Anti-ESG Movement Reveals How Blackrock Pulls-off World’s Largest Ponzi Scheme
Greenwashing Is Increasingly Making ESG Moot. Anti-ESG Movement Reveals How Blackrock Pulls-off World’s Largest Ponzi Scheme
Real-estate investor Sam Zell said to CNBC a few years ago: “I didn’t know Larry Fink had been made God.”
When you’re 98 years old you can say things others can’t, so bravo to Charlie Munger for daring to speak an important but too muffled truth about today’s financial markets. “We have a new bunch of emperors, and they’re the people who vote the shares in the index funds,” Warren Buffett’s Berkshire Hathaway partner said Wednesday. “I think the world of Larry Fink, but I’m not sure I want him to be my emperor.” Many CEOs no doubt privately agree.
* Musk Says ESG ‘An Outrageous Scam’!
Greenwashing Is Increasingly Making ESG Moot
Fossil fuel holdings, Russia’s war and revelations about who’s investing there are battering the strategy’s original meaning.
The concept behind ESG keeps getting harder to defend.
For years now, managers of big funds touting their supposed focus on the environment, social issues and corporate governance have been faulted for holding shares of fossil-fuel purveyors (including Exxon Mobil Corp. and Chevron Corp.), weapons manufacturers (like Raytheon Technologies Corp.) and mining companies (such as Newmont Corp.).
In fact, the largest ESG-focused exchange-traded fund—the $22.9 billion iShares ESG Aware MSCI USA ETF (ESGU)—has almost 3.1 percent of its assets invested in the oil and gas sector, the industry most responsible for the accelerating destruction of the planet’s atmosphere.
Criticisms of the ESG industry’s increasingly feckless profile have only grown louder since Vladimir Putin launched his war against Ukraine almost three weeks ago, killing thousands so far. Since then, it emerged that so-called ESG funds had at least $8.3 billion allocated to Russian government bonds and companies.
While the figure is small compared with the roughly $2.7 trillion devoted to ESG-related funds, the revelation has turbocharged skepticism about the merits of ESG investing.
Putin’s attack even prompted Ukraine’s former finance minister, Natalie Jaresko, to criticize ESG. She wrote in a March 3 column for the Financial Times that the Kremlin’s war raises questions for companies that have “vociferously professed the virtues of environmental, social and governance factors.”
This is “a moment of truth” for ESG, she said. By her read, the phenomenon of greenwashing has now morphed into “ESG-washing.”
“All too frequently, corporations and their executives engage in marketing or obfuscation of what they’re actually doing—what could more accurately be called ‘ESG-washing,’” Jaresko wrote. “Will this prove to be another case of looking the other way?” She called on companies to end their ties to Putin’s regime.
Since Russia invaded Ukraine on Feb. 24, a mass corporate exodus has accelerated, starting with BP Plc and quickly spreading to dozens of other global brands.
The unwinding has left companies wondering whether they’ll ever return and, more importantly for them, whether they’ll ever recoup the value of their abandoned businesses in a country that has almost overnight become the world’s most-sanctioned nation—and begun to nationalize those foreign assets.
Professors Elizabeth Demers, Jurian Hendrikse, Philip Joos and Baruch Lev (who recently retired from New York University’s Stern School of Business) pulled together a study questioning why companies were able to retain their high ESG scores after investing so heavily in Russia, a country long plagued by corruption.
Among their conclusions was that there is no statistical association between companies’ ESG scores and their response to the Russian invasion.
“If you’re an investor who has been picking stocks based on ESG scores under the assumption that your money is likely to be funding more socially responsible corporate behavior, particularly in periods of extreme crisis such as Russia’s invasion of a sovereign country, you should be very disappointed,” the professors wrote, adding to the chorus of doubters about the usefulness of ESG ratings.
They went on to say that Jaresko is fully justified for calling out companies for “not walking the talk of socially responsible corporate behavior.
Our evidence suggests that Russian-invested European firms that have higher overall ESG scores, and even those with higher ‘social’ scores, aren’t more likely to take meaningful action in response to Russia’s invasion of the Ukraine.”
So where does that leave ESG? It’s not clear that all this skepticism is having any impact as money keeps pouring into the sector. Last week, ESG-focused ETFs attracted $1.8 billion, the most since early February, even as the S&P 500 index dropped about 3%.
Proponents of ESG say that skeptics don’t understand how ESG is used in the investing process. It’s not about doing good with your money, per se: They contend it’s essentially a tool to help measure a company’s resilience to financially material ESG-related risks.
MSCI Inc., the leading provider of ESG scores, says on its website that the ratings aren’t “a general measure of corporate ‘goodness.’”
Why Green Stocks Are Slumping During An ESG Boom
Despite long-term growth prospects, there seems to be less enthusiasm for the sector, according to analysts.
Despite a drop in clean-energy stocks and intensifying concerns about widespread greenwashing, the market for investment products sold as being ESG-related had another record year by most yardsticks.
Issuance of sustainable loans and bonds, where proceeds are supposedly earmarked for environmental projects or to further a company’s social goals, exceeded $1.5 trillion, including about $505 billion of green bond sales; ESG-focused exchange-traded funds attracted almost $130 billion in 2021, up from $75 billion a year ago; and investment in early-stage climate tech companies approached $50 billion.
It also was a year of big fees for U.S. managers of sustainable funds, with revenue climbing to almost $1.8 billion from $1.1 billion in 2020, according to data compiled by researchers at Morningstar Inc.
But not everything went one way. The S&P Global Clean Energy Index, which includes companies like wind-energy giant Orsted AS, Spanish utility Iberdrola SA and Sunrun Inc., the largest U.S. residential-solar company, has declined 27% so far in 2021, after more than doubling in value last year.
The outlook for green stocks is challenging because of worries about rising interest rates tied to inflation, unpredictable U.S. politics and regulatory maneuvers like California’s decision to sharply lower subsidies and add new fees for home solar users, said Sophie Karp, an analyst at KeyBanc Capital Markets.
“Despite long-term growth prospects, there is waning enthusiasm for the sector,” she said.
Adeline Diab, head of ESG research for EMEA and the Asia-Pacific region at Bloomberg Intelligence, agreed. On Dec. 21, she wrote: “Despite mounting catalysts with the U.S. infrastructure plan and EU taxonomy requirements, the clean-energy sector may remain exposed to uncertainty linked to government support such as stimulus delays or incentives-cuts announcements, the most recent being in California.”
Shares of renewable energy stocks hit another speed bump this week when U.S. Senator Joe Manchin, a conservative Democrat from coal state West Virginia, shocked his own party by announcing his opposition to President Joe Biden’s economic plan, which includes a landmark investment in the fight against global warming.
Manchin, whose vote in an evenly-split Senate was needed in the face of universal Republican opposition to significant efforts to fight global warming, has undermined Biden’s bid to address the climate crisis.
Even with the stock market slide, this year was still the first since the Paris climate agreement in late 2015 that more money went into green bonds than debt issued by oil, gas and coal companies.
And next year is shaping up to be bigger. Analysts at Morgan Stanley estimate that green bond issuance will approach $1 trillion in 2022, led by sales from the European Union.
Bank of America Corp., the biggest corporate issuer of U.S. bonds sold as being tied to environmental, social and governance factors, also is predicting another big year for global sales of the debt.
“Will ESG primary issuance market double again in 2022? We’re not making that prediction,” said Karen Fang, the bank’s global head of sustainable finance, in an interview last week. “But we do think it will grow very, very strongly given the momentum behind the global net-zero transition and investor demand.”
Why The Sustainable Investment Craze Is Flawed
The first in a series of Streetwise columns about the failed promise of funds guided by environmental, social and governance principles, known as ESG.
The financial industry has spotted an opportunity to make money by helping people feel good about themselves. Despite claims to the contrary, these investments don’t do much to make the world a better place.
