance issues, which are high on investors’ mind.”

ESG and China

In a long report for Bloomberg (and republished here by Yahoo! Finance), Natasha White and Saijel Kishan noted that many ESG funds are using the outbreak of war between Russia and Ukraine to rethink some of their other more potentially volatile investments, particularly those in China:

“Caught flat-footed by Russia’s war on Ukraine, fund managers who get paid to avoid environmental, social and governance risks have started to look at China with a fresh sense of unease.

Their exposure to China is huge. Pure ESG funds domiciled just in Europe have about $130 billion invested in China assets, according to data compiled by Bloomberg. A further $160 billion is held by European-based funds that have screened for ESG-related hazards.

And yet the investment industry finds itself starting to contemplate the once unthinkable, as China’s ambiguous response to Russia’s invasion of Ukraine leaves the world on edge. China, the world’s second-largest economy, has sought to straddle both sides of the geopolitical divide, condemning the loss of life in Ukraine while blaming NATO for provoking Russia. And when the International Court of Justice voted to order Russia to “immediately suspend” military operations in Ukraine, only two countries dissented: Russia and China….

The attack of Ukraine hasn’t only renewed scrutiny of the parallels between Russia and China, it has put the countries’ relationship in the spotlight. Just before the war began, Chinese President Xi Jinping hosted Putin at the Beijing Olympics, a public demonstration of warm relations.

Of the ESG funds holding Chinese assets, a number are categorized as Article 9, which is the highest sustainability classification within Europe’s Sustainable Finance Disclosure Regulation. Together, these funds hold $7 billion. A further $124 billion is in Article 8 funds, which is a laxer ESG category within SFDR.

About $162 billion is in Article 6 funds, for which managers screen their portfolios to decide whether it’s relevant to disclose ESG risks.”

In the spotlight

Financial Times identifies conservative pushback against ESG

On March 27, The Financial Times carried a piece on what appears a rising tide of conservative pushback against ESG in terms of shareholder activism:

“The right has never been this engaged” in shareholder activism, said Justin Danhof of the National Center for Public Policy Research’s Free Enterprise Project, a conservative group that succeeded in placing motions at this year’s Disney, Costco and Walgreens Boots Alliance meetings.

The Securities and Exchange Commission “opened the floodgates” to activists’ resolutions last November by rescinding Donald Trump-era guidance that had limited which proposals on social policy issues could go to a vote, Danhof said. “We had three [proposals allowed] last year; we’ve already presented three this year and we will have at least 10 more that we know of.”

Between them, Danhof’s group and the National Legal and Policy Centre have submitted 19 proposals in 2022, up from a total of 16 last year, according to research from the Conference Board….

Proxy filings are growing across the political spectrum, with the Interfaith Center on Corporate Responsibility reporting that its members have filed a record 436 proposals this year, up from 244 at the same stage in 2021.

A proxy season analysis from As You Sow, the Sustainable Investments Institute; and Proxy Impact found that a record 529 environmental, social, and governance proposals had been filed as of last month, up 20 per cent year on year. Conservative groups had filed 5 per cent of them, it said.

Several of those proposals call for greater disclosure on charitable giving and racial equity audits, topics historically favoured by their liberal opponents.

This stemmed from a deliberate strategy, said Danhof: “Because of procedural hurdles at the SEC we have to file proposals that are rather similar to previously successful liberal proposals,” he said, “[so] our only avenue to the proxy ballot is to use as much leftist language as possible.”…

The conservatives say they are trying to save US companies from being distracted by liberal social causes. “The American capitalist system is the greatest system man has ever created economically but Marxist wokeism is . . . a cancer. We have to kill the cancer without killing the host,” Danhof said.

The left had taken over other institutions from universities to media outlets, he argued, and conservatives feared that it was doing the same in business and finance: “Now we have the leading bankers and tech titans all speaking the language of Davos and not championing American capitalism whatsoever.”

