The backlash against ESG

 Oliver Wiseman:

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The ESG story starts in 2004, when the three-letter acronym appeared in a UN report arguing for environmental, social and governance considerations to be hardwired into financial systems. Since then the term has been on a long but rapidly accelerating journey from NGO-world obscurity into the financial mainstream and subsequently the political limelight, prompting strong reactions from a chorus of prominent figures. Elon Musk calls it “a scam.” Peter Thiel says it’s a “hate factory.” Warren Buffett describes it as “asinine.”

Unsurprisingly for a piece of UN jargon that has become part of the political cut and thrust, “ESG” is often used to mean different things. Properly defined, it refers to an investment strategy that factors in environmental, social and corporate governance considerations. That might mean not investing in oil and gas companies, for example. Or it might mean only investing in companies that have a stated commitment to diversity, equity and inclusion. As it has grown in infamy, the acronym has also come to refer not only to investment products billed as ESG, but to other practices through which investment firms use their customers’ money to push political ends. For example, your pension may not be invested in an ESG fund, but the manager of that money may still be using stocks owned on your behalf to pursue political goals. A third, even broader, meaning is as a synonym for woke capitalism: a broad catch-all for big business’s embrace of bien pensant opinion, particularly on the environment.

Some of ESG’s biggest proponents have embraced a similarly broad-brush frame. Thanks to his remorseless embrace of right-on buzzwords and jargon like “stakeholder capitalism,” Larry Fink is the financial titan most associated with ESG. As CEO of BlackRock, the world’s largest asset manager, Fink never misses an opportunity to point out the happy coincidence that investing with his firm will not only make you rich, but save the world. “We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients,” wrote Fink with characteristic slickness in his 2022 annual letter last January.

This win-win rhetoric has been the rallying cry of the ESG crowd on what has looked like an unstoppable march. Make money and do good: who could possibly object? Millions have bought into this seductive logic. Globally, more than $35 trillion of assets are invested according to ESG considerations, an increase of more than 50 percent since 2016. From 2020 to 2022, the size of ESG assets in the United States grew by 40 percent. According to an analysis by the asset manager Pimco, ESG was mentioned on just 1 percent of earnings calls between 2005 and 2018. By 2021, that figure had risen to 20 percent.

ESG first came across Riley Moore’s desk soon after he was sworn in as the state treasurer of West Virginia in January 2021. As he explains, energy companies operating in the coal- and gas-rich Mountain State complained to him of the difficulties they were having accessing capital thanks to the big banks’ ESG lending policies.

Forty-two-year-old Moore is a careful, deliberate speaker with neat, close-trimmed hair and tidy features. “As we started to peel back more layers of the onion,” he tells me, “we discovered how insidious and pervasive this is throughout the financial sector in the United States. It’s in our pension funds, our rating agencies, the financial institutions of the country. It touches on all of it.”

Access to capital is a very real problem for energy firms these days. According to Goldman Sachs, the cost of capital is 15 percentage points higher in high-carbon versus low-carbon energy products today. The bank also estimates that “sectors like shipping, oil and gas, cement, steel, are all investing 40 percent less of their cash flow than they have done in their long-term history.”

It occurred to Moore that US states are big customers of the same financial institutions that the businesses which provide high-paying blue-collar jobs in West Virginia were struggling to borrow from. Why should we do business with firms that seem determined to hobble our state’s economy, Moore wondered — first to himself, then anyone who would listen.

“We looked at all the banks and asset managers my office was doing business with, and a good number of them had prohibitive lending policies to the fossil fuel industry,” he explains. Moore’s response did not rely on the passage of onerous regulation. It simply involved the state of West Virginia exercising its right to do business with whomever it chooses. Last January, Moore responded to BlackRock’s call for companies to embrace net zero by dropping the asset manager’s funds from West Virginia’s investment portfolio. The numbers involved were small — but the symbolic act suggested more action would soon follow. Sure enough, in August, West Virginia deemed five financial institutions — BlackRock, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo — ineligible for state banking contracts. “I simply cannot stand by and allow financial institutions working against West Virginia’s critical industries to profit off the very funds their policies attempt to diminish,” said Moore when he announced the move.

Moore claims such moves are working, pointing to US Bank, which, as he explains “actually changed their prohibition on lending to thermal coal and pipeline construction for natural gas and oil” to avoid ending up on the list.

Other states have followed West Virginia’s lead. In October, Louisiana pulled nearly $800 million of funds out of BlackRock. Missouri and South Carolina have done the same. In total, at least a dozen Republican state treasurers have been involved in a pushback against ESG in some form. In a sign of ESG’s growing political salience, Moore has announced a run for Congress and framed the move as a chance to take the fight against ESG to Washington.

While treasurers are flexing their state’s financial muscles, attorneys general have been using their legal authority to push back. In August, nineteen state attorneys general wrote to Larry Fink, warning that BlackRock “appears to use the hard-earned money of our states’ citizens to circumvent the best possible return on investment, as well as their vote.” The charge is that by factoring in anything other than maximizing return on investment, money managers are in breach of the “sole interest rule,” which requires investment fiduciaries (i.e., money managers) to maximize financial returns. Others go further, claiming not only that asset managers have breached their fiduciary duty to their customers, but that trustees who sit on public pension boards that invest with those firms have also violated their fiduciary duty.

The next step will be for states to strengthen their fiduciary rules. The American Legislative Exchange Council, a conservative nonprofit that helps draft legislation for state governments, has devised a bill that does exactly that.
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Big Green and elements of it like ESG are a threat t the US economy and should be treated as such.  The followers of the ESG movement have bought into the false narrative of the Big Green movement and the false belief that the world economy can survive without fossil fuels. They ignore the fact that their is not enough lithium in the world to make wind and solar reliable or provide adequate transportation for not only cars, but also for shipping.

See. also:

Biden’s Green Energy Transition Will Increase Shipping Costs/Consumer Prices