ESG funds, as they are known, promise to invest in companies with better environmental, social and governance attributes, to save the planet, improve worker conditions or, in the case of the U.S. Vegan Climate ETF, prevent animals from being eaten.
Money has poured into ESG funds as noisy lobby groups push pension funds, university endowments and some central banks to shift their investments. The United Nations-supported Principles for Responsible Investment says signatories have $121 trillion of assets under management; even assuming lots of double-counting, that is most of the world’s managed money.
Over the next few weeks, Streetwise will explore the explosion of ESG investing and why I think it is mostly—but not completely—a waste of time. I will also offer up some solutions and discuss how to use your money to make a difference, while understanding the inevitable trade-offs.
ESG supporters can point to what look like successes: Their pressure has encouraged many companies to sell off dirty power plants, mines and, in the case of Anglo-Australian miner BHP, its oil business. It has even forced board changes at Exxon Mobil.
Sadly, selling off assets or shares by itself does nothing to save the planet, because someone else bought them. Just as much oil and coal is dug up and burned as before, under different ownership.
And there are plenty of people out there to buy the assets, because never before in history has there been so much private capital operating without the public reporting requirements brought by stock markets.
Rich people who want to make the world greener could make a difference, by buying and closing dirty businesses even when they are profitable. So far, though, this hasn’t happened in any significant way. The pitch from Wall Street fund managers is the exact opposite—that by going green investors can change the world and make more money, not less.
“A lot of [clients] only really get enthusiastic if they get comfortable that they are not sacrificing return,” says Valentijn van Nieuwenhuijzen, chief investment officer at fund manager NN IP, which is being bought by Goldman Sachs.
Someone has to take a loss somewhere if fossil fuels are going to be left in the ground rather than extracted and sold. ESG investors’ hope is that the losses will fall on other people. The problem is that less environmentally-minded investors buying those shares, oil wells or power plants are absolutely not going to shut them down unless they stop being profitable.
It might make sense for an investor or company to sell out of fossil fuels early if they think the retreat from coal and oil is inevitable—indeed, that was the pitch by the activist who took on Exxon—but that is simply to invest according to a political prediction, not a way to fight climate change.
Some of the biggest sources of fossil fuels are immune to shareholder pressure anyway. Much of the world’s oil is pumped by government-controlled companies, led by Saudi Arabia and Russia.
Exxon can be forced to change its approach, but the global supply of oil is still determined by OPEC, as President Biden’s appeal to the cartel to pump more to keep fuel prices down has demonstrated.
There are three big pro-ESG arguments, which sound reasonable, but have major flaws.
First, if companies treat the environment, workers, suppliers and customers better, it will be better for business. This could work where companies have missed something to boost profits, such as add solar panels on a sunny roof or create a better employee retention program.
Early ESG activists plucked the low-hanging fruit here, but management has become painfully aware of changing customer and employee expectations, so there is less opportunity ahead.
Adding costs to reduce a company’s carbon footprint, or paying staff more, should only help the stock price if it also raises revenue or reduces other costs, by say generating more loyalty from carbon-conscious consumers, lowering staff turnover or improving relations with regulators.
Otherwise profits can only be maintained by passing the higher costs through into higher prices, and—unless the firm has monopoly power—eventually customers who don’t care will go elsewhere. The alternative is to reduce profits, but ESG investors are almost universally against this.
The second ESG point is that by shunning stocks or bonds of dirty companies, and embracing those of clean companies, it will direct capital away from bad things and toward good ones. After all, a lower stock price or higher borrowing cost in the bond market should make it less attractive for dirty companies to expand, and vice versa for clean companies.
In practice, there has been a very weak link between the cost of capital and overall corporate investment for at least a couple of decades. Small changes in the cost of capital pale in comparison to the risk and return projections of a new project.
That is not to say there is no link. Tesla, with extremely expensive shares, has repeatedly taken advantage of its ability to issue new stock to invest in factories and research. The high prices early last year for clean-energy stocks might have encouraged similar corporate investment.
The flip side of course is that buying wildly overpriced shares isn’t a good way to make money, as losses of a third or more from this year’s peaks for clean-energy stocks shows. Shifting the cost of capital just might help save the planet, but after the short-term shift in valuations is over, it should lead to underperformance.
The third claim from some ESG investors is that they are just trying to make money, and that involves shunning firms that are taking unpriced risks with the environment, workers or customers. Since they call themselves “sustainable” or use “ESG integration,” funds doing this look very like the rest of the ESG industry.
The selection principle of the most popular ESG indexes, for instance, those from MSCI, involves identifying only risks that are financially material.
I would say, sure. If you think the government is going to, say, raise fuel taxes, don’t buy manufacturers of gas-guzzlers. If you think the government will impose more restrictions on coal plants, then coal generation will be an even less attractive investment.
Equally, if you think customers will be willing to pay more for brands that cut their carbon use, by all means bet on their shares. Just don’t fool yourself that you are making much difference to the world with your investment decision.
Red-blooded capitalists chase these profits just as much as any green-minded investor. There is no need to try to persuade capitalists to have a conscience; they will do what you want if you make it profitable via customer demands or government intervention (or, if we are lucky, new technology).
There is one way that ESG investing does, sort of, work. Shareholders can push companies to stop lobbying governments in favor of fossil fuels. Conceivably this might help push customers and governments to do the things that would really make a difference.
My big concern about ESG investing is that it distracts everyone from the work that really needs to be done. Rather than vainly try to direct the flow of money to the right causes, it is simpler and far more effective to tax or regulate the things we as a society agree are bad and subsidize the things we think are good. The wonder of capitalism is that the money will then flow by itself.
ESG Pioneer Whose Firm Rose To Top Now Sees ‘Disconcerting’ Boom
Dodson sold his stake in Parnassus four months ago, almost 40 years after he started the San Francisco-based asset manager.
Few people have benefited more from the boom in ESG investing than Jerome Dodson.
Almost four decades ago, Dodson founded Parnassus Investments — a little known firm outside of ESG circles — and watched it grow into the world’s largest money manager dedicated to environmental, social and governance factors. The 78-year-old retired in October after he and his family sold their stakes in the business.
Dodson lauds how ESG has over the years helped push corporations and investors alike to act on issues such as worker rights and environmental protections. But as more money piles into the strategy, many companies and investors are exaggerating their efforts and impacts, Dodson said.
The ESG bubble is “a little disconcerting,” Dodson said in an interview. “It’s good that more people are talking about ESG. But if you look at how some money managers determine if a company is socially responsible, it’s not very rigorous and they’re not really strict in their criteria. We have a lot of money coming in and they use ESG as a marketing tactic.”
Stronger regulations are needed to clamp down on so-called greenwashing and address underlying issues such as climate change, Dodson said. “ESG alone isn’t going to save the planet.”
To counteract overstated claims, Dodson said investors need to be more rigorous in their analysis of companies by pressing them for specifics on the actions they’re taking on ESG issues, and disregard answers that are too general.
Investors themselves should specify what standards they are using in their strategies, while regulators should require fund managers to provide more details about their ESG tactics, he said.
A deluge of money has flowed into ESG in the past several years, making it one of the hottest areas of investing. The enormous growth has prompted other current and former sustainability executives and academics to criticize ESG for having limited impact in tackling systemic environmental and societal issues.
Dodson echoes Matt Patsky, who runs Trillium Asset Management, one of the oldest ESG firms. He said last year that regulators’ efforts to rein in money managers’ ESG claims are the “best thing to happen to the industry in years.” Regulators in Europe are seen as being closer than their U.S. counterparts to rolling out ambitious rules aimed at stamping out greenwashing.
Dodson, who ran a small bank in the late 1970s where he created a savings account that helped finance solar-energy projects in San Francisco, was inspired early in his career by Benjamin Graham’s book “The Intelligent Investor,” which described how to invest in undervalued stocks. Dodson sought to pair that strategy with socially responsible investing and started Parnassus in 1984.