Economy and Society: Pushback against ESG in retirement plans

ESG Developments This Week

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

Responses to Labor Department’s proposed rule encouraging ESG investments in retirement plans

On December 13, National Review’s Capital Matters carried a piece by Richard Morrison, a research fellow at the Competitive Enterprise Institute, critical of the Labor Department’s proposed rule regarding ERISA-governed retirement plans and ESG investments. Morrison is also the author of the recently published study, “Environmental, Social, and Governance Theory: Defusing a Major Threat to Shareholder Rights.” His case against Labor’s new rule reads as follows:

“One of the best policies enacted by the previous administration was a rule that made it clear to the people who manage pension funds that, when selecting investments, they need to prioritize returns for beneficiaries instead of pursuing their own political agendas. Unfortunately, Joe Biden’s Department of Labor is currently in the middle of repealing that rule. This effort, while obscure to the average American, is part of a much larger effort to redefine the world of saving and investing to permanently serve progressive policy goals. That should alarm not just conservatives, but anyone who wants to be able to enjoy a comfortable retirement someday.

As the 2020 Trump administration rule about pension fund investing reminded us, the law requires pension fund managers “to act solely in the interest of the plan’s participants and beneficiaries, and for the exclusive purpose of providing benefits to participants.” That’s it: nothing in there about staving off climate change, advancing gender diversity, or trying to drive tobacco companies out of business. Pensions should be dedicated to funding the retirements of workers, and that’s it — that’s the law.

In the interest of enforcing that law, the current rule was shepherded through the notice-and-comment process by former Secretary of Labor Eugene Scalia, and it reminded all of the relevant players of their responsibilities. It specifically warned them against the increasingly popular practice of using environment, social, and governance (ESG) factors to select investments, rather than traditional calculations of risk-adjusted return. Managers who did choose to include ESG factors in their investment decisions were expected to be able to demonstrate that these political considerations weren’t resulting in lower profits, but were only being used as a tiebreaker among options with otherwise identical expected returns.

But the same people pushing ESG-focused investing before the advent of the Trump rule are now promoting the Biden effort to repeal those safeguards. To the average reader, the language of the two rules will sound similar, but the difference is clear: Pension fund managers will now have a green light to use the retirements savings of beneficiaries to promote their own environmental and social policy goals. The language of the new rule actively encourages this, claiming that, for example, “Climate change is particularly pertinent to the projected returns of pension plan portfolios,” and encourages investment managers to emphasize the “long-term investment horizons” associated with pension plans in general. Is it impolite to ask whether workers retiring in five years really want their monthly checks to depend on what their plan manager is hoping the global average temperature will be in 2095?”

After explaining the details of the plans and what he sees as the implications of those details, Morrison concludes:

“If this Biden pension rule goes forward, we may be about to find out what happens when millions of American workers end up with “under-performing, but mostly profitable” pensions. It’s not going to be pretty.”

At the world’s largest stock-holder, ESG ratings are suspect

On December 16, Bloomberg continued its analysis of the investment practices at Norges Bank Investment Management, the world’s largest single holder of stocks. Bloomberg focused on how the management company/sovereign fund makes its ESG decisions and whether ESG ratings matter much at all in that process:

““We very rarely, if ever, use the ratings numbers,” said Patrick du Plessis, the global head of risk monitoring at Norges Bank Investment Management. 

NBIM, whose $1.4 trillion portfolio makes it both the world’s biggest wealth fund and the No. 1 investor in publicly traded equities, this week unveiled a tougher stance on assessing environmental, social and governance risk. Using a pre-screening tool, the fund will exclude benchmark stocks that would otherwise have made it into its portfolio, based on a series of ESG tests….

When deciding which stocks to avoid the fund examines everything from water use, to biodiversity to children’s rights. ESG ratings only come into the equation in the form of the raw data behind the headline figures provided by companies.

“What we do is that we de-aggregate” the ESG ratings data, du Plessis said in an interview on Tuesday. He and his team “get underlying data points, see where the various signals are, and incorporate that into our analysis.”…

The varying methodologies employed by the different ESG raters can sometimes result in seemingly unintuitive scores. Take BAE Systems Plc, whose involvement in the production of nuclear weapons means it’s blacklisted by the Norwegian wealth fund based on the advice of Norway’s ethics council. BAE is classified as an ESG leader by MSCI, which gives the company an AA rating. ISS gives BAE Systems a 10, which is the worst grade on its scale….

