ESG investors and the East Palestine Disaster

The derailed train in East Palestine, Ohio, has created significant environmental hazards, not only to the residents of that town but also to countless other communities along the Ohio River. The derailment led to an enormous chemical fire, with hundred-foot flames and a plume of black smoke exposing local communities to a variety of chemicals, including the carcinogen vinyl chloride and phosgene, the latter of which was used as a chemical weapon in World War I.

These highly toxic chemicals were spread into the air, water, and ground, and are threatening public health and displacing residents. The Ohio River is a source of drinking water for multiple states, and the E.P.A. is concerned that it has been seriously compromised. It is estimated that some 3,500 fish have been killed by the pollution thus far. Meanwhile, residents of East Palestine who have been assured that it is safe for them to return home have been complaining of nausea and severe headaches.

So it is a supreme irony that substantial shareholders in the railway involved, Norfolk Southern, include two of the biggest promoters of ESG investing: BlackRock and Vanguard.

According to various sources, top shareholders in Norfolk Southern Corp. are the Vanguard Group, and subsidiaries of BlackRock and JP Morgan. Specifically, as of this week, CNNMoney.com lists the Vanguard Group, Inc. as the top shareholder with 7.68 percent. BlackRock Fund Advisors and JPMorgan Investment Management tie at 4.54 percent as other top investors. As of December 31, 2022 Norfolk Southern’s own website lists Vanguard, BlackRock Institutional Trust Company and JP Morgan Asset Management as top shareholders.

The latest information about the cause of the accident and toxic discharge, indicates eleven of the fifty rail cars were carrying hazardous materials.

Josh Shapiro, the governor of Pennsylvania, criticized Norfolk Southern’s response in a Wednesday letter to Shaw, saying that mismanagement by the company had put first-responders and residents “at significant risk.” He said the rail company’s personnel made decisions without talking to state and local agencies, caused first-responders to have a lack of awareness, gave state officials inaccurate information about the impact of the controlled release of vinyl chloride and “failed to explore” alternatives to the controlled release that might have been safer.

“Norfolk Southern has repeatedly assured us of the safety of their rail cars — in fact, leading Norfolk Southern personnel described them to me as ‘the Cadillac of rail cars’ — yet despite these assertions, these were the same cars that Norfolk Southern personnel rushed to vent and burn without gathering input from state and local leaders,” Shapiro wrote.

Although not right now.

Both Vanguard and Black Rock are notable for having promoted investments based not on traditional criteria to which fiduciaries have been bound, such as profitability and capital accounts, but rather on how these investment managers assess the ESG (environmental, social and governmental) policies of the companies in which they place investment funds. Of course, their analyses are utterly subjective, fluid, and difficult to quantify. Unsurprisingly, these investments are generally underperforming. As we’ve frequently noted in this space in the past, a number of states are fighting back against placing investments through these operations for these very reasons.

Maybe, to be consistent with ESG policies, investors should shun Vanguard and BlackRock over their role in the disaster in East Palestine.

The Malign Genesis of ESG—Part 2

With BlackRock’s recent acknowledgement that it lost $1.7 trillion of investors’ capital in the first six months of 2022, the truth about the Environmental, Social, and Governance (ESG) construct—the inherent cultural Marxism of the name really tells you everything you need to know—has been splayed open, revealing what could only be described as a contrived correlation between investment risk and environmental risk.

Rather than criteria intended to mitigate investment risk, as has been repeatedly asserted by BlackRock CEO, Larry Fink, the ESG construct is actually an effort to develop a financial system that re-orients capital flows toward political and social ends which include government regulation, communal property rights, and social scoring. It is an organized effort to wrest control of private property from the hands of owners and transfer it to a global nomenklatura under the guise of "protecting" the environment and repairing the "damage" done by capitalism.

As described here yesterday, these activists use layered non-profit organizations, foundations, and non-governmental organizations (NGO's), to undermine business culture, interfere with free markets, and circumvent democratic institutions. Using reliably self-interested and feckless financial and banking sector partners, companies like BlackRock and State Street Capital have abandoned their fiduciary obligations in exchange for higher management and consulting fees and greater leverage to direct capital toward investments that buttress their worldview.

Gimme, gimme, gimme.

As self-ascribed arbiters of permissible corporate and social values, these ostensibly independent financial sector experts act more like cultish evangelizers than disinterested asset managers. They seek to codify political views into boardrooms and across industries using other peoples’ capital—leveraging it to change behavior and directing it toward investments that align with their values. In more enlightened decades such a scheme may have been considered coercion or collusion. But in the 2020s, financial leaders fancy it sophisticated enlightenment.