One of the funds he ran, which is now called Parnassus Mid Cap Growth, rose at an annual rate of 10.1% from the end of 1984 through April 2018, compared with the 11.2% return of the S&P 500, according to the firm.
Parnassus has steadily expanded, with assets increasing to $48 billion at the end of last year from $5.5 billion a decade earlier. The San Francisco-based firm prospered as the universe of ESG funds ballooned globally to about $4 trillion, according to data compiled by Morningstar Inc. In 2021, Parnassus attracted a record $4 billion of new money and generated $320 million of fees, more than any active manager of ESG funds, Morningstar said.
Dodson stepped down from running Parnassus in 2018 and became chairman. He continued to oversee one of the firm’s funds until the end of 2020. Four months ago, Dodson sold control of Parnassus to Affiliated Managers Group Inc. for about $600 million. Dodson and his family owned about 62% of Parnassus, and today Dodson is worth about $150 million, according to the Bloomberg Billionaires Index.
Parnassus plans to start filing shareholder resolutions that press companies to address ESG issues and is looking to hire someone to lead the effort, said company spokesman Joe Sinha.
It was something the firm hadn’t done under Dodson’s leadership because, Dodson said, they were too time-consuming. While Parnassus voted in favor of proposals filed by other investors, the fund preferred to raise issues directly with corporate executives in private meetings, Dodson said.
Dodson said he sold his stake in Parnassus to secure liquidity. He’s so far spent his time in retirement cycling daily around San Francisco’s Embarcadero waterfront, focusing on his charitable donations and monitoring investments. He said U.S. stocks are overvalued and expects them to fall about 20% from their January peak before recovering to “much more realistic valuations.”
Wall Street’s Green Push Exposes New Conflicts of Interest
Auditors, bond raters and others aim to profit by both judging and advising companies on their ESG scores.
The booming business of green finance is being led by an unlikely group of companies that sits at the heart of the financial system.
The giant firms that audit the books, rate the bonds, advise on proxy voting and categorize the world’s companies are spending billions to boost their climate-related operations. That could accelerate the shift away from fossil fuels but could also create a new set of conflicts of interest for industries that struggled to manage them in the past.
In the past two years, U.S. firms in the financial-services sector have spent more than $3.5 billion buying green-ratings companies and data providers, a review by The Wall Street Journal found. The Big Four audit firms are also moving into the environmental, social and governance, or ESG, arena. PricewaterhouseCoopers last year said ESG was a focus of its $12 billion investment plan.
When the United Nations last year asked the finance industry to back its plans to cut carbon emissions, many banks had to be cajoled into signing up. Financial-services firms eagerly jumped in, according to people involved in the effort.
These firms are betting on big profits as companies, responding to demands by regulators and investors, seek to reduce their carbon emissions and better disclose their ESG practices. The firms have bought up smaller companies to bolster their offerings.
The market for helping companies with corporate ESG reporting alone is worth an estimated $1.6 billion globally, and forecast to increase by 21% a year over the next six years, according to U.K.-based research firm Verdantix. “The growth rate across several areas of ESG professional services is very strong,” said Kim Knickle, a research director at Verdantix.
In many cases, firms that rate or evaluate companies on things like climate risk also sell services to help companies address these issues.
Many of the firms providing these ratings, such as credit raters and auditors, are already managing deep conflicts of interest because they are paid by the companies they judge. Conflicts of interest in the credit-ratings industry were one cause of the financial crisis, according to lawmakers.
One new set of potential conflicts springs from the widespread practice of selling ESG ratings alongside consulting and other services.
Institutional Shareholder Services, the nation’s biggest shareholder advisory firm, sells to investors its climate-risk ratings for thousands of companies. It also sells to those companies advice on how to increase those scores.
“Improve ESG Ratings,” the Rockville, Md.-based firm says in its pitch to the roughly 5,000 businesses it covers. “Stand out among companies that you compete with for capital.”
The financial-services firms’ multiple ESG services create clear potential conflicts of interest, according to Anant Sundaram, a finance professor at Dartmouth College’s Tuck School of Business. “They earn cash flows by selling their services…to the very firms they’re supposed to be unbiasedly scoring and ranking,” he said.
ISS’s general counsel, Steven Friedman, said the firm, owned by German stock exchange operator Deutsche Börse, has taken steps to address potential conflicts of interest in its ESG work, including a firewall separating its ratings and corporate-advisory units. “ISS does not and will not give preferential treatment to any corporate issuer,” Mr. Friedman added.
ESG raters typically get most of their income from investment firms, which package together top-scoring companies to create green-branded products that are sold to investors. That creates an incentive to hand out high ESG scores, said Hans Taparia, a business professor at New York University.
“If the raters were to be tough on companies, there wouldn’t be any products to create for investors,” Mr. Taparia said.
Fund-ratings firm Morningstar Inc. gives out performance awards that are available only to companies that pay it for an ESG assessment.
Morningstar’s Sustainalytics unit sells companies an “ESG Risk Rating License” for an undisclosed amount. “Showcase that you are rated by a world’s leading ESG Rating agency,” its website states. Only companies that buy the license are eligible to potentially get a “Top-Rated ESG Badge.”
Badge winners include Freehold Royalties Ltd. , a Canadian firm with a portfolio of oil-and-gas properties. The company isn’t top rated by everyone. It is classified as a “poor” ESG performer, with a score of 23 out of 100, by ratings-firm Refinitiv, owned by London Stock Exchange Group. A Freehold Royalties spokesman declined to comment.
A Sustainalytics spokeswoman said Freehold Royalties is rated a low ESG risk—and therefore scores well—because it earns most of its money from owning land on which oil and gas are produced, rather than from drilling wells.
She added that Sustainalytics views its management of potential conflicts of interest as “crucial to the independence and integrity” of its ratings.
Regulators are starting to look at potential conflicts of interest in the largely unregulated ESG sector. The International Organization of Securities Commissions, an umbrella group of finance watchdogs, last year highlighted the multiple services offered by many ESG-ratings firms.
It recommended its members, including the U.S. Securities and Exchange Commission, consider requiring ESG ratings and data firms to “identify, disclose and, to the extent possible, mitigate potential conflicts of interest.”
An SEC spokeswoman declined to comment.
Ratings firms are pushing back against potential new regulations. The “presence of any…potential conflicts does not necessitate regulation of ESG data,” Morningstar told IOSCO regulators last year.
Ratings giant Moody’s Corp. recommended to IOSCO that any new policies should allow firms to demonstrate how they address conflicts, “rather than construct narrow requirements.”
Moody’s, which last year paid $2 billion to buy climate and natural disaster analysis firm Risk Management Solutions Inc., sells ESG assessments of companies to investors. Moody’s also sells similar assessments to the companies themselves, saying it can help them “seize new opportunities for value creation” from climate-change.
Credit-ratings firms’ sales of ESG services create a further, troublesome, set of potential conflicts, according to Jeffrey Manns, a law professor at George Washington University.
Companies may feel pressured to buy ESG consulting services from a credit-rating firm to maintain a good relationship with that firm and safeguard their credit rating, he said.
Another risk is that credit-ratings firms may be more reluctant to downgrade companies that pay them big fees for credit ratings and, now, for ESG services, according to Mr. Manns. “Rating agencies have no interest in biting the hands that feed,” he said.
A Moody’s spokesman said the firm has safeguards to protect the independence and integrity of the credit ratings process. “Our credit ratings are not influenced by commercial considerations across any aspect of our business, including ESG,” the spokesman added.
Rival credit-ratings giant S&P Global Inc. has commercial interests in businesses that can affect companies’ ESG scores. It also issues such scores and sells ESG data reporting, auditing and risk-management services to companies.