Du Plessis says investors using ESG ratings scores need to understand what they’re dealing with. He also suggested that currently, many aren’t using ratings appropriately.”

In the States and cities

Bloomberg reports on how ESG is being viewed in the municipal bond market

Municipal finance professionals are, according to one Bloomberg piece, expecting 2022 to be a banner year in their corner of the financial services world. Among other highlights, municipal financial professionals included the potential for huge deals on ESG debt financing among the factors they expect to make it a productive and profitable year. According to Bloomberg:

“For the municipal finance professional, the new year holds the promise of elephant-sized debt deals, a potential premium for environmentally friendly bonds and a bounty of securities sales spurred by the U.S. infrastructure bill. 

So say some of the top bankers in the $4 trillion market, where debt offerings have shown remarkable resilience in the second year of the coronavirus pandemic as state and local government coffers quickly recovered….

Bloomberg News surveyed the heads of public finance at the market’s top investment banks on notable trends of 2021 and their outlook for 2022. In the following Q&A, they highlight just how important the historic infrastructure package will be to their industry. And like all bond professionals, they consider the potential effect of the fastest inflation in decades….

How is ESG being viewed in the municipal bond market? 

Municipals may have been the original impact investing market, with governments selling debt for decades to improve water systems, fund affordable housing and public education. In recent years, bonds specifically branded with a “green” or “social” label have grown in prominence.

Bonds classified as ESG, for environmental, social or governance purposes, are a focus for both issuers and investors. “While there are currently no measurable or consistent pricing benefits, the ability for issuers to diversify their investor base may be beneficial long term,” Kiehn said. The impact of climate change could spur more debt sales as the need grows for improvements to water systems, flood control projects and resiliency efforts like seawalls, she said. 

Peck at Wells Fargo said they’ve seen a few instances of a “greenium,” that is, a relatively lower cost of capital, but overall, credit quality, liquidity and relative values are still the biggest price drivers. 

“While some transactions have seen a modest pricing benefit, the real advantage to issuers is exposure to a broader, more diverse group of investors,” he said. “This can result in an indirect pricing benefit by widening distribution.””

On Wall Street and in the private sector

Bank of America argues green debt will be key driver of ESG in 2022

And speaking of green bonds, Bank of America believes that green debt of all sorts (not just municipal bonds) will be one of the key drivers of ESG next year. There may be growing pains, the bank admits, but that won’t stop this burgeoning corner of the market, they argue:

“Bank of America Corp., the biggest corporate issuer of bonds tied to environmental, social and governance in the U.S., is predicting another big year for global sales of the debt.

Issuance of sustainable bonds from corporations and governments worldwide surpassed $1 trillion for the first time ever this year, more than double all of 2020 issuance. The market is poised to grow at a significant pace next year as well, according to Andrew Karp, head of global corporate and investment banking ESG advisory and financing solutions at BofA and Karen Fang, the bank’s global head of sustainable finance.

“Will ESG primary issuance market double again in 2022? We’re not making that prediction,” Fang said in an interview Monday. “But we do think it will grow very, very strongly given the momentum behind global net zero transition and investor demand.”…

Bank of America, for its part, has so far issued about $11.9 billion in different ESG debt labels since it started tapping the market — one of the fastest growing across fixed income — in 2013, making it the biggest issuer of the bonds among U.S. corporate and financial issuers….

Karp said he expects “ongoing growth” particularly in the sustainability-linked debt and the ability for a larger client base to access the market.”

In the spotlight

BlackRock-related ESG under the microscope 

This week, Bloomberg published a piece entitled “The ESG Mirage”, critical of the ESG practices and rationales embraced by MSCI, an index provider who is closely tied to BlackRock, and BlackRock’s single largest customer:

“For more than two decades, MSCI Inc. was a bland Wall Street company that made its money by arranging stocks into indexes for other companies that sell investments. Looking for ways into Asian tech? MSCI has indexes by country, sector, and market capitalization. Thinking about the implications of demographic shifts? Try the Ageing Society Opportunities Index. MSCI’s clients turn these indexes into portfolios or financial products for investors worldwide. BlackRock Inc., the world’s biggest asset manager, with $10 trillion under management, is MSCI’s biggest customer.