The first and most critical threshold these central planners established was to expand and conflate shareholders (investors) with stakeholders (non-owners, communities and entities outside the company). They began by expanding the understanding of shareholders to include these “stakeholders” that necessarily underpin stakeholder capitalism. It is a system, according to World Economic Forum founder Klaus Schwab, in which private corporations are (imaginary) trustees of society and work for the benefit of everyone. Codifying this concept has been successful inasmuch as stakeholder capitalism has been integrated into the MBA programs of every major business school in the U.S. and around the world starting nearly three decades ago. Those students are the C-Suite leaders of today. They have become the reflexive mouthpieces of the ESG/Industrial Complex, promulgating a construct the genesis of which they are ignorant—and the impact of which they do not understand.

Once non-owners, communities, and supply chains are given standing through stakeholder capitalism, the follow-on concept of “natural capital” can more easily be integrated into the corporate psyche. As articulated in the Carbon Disclosure Project’s (CDP) most recent report, “Accelerating the Rate of Change: 2021-2025,” these stakeholder advocates assert that the most pressing objective to ensure the culmination of decades of work is to codify the concept of natural capital as having parity with financial capital.

Under the ESG construct, "natural capital" refers to the entire planet's stocks of water, land, air, and renewable and non-renewable resources such as plant and animal species, forests, and minerals. Already protected by the current statutory and regulatory framework that includes the National Environmental Policy Act (NEPA), the Endangered Species Act, and the Clean Air Act—among the tens of thousands of pages of administrative rules and regulations enacted under the authority of these and other statutes—"natural capital" is intended to be the agent of change, not the point of the change. This newly sought parity represents a radical and game-changing extension of commonly understood financial capital. Successfully equating "natural capital" with financial capital would entrench stakeholder capitalism into corporate boardrooms and irreparably harm the country and economy.

"Parity" would provide the necessary portal through which these ESG-activist entities could fully gain control of corporations. After achieving complete control over business, they seek to dictate how a company monetizes its properties, the manufacturing processes from which it derives revenue, and to whom the company sells its product or service. If natural capital is given parity to financial capital, there is no longer any private property. Under the stakeholder-inspired understanding of capitalism whereby property can be controlled by everyone, it is owned by no one.

Bend over, comrade. It's for the common good.

At scale, this scheme will impact individual corporations and entire industry sectors, including American oil and gas. Abundant and inexpensive energy is central to a thriving capitalist economy. The U.S. oil and gas industry consistently delivers low-impact, inexpensive, and abundant energy. With a commitment to efficient, rapid, and environmentally superior extraction technology, the industry has improved the well-being of people and communities around the world. ESG unequivocally threatens its future.

Because America is the only country in the world in which oil and gas mineral rights are privately owned, the U.S. oil and gas sector is not only a symbolic Marxist-socialist enemy but also a highly strategic target of the ESG/Industrial Complex. The significance of this fact cannot be overstated. By seeking to gain control of the energy sector through the ESG moral bludgeon, government regulation and divestment become not merely political initiatives in an ideological struggle but rather a critical battle for the survival of the entire industry, and by extension the entire U.S. domestic economy. It is therefore imperative that the response to reject and unwind the ESG movement be led by those from the oil and gas industry, joined by the agricultural, mining and construction sectors, all of whom have foreknowledge about the comping economic and political impact of ESG and the requisite resources and expertise to exploit its weaknesses and mount an effective counterattack.

According to the non-profit CDP, formerly known as the Carbon Disclosure Project, the ESG/Great Reset cabal wants "governments to introduce ambitious legislation that drives market changes. We create space for this by running a reporting mechanism that incentivizes good behavior, catalyzes the creation of new standards and prepares the market for the change to come.” In case you're wondering on which side they're on, here's their mission statement:

CDP runs the global environmental disclosure system. Each year CDP supports thousands of companies, cities, states and regions to measure and manage their risks and opportunities on climate change, water security and deforestation. We do so at the request of their investors, purchasers and city stakeholders. Over the last two decades we have created a system that has resulted in unparalleled engagement on environmental issues worldwide.

In sum, ESG is a front in an ideological war with real political, economic, and social consequences. It is a front in a non-kinetic war, which instead of guns, bombs and missiles employs the weapon of ESG to control speech, dictate how one can use his property, re-direct capital flows, and expand the role of government. Their objective is to control every aspect of the economy and business and to reorder national governments and human society.

The generals on their side don’t come from the military. Rather, they come from government, central banks, and the financial sectors. Meanwhile, the domestic oil and gas industry must defend the side of liberty in all its forms. It should not merely rebuff these attackers and render the ESG/Industrial Complex impotent, It must continue to strive for excellence in its development and delivery of energy. Meanwhile, the American people must stand shoulder to shoulder with them and help lay the foundation on which future generations will flourish.

Bad Day at Black Rock

Two years ago at The Pipeline, I discussed the growing trend to force trustees of private trusts, pension and retirement accounts, and charitable endowments to ignore traditional measures of value in favor of companies scored on the basis of imprecise, utterly subjective compliance with environmental, social and corporate governance (ESG) goals. I asked whether such investment policies might not violate their fiduciary obligation to manage funds prudently to maximize returns. After all, their sole obligation is to the funds’ beneficiaries not to unnamed, you should pardon the modern expression, corporate “stakeholders.” I contended that the fluidity and subjectivity of ESG evaluations made rational and traditional empirical evaluations of investments impossible.