S&P is part-owner of a San Francisco-based company called Xpansiv that runs the Aviation Carbon Exchange, a marketplace that allows airlines to buy and sell carbon credits. Airlines’s use of such credits to brand their operations as sustainable has been criticized by environmental groups, among others.
An S&P spokeswoman said the firm is committed to the independence and objectivity of its products and services. S&P has “controls in place to identify and manage actual, potential, or perceived conflicts of interests,” the spokeswoman added.
Many Big ESG Funds Are Just Glorified Market Trackers
And some of them perform even worse than the indexes.
In the recent market tumult, the largest ESG-focused exchange-traded funds in the U.S. are again showing that they are little more than market-trackers—with even worse performance.
The iShares ESG Aware MSCI USA (ticker ESGU), which claims to invest in U.S. companies with positive environmental, social and governance characteristics, has dropped 5.3% since the start of the year, slightly worse than the 4.6% decline of the S&P 500.
Seventeen of the $24.7 billion fund’s 20 largest holdings, led by technology stocks, are the same as those with the heaviest weightings in the benchmark U.S. index. The only differences are ESGU owns sizable stakes in PepsiCo Inc., Coca-Cola Co. and Cisco Systems Inc. as opposed to Berkshire Hathaway Inc., Exxon Mobil Corp. and Pfizer Inc.
An analysis of the Vanguard ESG U.S. Stock ETF (ticker ESGV) shows a similar focus on shares of tech companies. About 20.8% of ESGV’s assets are invested in four tech stocks—Apple Inc., Microsoft Corp., Amazon.com Inc. and Alphabet Inc. By comparison, the S&P 500’s weighting in the four leading U.S. technology companies is 20.6%.
Vanguard’s $6.2 billion ETF has fallen 6.5% since the start of the year, almost 2 percentage points more than the S&P 500.
The third biggest ESG-focused fund with ESG in its title is BlackRock Inc.’s iShares MSCI USA ESG Select Social Index ETF (ticker SUSA). The fund’s three top holdings are Apple, Microsoft and Alphabet and it has almost one-third of its $4.1 billion devoted to tech-related companies.
Of the three funds, ESGU is closest to a market-tracking fund based on the fund’s overall composition, said Shaheen Contractor, an analyst at Bloomberg Intelligence who writes about ESG-focused ETFs.
ESGV shouldn’t be graded against the S&P 500 since they hold a larger proportion of mid- and small-cap stocks, Contractor said. For ESGV, the appropriate benchmark is the Russell 3000, which has declined 5.2% since the start of the year—less than ESGV.
SUSA’s benchmark is the MSCI USA Index, which has fallen 5.7% since the end of December. The fund dropped 6.6% in the same period.
From an ESG standpoint, it does make some sense that managers of these funds gravitate to tech stocks. Companies like Apple, Microsoft and Amazon.com were among the earliest companies to announce plans to reduce their emissions to net zero by 2050.
Microsoft, for example, has received credit from analysts at BloombergNEF for setting targets that go beyond its own operations to address the company’s broader impact on climate and society.
Nevertheless, most investors in ESG ETFs likely would be more comfortable knowing that managers of their funds are focused on adhering to the best environmental, social and corporate governance principles, rather than simply looking for ways not to deviate too far from benchmark stock indexes.
Contractor said considering the level of ESG exposures and the fees charged helps identify reasonably priced ETFs. “ESGU stands out as a strategy that offers low levels of ESG exposure with relatively higher fees, making it an industry laggard,” she said.
Banks Get ESG Upgrades Despite Lending Billions For Fossil Fuels
Wells Fargo, Citigroup, Morgan Stanley received a boost in their green credentials from MSCI, even after providing $74 billion to polluting companies.
The world’s leading rater of green credentials is rewarding some of Wall Street’s biggest banks even though they continue to lend billions of dollars to fossil-fuel companies.
Those credentials come in the form of upgrades from MSCI Inc., which ranks corporations globally on environmental, social and governance criteria.
In the past two years, Wells Fargo & Co., Citigroup Inc. and Morgan Stanley were among banks that got an ESG headline-rating upgrade for environmental reasons, even though the three banks arranged a combined $74 billion of loans for fossil-fuel companies.
Climate change, racial inequality and the growing wealth gap have created huge demand for ESG data on global companies. Adjustments to ESG ratings, which investors use to trade shares in a booming market for sustainable investing, can affect the flows of money invested in a company’s stock.
Some $2.7 trillion now sits in sustainable funds, more than triple the amount from two years ago, according to research firm Morningstar Inc. That sum is expected to continue growing at a rapid pace.
Bloomberg News analyzed MSCI’s ESG rating upgrades given in the past two years to lenders in the S&P 500, a representative sample of companies in the world’s largest economy.
The analysis found that 13 of 22 banks got upgrades, and almost half of those were because MSCI analysts took into account a “more granular breakdown” of the banks’ loans — meaning which industries get their loans.
Only three of the 22 lenders got an ESG rating downgrade: Zion Bancorp, Signature Bank and M&T Bank Corp.
Rather than measuring the total sums loaned to high polluters, MSCI analysts focused on how much those loans accounted for in a bank’s lending portfolio.
For example, if a bank lent billions to an oil company but those loans represented a small part of its overall lending, MSCI would consider the bank to be greener — and worthy of a rating upgrade — compared with one that lent millions but whose loans accounted for a larger part of its overall portfolio.
Analysts at MSCI found that six firms — Wells Fargo, Citigroup, Morgan Stanley, Truist Financial Corp., Regions Financial Corp. and U.S. Bancorp — had only a small proportion (about 10% or less) of their total lending going to polluting businesses such as oil, gas and power companies or miners.
What mattered more isn’t the total sum lent to these corporations, but the lending portfolio’s “environmental intensity,” which is how much environmental harm the firm could be on the hook for per dollar lent across its entire portfolio.
JPMorgan Chase & Co. was the only S&P 500 bank whose ESG rating upgrade in 2020 was driven largely by its green-lending practices. MSCI analysts noted that its green bond issuance in 2019 stood at levels “besting industry peers.”
Since the Paris Agreement was signed in 2015, JPMorgan has underwritten more bonds for fossil-fuel companies than any U.S. bank. The company also ranks as the leading underwriter of green bonds in the same period among its domestic peers, according to data compiled by Bloomberg.
MSCI, which markets its ratings as a way to “build better portfolios for a better world,” said its ratings are tied to “relevant ESG risks.” MSCI’s ESG ratings measure how government regulations, legal judgments or other factors will affect those companies’ bottom line, rather than the risks the companies’ activities might pose to the world — a fact revealed by a Bloomberg Businessweek investigation published in December.
In a statement, MSCI said its ESG ratings “are used by institutional investors to better understand a company’s exposure to financially relevant ESG risks, not to measure a company’s total climate impact — we have other tools and data for that purpose.
We are explicit about this investment management purpose and investors using our ratings understand and agree with our approach.”
But in a November interview responding to the Bloomberg investigation, MSCI Chief Executive Officer Henry Fernandez said even “many portfolio managers don’t totally grasp that.”
While the approach of considering risks to the company’s bottom line is an industrywide practice among ESG data providers, Bloomberg Intelligence estimates that 60% of all the money retail investors have plowed into sustainable or ESG funds globally has gone into ones built on MSCI’s ratings.
So changes to those ratings can have outsized impact compared with ESG scores from competitors such as Sustainalytics or Bloomberg LP. (Bloomberg LP, which owns Bloomberg News, also provides ESG data and scores; it has a partnership with MSCI to create ESG and other indexes for fixed-income investments.)
In response to this article, MSCI said it takes into consideration the reputational risks that lenders face tied to their absolute sums lent to fossil-fuel companies. But its in-depth reports don’t explain exactly how the assessment feeds into the ESG rating.