Sales have historically been good, but no one was ever going to include MSCI itself in an index of sexy stocks. Then Henry Fernandez, the only chairman and chief executive officer MSCI has ever had, saw it was time for a change. In a presentation in February 2019 for the analysts who rate MSCI’s stock, he said the company’s data products, the source of its profits, were just “a means to an end.” The actual mission of the company, he said, “is to help global investors build better portfolios for a better world.”

No single company is more critical to Wall Street’s new profit engine than MSCI, which dominates a foundational yet unregulated piece of the business: producing ratings on corporate “environmental, social, and governance” practices. BlackRock and other investment salesmen use these ESG ratings, as they’re called, to justify a “sustainable” label on stock and bond funds. For a significant number of investors, it’s a powerful attraction.

Yet there’s virtually no connection between MSCI’s “better world” marketing and its methodology. That’s because the ratings don’t measure a company’s impact on the Earth and society. In fact, they gauge the opposite: the potential impact of the world on the company and its shareholders. MSCI doesn’t dispute this characterization. It defends its methodology as the most financially relevant for the companies it rates.

This critical feature of the ESG system, which flips the very notion of sustainable investing on its head for many investors, can be seen repeatedly in thousands of pages of MSCI’s rating reports. Bloomberg Businessweek analyzed every ESG rating upgrade that MSCI awarded to companies in the S&P 500 from January 2020 through June of this year, as a record amount of cash flowed into ESG funds. In all, the review included 155 S&P 500 companies and their upgrades.

The most striking feature of the system is how rarely a company’s record on climate change seems to get in the way of its climb up the ESG ladder—or even to factor at all. McDonald’s Corp., one of the world’s largest beef purchasers, generated more greenhouse gas emissions in 2019 than Portugal or Hungary, because of the company’s supply chain. McDonald’s produced 54 million tons of emissions that year, an increase of about 7% in four years. Yet on April 23, MSCI gave McDonald’s a ratings upgrade, citing the company’s environmental practices. MSCI did this after dropping carbon emissions from any consideration in the calculation of McDonald’s rating. Why? Because MSCI determined that climate change neither poses a risk nor offers “opportunities” to the company’s bottom line.

MSCI then recalculated McDonald’s environmental score to give it credit for mitigating “risks associated with packaging material and waste” relative to its peers. That included McDonald’s installation of recycling bins at an unspecified number of locations in France and the U.K.—countries where the company faces potential sanctions or regulations if it doesn’t recycle. In this assessment, as in all others, MSCI was looking only at whether environmental issues had the potential to harm the company. Any mitigation of risks to the planet was incidental. McDonald’s declined to comment on its ESG rating from MSCI.

This approach often yields a kind of doublespeak within the pages of a rating report. An upgrade based on a chemical company’s “water stress” score, for example, doesn’t involve measuring the company’s impact on the water supplies of the communities where it makes chemicals. Rather, it measures whether the communities have enough water to sustain their factories. This applies even if MSCI’s analysts find little evidence the company is trying to restrict discharges into local water systems.

Even when they’re not in opposition to the goal of a better world, it’s hard to see how the upgrade factors cited in the majority of MSCI’s reports contribute to that goal. In 51 upgrades, MSCI highlighted the adoption of policies involving ethics and corporate behavior—which includes bans on things that are already crimes, such as money laundering and bribery. Companies also got upgraded for employment practices such as conducting an annual employee survey that might reduce turnover (cited in 35 reports); adopting data protection policies, including at companies for which data or software is the entire business (23); and adopting board-of-director practices that are deemed to better protect shareholder value (25). MSCI cited these factors in 71% of the upgrades examined. Beneath an opaque system that investors believe is built to make a better world is one that instead sanctifies and rewards the most rudimentary business practices.”

Economy and Society: Rubio introduces bill targeting ESG-conscious corporate policies

ESG Developments This Week

In Washington, D.C.

Rubio introduces bill targeting ESG-conscious corporate policies

U.S. Senator Marco Rubio (R-Fla.) on September 23 introduced the Mind Your Own Business Act, which would allow a company’s shareholders to sue the company if it adopts policies that shareholders claim are not in the company’s best interest. The legislation aims to address the corporate adoption of what Rubio describes as woke culture.