Consider the example of Wells Fargo. The bank was the largest lender to fossil-fuel companies during the past two years, helping arrange $41.5 billion of loans, according to data compiled by Bloomberg.
MSCI analysts found that Wells Fargo is only “involved in moderate controversy” tied to its lending to polluting industries and that its decision-making process for “incorporation of environmental due diligence” is in “line with industry best practices.”
Officials at Wells Fargo declined to comment.
Apart from the six banks that got headline-rating upgrades driven by loan-portfolio analysis, five other lenders in the S&P 500 got ratings upgrades from MSCI without taking any meaningful action.
Instead, it was the result of MSCI changing how it calculates underlying scores of those lenders relative to peers. Those upgrades coincided with a spectacular run for the stock price of most Wall Street firms as global markets recovered thanks to economic stimulus from governments responding to the pandemic.
Italy’s Push To Create Greener Cities Led To $5 Billion In Fraud
Generous government incentives were snapped up by scammers and may have created a construction bubble.
Rome, Milan and cities across Italy have become clogged with scaffolding after real-estate owners rushed to tap generous government programs to fund energy-efficiency renovations.
The problem is many were scammers. Instead of paying for improved insulation, draft-free windows and cleaner boilers, part of the state support ended up funding investment in cryptocurrencies, gold and other assets, according to Italian officials.
Authorities suspect 4.4 billion euros ($5 billion) ended up in the hands of criminals in what Finance Minister Daniele Franco called “one of the biggest frauds in the history of the Italian republic.”
Even Prime Minister Mario Draghi lost his cool over the fiasco, raising his voice at a press conference earlier this month as he slammed the “system without checks” that was put in place by the previous administration.
The government is now trying to fix the problem by tightening rules, but the damage has been done and it may go well beyond fraud. The rush for funding led to a sudden surge in demand that risks further accelerating inflation, while a bust might be just around the corner as the government responds to misuse.
The issue shows how even well-intended programs can backfire if not properly managed. In a similar case, Germany angered homeowners earlier this year by abruptly pulling the plug on an energy-efficiency program after the money dried up.
Italy’s most generous program offered a tax break worth 110% of the investment for climate-friendly renovations, while others promoted upgrading roofs and facades as well as buying efficient gas heaters. Owners of more than 100,000 buildings tapped the 110% credit, the so-called superbonus, for a total of 20 billion euros, as of the end of January.
The problem was that the tax credit could be turned immediately into cash at banks and other financial institutions, then traded on indefinitely with no tracking. While the idea was meant to help people finance construction work straight away, conditions were too loose.
About 2.3 billion euros in illegally drawn tax credits have since been seized, according to Italian authorities. In one case, finance police in the resort town of Rimini claim a criminal structure used figureheads to trade in credits several times to obscure their trail for false claims totaling 440 million euros.
Aside from fraud, the program has created other issues. A clamor for construction capacity drove up prices for construction materials and equipment by five times in some cases. Ecological Transition Minister Roberto Cingolani intervened with a decree to cap prices for roofing materials and equipment, such as scaffolding and heaters.
The impact was so widespread that about 1% of Italy’s 6.5% growth in gross domestic product last year was due to the construction sector. But as with any boom, there’s risk of a bust.
“This system created a bubble which somehow doped the entire construction market,” said Fabrizio Mancini, head of Rome-based builder Olytecma Italia. “We’ve seen a proper gold rush.”
The government first intervened in January, banning the trading of tax credits after the first transfer, essentially blocking the system and prompting banks and intermediaries such as Poste Italiane SpA and Banco BPM SpA to stop accepting them.
That created an uproar. Confartigianato Cuneo, a lobby group for trade workers, complained the moves brought the industry to a “standstill” and warned of a 40% drop in sales for construction companies this year if the trading of tax credits remained suspended.
The government backed off. It again allowed banks to transfer tax credits, but added further checks to prevent fraud and clarified the status of sequestered credits. The decree is positive for banks as it reduces the risk of writedowns, broker Equita SIM said in a note. Banco BPM resumed operations on the tax credit, while Poste Italiane still hasn’t.
Mancini’s firm invested in scaffolding and vehicles and hired four new workers to keep up with demand. Now he’s afraid those investments might turn bad.
“In two to three years time, what will become of all of us?” said the 53-year-old.
ESG Debt Concerns Revealed By Watchdog Urging Rapid Fix
* Finance Sector Found To Use Inconsistent ESG Debt Valuations
* Global Accounting Rules Haven’t Kept Pace With ESG Innovation
The unfettered boom in ESG debt has created some accounting concerns that are in urgent need of regulatory attention, according to Europe’s markets watchdog.
Firms are booking the value of so-called sustainability-linked bonds and loans in inconsistent ways, the European Securities and Markets Authority has found. The development has the potential to “negatively affect the decision-making of financial market participants and thus the efficient functioning of capital markets,” ESMA told Bloomberg in an emailed response to questions.
Demand for such debt products has soared in recent years and Moody’s ESG Solutions expects the ESG bond market alone to hit about $1.4 trillion in 2022, as issuers try to tap into seemingly insatiable demand for ethical investments.
But accounting rules for determining their asset and liability values aren’t keeping pace with the market boom, leaving firms to apply varying valuation models.
ESMA says it’s concerned that existing plans by the International Accounting Standards Board to regulate the market are moving too slowly, and is now calling on IASB to treat the valuation of ESG debt as a matter of urgency. The board should set specific guidelines for valuing instruments whose interest rates change based on environmental or social targets, according to ESMA.
The IASB says it’s reviewing the rule known as IFRS 9, which determines how financial assets are valued, and is going over the feedback it’s received on accounting for ESG elements in loans, bonds and structured instruments.
The board says that review includes a closer look at “market changes since the accounting standard was issued” back in 2018, “and how responsive the accounting standard has been to those market changes,” a spokesperson said.
“In that context, many stakeholders have provided information about the development of loans with interest rates that vary depending on whether the borrower meets pre-determined ESG targets.”
But that review process — and any potential action based on its findings — is in danger of being too slow, according to bankers, businesses and regulators.
Differing Models For Valuing ESG Debt…
Most banks want IASB to adopt a standard that’s based on valuing an asset at a so-called amortized cost. They say that using fair value, which is the model preferred by accountants, risks making profit and loss statements more volatile.
That could ultimately discourage a bank from “promoting sustainable financing,” Dominique Crowe, head of group accounting policy at UBS, said in a Jan. 27 letter to the IASB. Her comments were echoed by BNP Paribas.
The lack of uniformity is also a concern for issuers. In a Jan. 28 letter, Shell International urged the IASB to “ensure consistency in the judgments made on debt instruments and other lending agreements with ESG-linked features.”
It’s not the first time that sustainability-linked debt, which carries an adjustable interest rate depending on whether key ESG performance indicators are met, has faced questions.
In September, Bloomberg published an analysis of over 70 sustainability-linked revolving credit lines and term loans arranged in the U.S. since 2018, which showed that more than a quarter contained no penalty for falling short of stated goals, and only a minuscule discount if targets are met.
When it comes to valuing sustainability-linked debt in financial accounts, Europe’s markets regulator isn’t alone in its concerns. Regulators, banks, pension funds and accountants from Brazil to Australia are calling on the IASB to acknowledge the need for swift action. The accounting issues don’t stop with banks, but also affect pension funds and other corners of the investment industry.
“As the volume of these financial assets is growing rapidly, we believe there is an urgent need for the Board to issue guidance as to how ESG features should be analyzed to determine whether financial instruments with these features meet the SPPI criterion,” KPMG IFRG Ltd said in Jan. 28 letter.
The issue is of particular concern for banks in Europe, where governments and regulators are moving faster than other jurisdictions to create a framework that channels capital toward environmentally and socially sustainable activities.
“Considering the pressure on banks to promote this type of instrument and the implications in the economics of the banking industry we consider that the review of this project should be given the utmost priority,” the European Banking Federation said in a Jan. 27 letter.
Europe’s top banking watchdog echoed the concern, and called for a broader review of ESG characteristics citing the potential impact on credit losses.
“This topic deserves a broader discussion and should not be limited to the accounting classification of financial assets,” the European Banking Authority said in a Jan. 25 letter to the IASB. “ESG risks impact the measurement of financial assets via the computation of expected credit losses and determination of fair value.”
As such, an overall assessment of how the classification criteria — and related measurement basis — would work in conjunction with expected credit losses and fair-value models “seems to be needed,” the EBA said.
Conservative Group Wants To Stop State Pensions From Pursuing ESG Initiatives
A proposed model bill from the influential right-leaning group ALEC would bar state pension funds from looking beyond returns in their investment decisions.
State pension funds should be barred from considering social and environmental factors in their investment decisions, a conservative association said in a push for new state legislation that would clash with the financial industry’s efforts to focus on greener investments.
American Legislative Exchange Council, an association of state legislators, on Wednesday put forward model legislation that provides states a template for laws to keep pension funds from following so-called environmental, social and governance trends.
“Politically motivated investing, by definition, takes rates of return off the table,” Jonathan Williams, the chief economist at ALEC, said.
ALEC’s move comes amid an ideological row between proponents of incorporating ESG considerations into business, including some in the financial industry, and some politicians who argue that banks should stick to making money.
ALEC drafts model laws that state legislatures can easily adapt and adopt, complete with references to “[state name]” ready to be filled in. The organization has about 2,000 legislators in its ranks and about 300 additional private sector members.
Its record of seeing its model laws ultimately passed by legislatures has led to complaints from some left-leaning critics that it is effectively drafting laws in secret, though the organization says it operates transparently.
The legislative template that ALEC put forward doesn’t mention ESG outright, though, according to ALEC, countering ESG motivations in state pension fund decision-making is a driving factor behind its proposal.
The template would mandate that investment advisers haven’t “sacrificed investment return…to promote goals unrelated to those pecuniary interests” of state pension fund beneficiaries.
State pension funds are among the largest institutional investors in the U.S. The California Public Employees’ Retirement System, the nation’s largest public pension fund, reported holding about $477 billion in assets at the end of February, while Teacher Retirement System of Texas, which provides retirement benefits for the state’s public school, college and university employees, held about $201 billion in assets as of September 2021.
Leaders of the funds have begun to split on how—and whether it is appropriate—to use their heft to drive change related to ESG issues in the business sphere.
In 2020, the New York State Common Retirement Fund, which provides retirement benefits to the state’s employees, said it would pursue a plan to have a net-zero portfolio in terms of carbon emissions.
Maine legislators in June passed an act that required the Maine Public Employees Retirement System to divest itself of fossil-fuel assets, and three New York City public retirement funds in December said they had sold off $3 billion in energy company stocks because of environmental risks.
Texas has aligned itself with the opposite camp. Comptroller Glenn Hegar in March sent letters to 19 major financial companies in an investigation launched under Texas’ Senate Bill 13, which would bar state agencies from working with investment firms that boycott the energy sector.
Mr. Williams said he didn’t know what states might take up the model policy, but that he was hopeful it would be broadly considered across the country. ALEC, though, bills itself as a proponent of “limited government” and “free markets,” and its model policies historically tend to have more traction with right-leaning state governments.
ALEC isn’t concerned with what retail investors decide to do with their money, but that retiree funds should be invested for maximum returns, a system already in place under current federal rules for private workers’ pension funds, Mr. Williams said.
“The minute that they put the hard earned dollars of state employees, and others within state pension systems and use that ESG- or social- or politically-based investing motivation, they’re foisting their political views on the individual retiree,” Mr. Williams said.
Billionaire Carl Icahn Calls Out Wall Street ESG ‘Hypocrisy’ In McDonald’s Fight
* Billionaire Investor Says ‘ESG Status Quo’ Needs To Change
* Icahn Is Proposing Two Directors To Serve On Mcdonald’s Board
Billionaire activist investor Carl Icahn said Wall Street’s ESG efforts may be the “biggest hypocrisy of our time” with firms cashing in on the investing strategy without concern for actual societal impacts.
The world’s largest money managers, their bankers and lawyers “seem to be engaged in a cover-up to downplay their ESG-related economic incentives and promote their purported social impact,” Icahn said Thursday in a letter to McDonald’s Corp. shareholders. “Clearly, the ESG status quo on Wall Street needs to change.”
Icahn criticized asset managers for “subjectively selecting” which environmental, social and governance issues are important. If ESG is to be more than marketing and way to raise money, investors must “back up their words with actions,” he said.
ESG has ballooned into an industry embraced by the investing and financial world, with the label now slapped on everything from loans to exchange-traded funds as fund managers and bankers generate hundreds of millions of dollars in fees. The global market adds up to about $40 trillion of assets, according to estimates from Bloomberg Intelligence.
That growth has prompted some current and former sustainability executives and academics to criticize ESG for having limited impact in tackling systemic societal issues. Even the man who led a group that coined the acronym has said the finance industry has “sprinkled ESG fairy dust” on products and that there will be an industry shakeout in the next five years.
Icahn said that while ESG covers a range of issues, it’s both “unacceptable and irresponsible” that large asset managers have put little emphasis on animal welfare in their stewardship and proxy-voting guidelines.
Icahn has proposed adding new directors to the boards of McDonald’s and Kroger Co., saying the companies are mistreating pigs in their supply chains by sticking pregnant sows in tight crates.
He told McDonald’s shareholders in his letter that backing his two directors — including one that runs a sustainable-investment firm — would send a message to management teams across the U.S. and the world.
“As climate change and other natural resource challenges continue to threaten our world, animal welfare is an increasingly pivotal societal issue,” Icahn said.
Pence Rips Socially Minded Investing, Wants To ‘Rein In’ ESG
* Former Vice President Giving Energy Policy Speech In Houston
* Pence Is Citing Investor Securing Three Seats On Exxon Board
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 on 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. Officials in Utah and West Virginia have pressed S&P Global Ratings to scrap a system that scores US states based on their ESG-related credentials. In Texas, officials are asking finance firms to disclose their climate policies, including whether they’re limiting business with energy companies.
Finance was always meant to facilitate investment and spur economic growth that benefits the entire US, Pence said. But President Joe 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.
But the notion that such campaigns hurt companies is unproven, especially in Exxon’s case. Engine No. 1’s success came from persuading large shareholders that an improved climate strategy would also help the oil giant’s financial returns.
After the vote, Chairman and Chief Executive Officer Darren Woods quickly made peace with the three new directors, and announced a series of green measures including eliminating emissions from its operations by mid-century and locking in lower spending on fossil fuels. Buoyed by higher oil prices, Exxon’s stock is up 36% in the past year.
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.
One proposal by the Securities and Exchange Commission would require businesses to reveal the risks a warming planet poses to their operations when they file regulatory statements.
Musk Says ESG ‘An Outrageous Scam’ After Tesla Index Exclusion
Tesla CEO Elon Musk called ESG “an outrageous scam” after the electric vehicle maker lost its spot on an S&P Global index that tracks companies on their environmental, social and governance standards.
Exxon is rated top ten best in world for environment, social & governance (ESG) by S&P 500, while Tesla didn’t make the list!
ESG is a scam. It has been weaponized by phony social justice warriors.
— Elon Musk (@elonmusk) May 18, 2022
Expressing his displeasure in a series of tweets, Musk said the index compiler had “lost their integrity” and said “political attacks” on him would “escalate dramatically in coming months.”
S&P Dow Jones Indices cited concerns related to working conditions at Tesla among its reasons for removing the automaker from its S&P 500 ESG Index.
The Tricky Politics of Anti-ESG Investing
A new asset-management company backed by Peter Thiel claims to be pushing back against an “ideological cartel.” That’s a leap.