“In the case of the ‘woke corporations,’ if a company is going to boycott a state, if a company is going to pull a product off the market because it has an American flag on it and that might offend some people — if a company is going to make these decisions under pressure from either the ‘woke culture’ or some employee uprising internally that is pushing them in this direction, then they should have to justify to their large shareholders why they’ve done it and why that’s in the best interest of the company,” said Rubio in an interview on Fox Business Network.

The Mind Your Own Business Act would require corporations to demonstrate that their actions support the best interests of their shareholders “in order to avoid liability for breach of fiduciary duty in shareholder litigation over corporate actions relating to certain social policies,” according to the legislation. If the bill becomes law, corporate directors and officers could be held liable in the event that corporate actions fail to align with shareholders’ best interests.

Putting the T (for taxes) in ESG

In a piece published by Bloomberg Tax, PwC’s Kathryn Kaminsky suggested that companies put “the ‘T’ in ESG.” She wrote:

“While tax may not be thought of as being at the forefront of this revolution, it has been involved from the beginning—and it’s accelerating. Investors are not only asking about the sustainability of tax rates, but internal governance and tax risk monitoring too. The number of rating agencies ranking companies for environmental measures and tax is increasing as well. As is the number of voluntary sustainability reporting boards, such as the Global Reporting Initiative (GRI) and the International Business Council (IBC). And earlier this year, the Securities and Exchange Commission (SEC) issued a request for input on climate change disclosures.

In this new era when everyone is talking about ESG, it’s important to understand how tax fits into the larger picture. Considering tax early and often can provide a strategic advantage for businesses and their stakeholders….

It’s important for companies to tell one comprehensive business story, especially around complex, sometimes non-intuitive data (tax reports!). This helps to meet stakeholder needs and expectations and ensures that the data is presented in the right context….

Tax is complicated and often nuanced. Professionals need to understand the legal and regulatory landscape while also working to hold both shareholders and stakeholders in mind. Considering stakeholders and shareholders is not an either/or proposition—it’s an “and” opportunity. ESG creates an opportunity for tax professionals to restart that conversation. Right now, regulators and companies are building ESG standards and practices. Let’s build tax standards along with it, building greater societal trust and resiliency in the process.”

Many ESG critics have claimed that ESG is “whatever you want it to be.” This is reflected in the variety among and discrepancies between various ESG ratings (which is why many critics advocate for standardization among rating agencies). If one of the major accounting agencies is advocating for taxes to be part of the ESG calculation, then it is likely that the other three, not to mention various governments, are interested in the perceived sustainability of corporate tax practices. It is also likelygiven the differences in their probable perspectives on the importance of corporate tax behaviors​​that these various stakeholders will define sustainability quite differently. And that means, in turn, that personal definitions of ESG might continue to vary significantly.

National Review on Aswath Damodaran’s ESG critiques

In last week’s edition of this newsletter, the final subject covered a long critique of ESG by Aswath Damodaran, a well-known finance professor at the Stern School of Business at New York University. This week, in the weekly-roundup edition of National Review Online’s “Capital Matters” column, the column’s editor, Andrew Stuttaford, examined Damodaran’s work in ESG in greater detail, noting, among other things, the professor’s comments on the amorphous definition of ESG. In a section on a note Professor Damodaran penned last year, Stuttaford notes that Damodaran, “highlights some of the various inconsistencies in the case being made for ESG. These include the lack of agreement over what the required standards should be.” He then quotes the professor as follows:

“what I find to be good or bad in a company will reflect my personal values and morality scales, and the choices I make will be different from your choices, and any notion that there will be consensus on these measures is a pipe dream.”

Stuttaford then concludes that these are:

“Wise words, but they are unlikely to weigh heavily with the SEC, which seems set on introducing as much standardization as it can in this area, as this can be the pathway for an activist SEC — and that, unfortunately, is what we have now — to, whether directly or indirectly, transform corporations into engines of societal change.”