Recently, it may feel as if your 401K is just a mathematical distillation of every wrong decision you’ve ever made. Even worse, though, what if your investments are nothing less than the means by which a shallow and divisive agenda is foisted on millions of unsuspecting Americans by an “ideological cartel”?
That choice phrase comes from Vivek Ramaswamy, a former biotech executive, author and now cofounder of a new investment firm seeded by, among others, the billionaire Peter Thiel.
Strive Asset Management seeks to take on the Big Three — BlackRock Inc., State Street Corp. and Vanguard Group Inc. — accusing them of coordinating a campaign to push political objectives that are at odds with their clients’ best interests.
In essence, BlackRock CEO Larry Fink et al. decide that they want to prioritize tackling climate change or systemic racism or whatnot and then use the trillions of passive dollars they invest to force companies to prioritize that, too.
Strive will do the opposite, pushing instead “excellence capitalism” — that is, nudging companies to ditch the political stuff and focus on delivering good products and services.
Ramaswamy laid out his anti-ESG thesis in a book published last year titled “Woke, Inc.” As much as it contains useful observations, its thesis is overwrought. It may nonetheless be useful for the ESG — environmental, social and governance — movement to grapple with it.
Ramaswamy’s core argument is a warning about the growing power of passive money managers. This has merit. The Big Three own, on their clients’ behalf, about one-fifth of each S&P 500 member, on average, with potentially negative implications for governance and competition. There is already lively debate and a body of academic literature about this.
Still, it remains a leap to conclude that there now exists a cartel — a loaded term — that effectively forces certain political stances on US companies and Americans in general.
It is far from clear that corporations set the pace on social issues rather than take their cues from below. For example, plenty of people — indeed, a majority in the US — are concerned about climate change, and that didn’t require the imprimatur of any corporate executive.
Indeed, while Strive cites a survey by Brunswick Group that it says demonstrates that “most American consumers, voters and shareholders overwhelmingly agree” with its approach, the conclusions of that survey are more nuanced. It does show that only 36% of respondents “unequivocally” think companies should speak out on social issues.
However, another 44% think companies should do so but only if the issues are directly related to their core business. Only 20% give a blanket “no.”
The takeaway is not that companies should avoid taking any positions on such issues but that they should choose their battles carefully and, crucially, pay more than lip service if they do speak out.
The Brunswick survey does reinforce another of Ramaswamy’s criticisms, namely corporate hypocrisy. In his book, he does a good job recounting examples of companies posturing about this or that, often to distract from a more mercenary or scandalous story. Undoubtedly correct, this is hardly a revelation.
About 60% of survey respondents said companies speak out on social issues in order to look better to consumers. Such common skepticism rather undercuts the idea that top-down social conditioning via fiduciary fiat and corporate campaigning is actually effective.
Companies clearly can get out over their skis. Walt Disney Co., for example, in its spat with Florida’s governor, looks to have been bounced into taking a stand before it was sure of its ground. But this is a gray area. It might not be obvious why, say, a software developer would want to take a stand on voting access or transgender rights.
But one rationale may be considerations for the morale of younger workers amid a high quits rate. Would that be “wokeness,” managing the risks around the “S” in ESG, or just a way to retain staff without offering raises? Even hypocrisy can have useful outcomes.
Strive also cites Exxon Mobil Corp. as an example. Last year, Exxon famously lost a proxy battle to an upstart ESG fund, Engine No. 1 LLC.
Ramaswamy says he would have voted against the three dissident directors elected to the board and that the subsequent oil-price spike shows that Exxon would have been better off ignoring the green stuff and drilling more wells. Yet, as Engine No. 1’s own campaign showed, the environmental part was inextricably linked with the governance part.
Exxon’s lagging financial results (and stock) were plausibly blamed on financial indiscipline under a board that looked underqualified to oversee a traditional oil major, let alone one facing the novel challenges of climate change.
The relative restraint on drilling shown by Exxon, among others, in the face of triple-digit oil prices is precisely what has persuaded ambivalent investors to buy back into the sector.
The Exxon example gets at possibly the biggest problem with Strive’s approach — though also with the investment philosophy that Strive sets itself against.
Google articles about Strive and you will find terms like “ESG,” “SRI” — socially responsible investing — and stakeholder capitalism used interchangeably. Similarly, Ramaswamy’s book uses the catch-all term “woke”:
Basically, being woke means obsessing about race, gender, and sexual orientation. Maybe climate change too. That’s the best definition I can give.
If you say so. Dismissing climate change as just another activist obsession speaks to the logical disconnect of exhorting Exxon to focus on delivering a high-quality product without acknowledging that said product carries an inherent, climate-related flaw that requires a strategic response. One person’s liberal hobby horse is another’s systemic risk.
The blurring of lines between ESG, SRI and all the rest of it has done a disservice to sustainable investing, in part by creating space for blanket dismissal.
As my colleague Nir Kaissar has written, some of the blame for this lies with seeming champions such as Fink himself, who mixes calls for companies to adopt pragmatic ESG risk management with very different SRI proposals to exit investments in sectors deemed unsustainable. This sows confusion and invites derision.
In that sense, Strive’s broadside offers a useful wake-up call for ESG to hone its messaging and methodology. ESG’s great strength is its use of objective criteria rather than subjective beliefs to reduce financial risk or enhance financial performance. It also allows for more nuance; one could, for example, invest ESG-style in a coal-heavy utility today in order to help along (and benefit from) its future renewables projects.
The fuzziness of the investment movement that anti-woke asset management sets itself against is a doubled-edged sword. Most passive investors prize the low costs that come with scale, and “excellence capitalism” seems too vague a pitch to disrupt that. Nevertheless, Strive’s timing is impeccable, effectively taking the opposite side of what has become a crowded trade.
That timing also makes it suspect. Strive launches amid a gathering Republican campaign against companies taking positions that oppose the party line on wedge issues.
The day after Strive’s announcement, former Vice President Mike Pence gave a speech in Texas attacking ESG and socially minded investing, making a wild claim that Exxon’s new directors were “now working to undermine the company from the inside.”
As much as Strive touts itself as “depoliticizing corporate America,” I’m afraid you don’t get to do that credibly while also boasting about seed money from Thiel.
If Tesla Isn’t Good Enough For An ESG Index, Then Who Is?
The carmaker’s removal from the S&P 500 ESG Index places in stark relief the broader market’s conflation of the label with sustainability.
Tesla Inc.’s removal this week from an industry benchmark index is raising new questions about what ESG actually means to investors.
The strategy, widely seen as favoring industries ostensibly interested in sustainability (of the environmental, social and governance sort), started about two decades ago as a way to protect investors from risks tied to things like global warming, labor violations and discrimination.
Since then, it’s morphed into a $35 trillion industry that’s allowed millions of investors to feel as though they’re “doing good.” And now people are confused about what ESG is really supposed to achieve.
“The market continues to conflate ESG with sustainability, and you’re certainly seeing that play out here,” said Rob Du Boff, senior ESG analyst at Bloomberg Intelligence. “Our ETF team likes to note Tesla is the ultimate Rorschach test for ESG investors.”
While many would agree few automakers have done more than Elon Musk’s company in the global shift away from fossil fuels, Tesla’s management and workplace issues have been at times problematic. So much so that S&P Dow Jones Indices, while acknowledging Tesla’s environmental prowess, nevertheless decided to remove the electric vehicle maker from the S&P 500 ESG Index over safety and labor issues.
“How can a company whose self-declared mission is to ‘accelerate the world’s transition to sustainable energy’ not make the cut in an ESG index?” wrote Margaret Dorn, senior director and head of ESG indexes for S&P Dow Jones in North America, in a blog post. Answering her own question, she said “there are many reasons,” including that Tesla “has fallen behind its peers when examined through a wider ESG lens.”
Dorn focused on social and governance factors at the company, which had a negative impact on its overall ESG score. She singled out two events centered around allegations of racial discrimination and poor working conditions at Tesla’s factory in Fremont, California, as well as its handling of a U.S. National Highway Traffic Safety Administration investigation after multiple deaths and injuries were linked to its “autopilot” function.
Academics like Todd Cort of Yale University agree with Dorn. The S&P methodology focuses on corporate performance, and Tesla’s “management systems and controls are still pretty undeveloped” relative to industry leaders, he said.
But investors including Cathie Wood of ARK Investment Management have strenuously disagreed. In a post on Twitter, she called S&P’s decision “ridiculous.” It’s “not worthy of any other response.”
Paul Watchman, an industry consultant who wrote a seminal report in the mid-2000s that helped spur ESG investing, said Tesla should be part of ESG indexes. “Not all breaches of ESG are equal, and this assessment shows just how warped the S&P assessment is,” he said.
Tesla does have multiple problems related to corporate governance and health and safety, but Watchman said they should be viewed in context. “However relevant these failures and shortcomings may be, they aren’t nearly as bad other companies.” Fossil fuel giants being one example, he said.
MSCI Inc., the leading provider of ESG ratings, still includes Tesla (as well as Exxon Mobil Corp.) in its more widely tracked ESG-focused indexes, adding to the confusion about what ESG actually is. (The methodologies MSCI and S&P use for their ESG indexes are very similar.)
MSCI said its ESG-focused indexes are designed to “maximize their exposure to positive ESG factors” while “exhibiting risk and return characteristics” similar to the overall market. Companies with links to the tobacco, “controversial” weapons, civilian firearms, oil sands and thermal coal are excluded from the indexes.
S&P Dow Jones Indices said its S&P 500 ESG Index is “a broad-based, market-cap-weighted index that’s designed to measure the performance of securities meeting sustainability criteria, while maintaining similar overall industry weights as the S&P 500.” The index also excludes companies engaged in the thermal coal, tobacco and controversial weapons industries.
Still, widespread confusion over the metrics and measurements that go into ESG has become more controversial over time. But from a market standpoint, ESG indexes matter because investors have poured $410 billion into passively run ESG-labeled funds, according to data compiled by Bloomberg Intelligence.
Tesla has made the world a greener place with their innovative electric vehicles, and investors have been rewarded as a result, BI’s Du Boff said. Shareholders also have been stung by Musk’s tussles with the US Securities and Exchange Commission and his recent takeover approach to Twitter Inc., he said.
“Turns out investors should have been paying closer attention to signs of poor corporate governance,” Du Boff said.
And that brings the conversation back to trying to define ESG. Hours after it emerged that S&P Dow Jones had expelled Tesla, Shaheen Contractor and Eric Balchunas from BI published a note with this headline: “Is Tesla ESG? Many Funds Think So Even as S&P ESG Index Drops It.”
Contractor and Balchunas said their analysis ranks Tesla 46th in the S&P 500 for inclusion in ESG-focused funds. “The automaker’s ESG status remains among the most debated for any stock,” they wrote.
BNY Mellon To Pay $1.5 Million To Settle ESG-Related Charges
BNY Mellon has settled charges that it made a series of misstatements and omissions about the environmental, social, and governance aspects of a series of mutual funds it worked with as a registered investment advisor.
Under the agreement, BNY Mellon accepted a censure for its conduct from the Securities and Exchange Commission and agreed to pay a penalty of $1.5 million.
The settlement highlights the growing regulatory scrutiny that ESG-labeled investments are facing as assets continue to flow into funds that advertise a values-based component.
The SEC has named ESG investments as one of its examination priorities this year, and commission officials have said that they are a growing concern.
Tomorrow, the SEC is planning to vote on draft rules that would crack down on how advisors and fund companies market investment products using terms like “sustainable” or “carbon-neutral.”
In many cases, the trouble with ESG boils down to the simple precept that firms need to deliver what they promise. If a firm is touting an ESG strategy in an advertisement or some other communication with clients or prospects, it needs to be truthful in what it’s describing, and be sure that it adheres to any commitments it is making.
That was the issue with BNY Mellon, according to the SEC. The firm was assuring investors in the prospectuses for a series of investment vehicles it was advising known as the Overlay Funds that each fund had undergone an ESG quality review to ensure it lived up to its sustainability commitment.
In fact, the SEC alleged, some individuals at the affiliated subadvisor BNY Mellon relied on to conduct those reviews selected investments for the funds that had not gone through the ESG evaluation process.
Over a period from January 2019 through March 2021, one of the funds made 185 investments, but 67 of those did not go through the ESG review, according to the SEC.
“Numerous equity and/or corporate bond investments held by certain Overlay Funds did not have an ESG quality review score as of the time of investment,” the SEC said in its settlement.
For its part, BNY Mellon is eager to move on from the incident, and said it has updated its communications to ensure it is accurately describing its ESG policies.
“BNY Mellon Investment Adviser is pleased to resolve this matter concerning certain statements it made about the ESG review process for six U.S. mutual funds,” the company said in a statement. “While none of these funds were part of the BNYMIA ‘Sustainable’ fund range, we take our regulatory and compliance responsibilities seriously and have updated our materials as part of our commitment to ensuring our communications to investors are precise and complete.”
Thiel-Backed Firm Debuts Anti-ESG ETF
An anti-activism exchange-traded fund of sorts has launched to supposedly “unshackle” energy companies from climate concerns that some investors have forced them to reckon with.
The aim of the Strive U.S. Energy ETF (ticker DRLL), which began trading Tuesday, is to accumulate enough assets for the Ohio-based manager to have say in the boardroom, according to co-founder Vivek Ramaswamy.
Strive launched in 2022 with backing from billionaire investors including Peter Thiel and Bill Ackman.
DRLL joins a small but growing wave of so-called anti-woke ETFs after issuers such as BlackRock Inc. put their heft behind environmental, social and governance-focused funds in recent years.
With an expense ratio of 41 basis points, Strive is directly positioning itself against BlackRock’s $2 billion iShares US Energy ETF (IYE), which charges the same fee. IYE, which tracks an index that measures the performance of the energy sector, doesn’t have an explicit ESG bend.
However, DRLL’s selling point is that Strive would use its shareholder-voting power to encourage oil and companies to “drill more and frack more,” Ramaswamy said.
While Energy Information Administration data Wednesday showed US crude production has returned to the highest level since April 2020, global oil supply is extremely tight.
“We are post-ESG,” Ramaswamy said in a phone interview. “US energy stocks have tremendous potential if they’re unshackled from the shareholder-imposed ESG mandates.”
If successful, DRLL would be the ideological foil to the experience of Engine No. 1, which won three seats on the board of Exxon Mobil Corp. in June 2021 to push the company to diversify beyond oil.
The activist shareholder went on to launch the $84 million Transform Climate ETF (NETZ) in February.
Roughly $27 million traded in DRLL on Tuesday, Bloomberg data show. While most of that likely came from investors lined up ahead of time, it’s an impressive amount of day-one volume for an “indie ETF,” according to Bloomberg Intelligence senior ETF analyst Eric Balchunas.
Whether DRLL sustains that momentum remains to be seen. Principles-based ETFs have struggled to gain traction in recent years, with the Point Bridge GOP Stock Tracker ETF (MAGA), which invests in companies that support the Republican party, attracting just $16 million in assets despite outperforming the S&P 500 this year.
ESG funds have also struggled lately. The category has raked in roughly $4 billion so far in 2022, a massive slowdown after two straight years of more than $30 billion in inflows, Bloomberg data show.
“Principle-based ETFs have historically had a really tough time gathering assets, so it is definitely helpful to have a nice start like this,” Balchunas said. “Now comes the hard part though of finding other investors outside of the friends and family.”