Stuttaford’s analysis of Damodaran’s work is long and detailed and covers many of the professor’s additional concerns with ESG, including his belief that the entire project is so hot and so “irresistible” right now, in large part because of the money that it is making for its practitioners:

“Why is ESG being sold so aggressively? Because accountants, measurement services, fund managers & consultants are on the ESG gravy train, with stockholders & taxpayers paying. Corporate CEOs are buying into ESG, because it makes them accountable to no one.”

On Wall Street and in the private sector

ESG-ratings confusion 

On September 15, Bloomberg ran a piece demonstrating, in a real-world example, how the confusion over ESG ratings can affect investment decisions and, unwittingly, promote companies that have environmental, social, and governance skeletons in their proverbial closets. In a piece about Golden Agri Resources Ltd., the newswire reported the following:

“In the impoverished West African country of Liberia, a unit of the world’s second-largest palm oil company has admitted to destroying forests and violating the rights of indigenous people. Yet its parent is among the industry’s leaders in investor ratings for environmental and social policies.

Golden Agri Resources Ltd. acknowledged in February that its Golden Veroleum Liberia (GVL) unit hadn’t done enough to compensate local residents for business practices that included razing part of one of the planet’s richest biodiversity regions. Among the company’s shareholders is BlackRock Inc., the world’s largest asset manager, whose chairman Larry Fink has made combatting climate change a focus for the $9.5 trillion of assets his firm manages….

The controversy surrounding Golden Veroleum surfaced three years ago when Friends of the Earth and the Sustainable Development Institute Liberia filed a complaint with the High Carbon Stock Approach, a body set up a decade ago by Golden Agri and environmental groups to develop a scientific way of evaluating tropical forests to curb deforestation and protect the rights of local people. HCSA’s members now include some of the world’s biggest food producers such as Unilever Plc and Cargill Inc.

Activists for the environmental groups had visited the area around Wiah’s Town, a ramshackle group of some 100 tin-roofed buildings strung along a red-dirt road an hour’s drive from the coast. Inhabitants say GVL promised to provide jobs and amenities such as piped water, but instead the company cut down the forest, deprived farmers of their land and polluted the water supply.

“GVL cleared the land of the Lower Kulu people called Blogbo land without our consent,” says Russels Kumon, 67, a retired teacher who returned to Wiah’s Town a few years after his country’s second civil war ended in 2003. “The whole place has been enclaved. We are just in the enclaved area, making farming and any other things difficult for us. The land has been destroyed.”…

At the heart of the problem for investors are the ESG scores, which are largely based on self-reported and unaudited information, lack consistency between ratings providers, and emphasize corporate policies and processes rather than impacts.

Even within those limits, many of the world’s top agricultural producers and wholesalers score poorly. Golden Agri has spent years trying to build an image as a producer of sustainable palm oil and topped the environmental list in 2019 after its rating rose to 4 from 0.9 in 2015, data compiled by Bloomberg show.”

Analysis determines BlackRock biggest beneficiary of ESG investing trend

In a September 15 analysis, The Wall Street Journal determined that the biggest winner in the ESG investment movement so far is BlackRock, Inc., the world’s largest asset management firm, with nearly $10 trillion in assets under management. According to the analysis:

“BlackRock Inc. BLK -0.18% has vaulted from fourth to first place in socially responsible fund assets in the past 18 months with a barrage of 29 launches of mutual funds and exchange-traded funds.

Long the No. 2 index mutual-fund and ETF manager behind Vanguard Group, BlackRock BLK -0.18% has gained ground thanks to its deep ties with institutional investors and a push to include its sustainable funds in model portfolios used by advisers with individuals as clients. 

The blitz of new funds from BlackRock, led by iShares product chief Carolyn Weinberg, has helped quintuple assets in BlackRock’s sustainable mutual funds and ETFs to $58.8 billion in June, from $10.3 billion at the end of 2019, according to Morningstar….

In the past 18 months, BlackRock has nearly tripled its count of ESG funds to 46 from 16, with some big launches. One, the BlackRock U.S. Carbon Transition Readiness ETF (LCTU) which invests in companies well-prepared to benefit from the transition to a low-carbon economy, started in April with $1.2 billion from eight institutions led by the California State Teachers Retirement System. Some of its new funds screen more aggressively, like Vanguard’s, or focus on narrower themes like low carbon. In a line of iShares ESG funds launched last year, known as ESG Advanced, each fund excludes companies in 14 categories.”

BlackRock is aggressively promoting its ESG products to wealth advisers. “Advisers are taking a second look at sustainable investing,” a BlackRock webpage says, adding that “clients are asking for it.” And it warns: “Introduce it to your clients before somebody else does.””

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

ESG Developments This Week

In Washington, D.C.

SEC Chairman Gensler testimony on crypto, disclosure, and more

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

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

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

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

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

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

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

The offer and sale of crypto tokens

Crypto trading and lending platforms

Stable value coins

Investment vehicles providing exposure to crypto assets or crypto derivatives

Custody of crypto assets…

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

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

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

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

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

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

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

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

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

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

Plan advisors have big hopes for Labor Department

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

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

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

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

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

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

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

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

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

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

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

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

In the spotlight

NYU professor Damodaran posts criticism of ESG 

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

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

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

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

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

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

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

Notable quotes

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

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

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

ESG Developments This Week

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

Saudi sovereign wealth fund reportedly seeking ESG framework, redux

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

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

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

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

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

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

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

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

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

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

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

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

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

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

On Wall Street and in the private sector

PwC expanding its ESG services—and others join in

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Notable quotes

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

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

Economy and Society: Regulatory scrutiny over ESG-related sustainability claims intensifies

ESG Developments This Week

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

Regulatory scrutiny over ESG-related sustainability claims intensifies

As was noted in last week’s newsletter, the SEC is investigating DWS (the asset management arm of Deutsche Bank) for alleged ESG-related fraudclaims DWS rejects. Many ESG observers believe that the DWS probe is the beginning of a larger SEC crackdown on potentially deceptive ESG promises. On September 1, for example, Bloomberg Green noted the following:

“Pressure is increasing on managers of ESG-labeled investment funds to show they’re being truthful with customers about what they’re selling.

The heat was really turned up last week when the U.S. Securities and Exchange Commission and BaFin, Germany’s financial regulator, initiated a probe into allegations that Deutsche Bank AG’s DWS Group asset-management arm has been misstating the environmental—and possibly the social—credentials of some of its ESG-labeled investment products. Regulators have signaled the review is at an early stage, and DWS has rejected claims it overstated ESG assets.

Since then, researchers have raised questions about the credentials of money managers who claim they are marketing funds designed to address the climate crisis and social injustice.

A London-based nonprofit called InfluenceMap said more than half of climate-themed funds are failing to live up to the goals of the Paris Agreement….

InfluenceMap found that 55% of funds marketed as low carbon, fossil-fuel free and green energy exaggerated their environmental claims, and more than 70% of funds promising ESG goals fell short of their targets.

The SEC formed a task force in March aimed at investigating potential misconduct related to companies’ sustainability claims. Gary Gensler, who took over the agency in April, has said his staff is working on a rule to boost climate disclosures by stock issuers, and that the regulator remains focused on ESG issues.”

On September 3, Bloomberg’s market-news division reported that asset management firms didn’t have to wait long to learn whether DWS would be a one-off investigation or the start of a trend on the federal government’s part:

“U.S. regulators have long said they’re dubious about the green and socially conscious labels that Wall Street applies to $35 trillion in so-called sustainable assets. Now, the watchdogs are hunting for proof that they’re right.

For several months, Securities and Exchange Commission examiners have been demanding that money managers explain the standards they use for classifying funds as environmental, social and governance-focused, said people familiar with the matter. The review is the SEC’s second into possible ESG mislabeling since last year — showing the issue is a priority for the agency and a reason for the industry to worry about a rash of enforcement actions. 

The SEC is following the money: Few businesses are booming in high finance like sustainable investing, as governments, pension plans and corporations all seek to lower their carbon footprints and be better public citizens. Amid the rush for dollars, more and more ESG insiders have started sounding alarms that a lot of the marketing is hype, a term known in the industry as greenwashing.

Letters that the SEC sent out earlier this year point to some of the agency’s top concerns, said the people who asked not to be named because the correspondence isn’t public. 

Investment advisers were asked to describe in painstaking detail the screening processes they use to ensure assets are worthy of ESG designations, one of the people said. The SEC also wants to know how firms are grappling with different jurisdictions’ requirements. For instance, Europe has specific standards that money managers must adhere to in making sure assets are green or sustainable. But in the U.S., it’s much murkier. 

Another SEC query sought information about ESG compliance programs, policies and procedures, a different person said. The SEC additionally asked about statements made by managers in their marketing materials or regulatory filings. 

The SEC has shown it’s keen to bring cases, forming a taskforce of enforcement lawyers in March whose focus includes fund managers’ ESG disclosures.” 

Both of these stories followed an August 26 piece published by MarketWatch (a Dow Jones & Company financial news site), also suggesting that the DWS matter would be the start of a something longer:

“This is the first of many more to come,” Amy Lynch, a former SEC regulator and president of FrontLine Compliance, told MarketWatch. “The SEC has been letting the industry know that this is an area they’re looking into for the past year. They’ve given every warning.”…

Under the chairmanship of Gary Gensler, the SEC has made it a top priority to regulate what public companies must disclose about risks related to climate change and the environment, new information about its workforce policies and other policies that impact social issues.

At the same time, it has telegraphed its intention to hold investment managers responsible for clearly disclosing the principles they use to develop sustainable investment funds.

“When it comes to sustainability-related investing…there’s currently a huge range of what asset managers might mean by certain terms and what criteria they use,” Gensler said in a speech last month. “I think investors should be able to drill down to see what’s under the hood of these funds.”

Meanwhile, in the United Kingdom

On September 5, London’s Mail on Sunday newspaper reported that British Prime Minister Boris Johnson has decided to heed the advice of Tariq Fancy’s advice to make climate change finances issues a government matter, while, at the same time, maintaining the idea that investments can power a more sustainable economy. Fancy is a former CIO for sustainability at BlackRock, who has spoken publicly about his belief that ESG investing is, at best, in his view, what he describes as a dangerous distraction. The paper reported that:

“Boris Johnson will meet pension and insurance bosses in Downing Street next month to thrash out plans to channel billions of pounds of retirement funds into ‘green’ projects. 

A source said there will be in-depth discussions about how pension cash can be diverted into initiatives such as installing solar panels in homes and providing charging points for electric cars. 

More than £1trillion is sitting in defined contribution pensions – including workplace schemes.

The Government is hoping to unlock more of this to invest in Britain’s green economy and ‘build back better’ initiative. Another £2trillion is in annuities and defined benefit schemes. 

The agenda is expected to include more detail on funnelling pension money into various projects to reach ‘net zero carbon’ by 2050 – the commitment to reduce greenhouse gases to offset carbon emissions in order to combat climate change. 

Sources said the trade body the Association of British Insurers is separately meeting with City Minister John Glen this week to talk over the new push.

A source said: ‘This needs a scheme, and the Government is probably best placed to do it because you need a supply chain lined up including investment and the people to implement projects. There is a need to coordinate and get the right types of projects going.’ 

But the plans are expected to spark controversy as many of these investments are illiquid – meaning they are difficult to buy and sell – which could leave pension savers with some of their cash trapped in assets.”

In the Spotlight

Wages before sustainability?

For much of its history, ESG has been nearly synonymous with the idea of what is often called by its advocates sustainable investing. However, according to a recent study by Cerulli Associates, an American asset management research company based in Boston, when affluent American retail investors identify the factors that most influence their investment decisions, they prefer companies that pay what they deem are fair wages over companies that are keenly environmentally aware. It’s not that they don’t appreciate environmental friendliness, according to the study. It’s just that they appreciate what they deem the fair treatment of workers more:

“While the majority (53%) of affluent respondents indicate that investing in an environmentally responsible firm is important to them, 65% of respondents favor investments in companies that pay their workers a fair/living wage. “This result highlights one of the biggest challenges in promoting ESG or sustainable investing products,” says Smith. “When presented with these offerings, investors and advisors get hung up on the ‘E’ and rarely consider the ‘S’ or ‘G.’” Particularly notable in these results are indications of interest 16 to 25 percentage points higher among respondents in the three oldest cohorts compared with their overall ESG interest levels.”