As public pension systems like Calpers are increasingly facing shortfalls the issue becomes even more serious. When there are not enough funds to meet obligations, betting on an untested, often counter-rational means of placing investments is a dangerous proposition. For investors, to take but one example, the greater interest in the corporate governance of companies is demonstrated ability, not the sex or gender of the company’s management, which is of interest only to the ESG rankers. I said Black Rock was promoting to its clients ESG investment policies and warned it might lead to no good end.

Mind your own business, Father.

Are companies like Black Rock, which court socially conscious investors, in danger of violating their duty of fiduciary obligations? Bernard Scharfman thinks they may be. He hints that such virtue-signaling may be an effort to draw in Millennials and discusses the practical limitations of Black Rock’s stated plan to weigh companies’ stakeholder relationships in weighing investments. He says this sort of shareholder activism may breach the duty it owes to its own investors:

While Black Rock’s shareholder activism may be a good marketing strategy, helping it to differentiate itself from its competitors, as well as a means to stave off the disruptive effects of shareholder activism at its own annual meetings, it seriously puts into doubt Black Rock’s sincerity and ability to look out only for its beneficial investors and therefore may violate the duty of loyalty that it owes to its current, and still very much alive, baby-boomer and Gen-X investors. In sum, if I were running the Department of Labor or the Securities and Exchange Commission, I would seriously consider reviewing Black Rock’s strategy for potential breaches of its fiduciary duties.

Why is Black Rock’s position on ESG so significant? And what was its reason for switching from tested investment policies to untested, subjective elements not subject to empirical analysis? Heartland offers an explanation—it was a profitable strategy for Black Rock and one in accord with its founder’s political beliefs that investors can force top-down social policies which they favor, without being accountable for their failures.

ESG funds have been tremendously lucrative to the financial institutions and their corporate stakeholders at the heart of this radical shift in corporate governance. ESG’s novelty has justified higher management fees, and the system “gives a pass to a large number of harmful actors, driving large fund flows to them and lowering their cost of capital, while CEOs and Wall Street executives celebrate a lucrative movement that they hope will improve their public image.”

And it is BlackRock, the world’s largest private asset manager, that has stood to gain the most. BlackRock holds a stake in almost every public company with its $7.4 trillion in assets under management, and it has leveraged its size and diversification to fully reap the benefits of ESG investment. BlackRock’s iShares Global Clean Energy ETF is one of the largest ESG funds in the world.

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For a while the emphasis on this new investment strategy worked for Black Rock, drawing in clients. And then it didn’t. In six months in lost $1.7 trillion dollars of client funds This is the largest amount of money ever lost by a single firm over a six-month period.:

BlackRock has gone off the investing reservation by going with the Environmental, Social, and Governance (ESG) investing, which in turn has suffered in the current downturn. While other brokerage houses are turning away from ESG investments since the returns are always so much lower than investing to create wealth.

By getting portfolio companies to invest in green companies that are allegedly environmentally sound, but economically lagging, making a profit in the best of times is hard and during bad times is nearly impossible. iShares’ ESG Aware MSCI ETF — which has its largest holdings in companies like Microsoft, Alphabet, and Tesla — is down 18 percent since the beginning of 2022. But, iShares’ Global Energy ETF — dominated by oil and gas conglomerates like Exxon Mobil, Chevron, and Shell — has risen nearly 25 percent over the same time period.

Plus a bridge in Brooklyn for sale.

Simply speaking there is no clear link between a company’s ESG rank and its bottom line. As Institutional Investor notes:

In many cases, ESG factors are not material to the performance of a particular business, nor do they highlight areas where the business has the greatest impact on society. The carbon footprint of a bank, for example, is not material to a bank’s economic performance, nor would reducing its footprint materially affect global carbon emissions. In contrast, banks’ issuance of subprime loans that customers were unable to repay had devastating social and financial consequences. Yet ESG reporting gave banks credit for the former and missed the latter altogether, in part because the voluntary and reputation-focused nature of sustainability reports tends to leave out bad news. Such broad and upbeat ESG reporting may make investors and consumers feel good by encouraging corporate window dressing, but it distracts from incentivizing and enabling companies to deliver greater social impact on the issues most central to their businesses.

Given this example and the irrational nexus between ESG weighting and performance I think the hyping by Black Rock and others of their novel ESG investing strategy was both a marketing ploy to attract virtue-signaling asset managers and a means to enable trustees to tamp down the disruptions occasioned by shareholder activism. It was never a sound investment practice.

On the bright side, though the investors in this new improved, investment strategy might have just lost a lot of money, Black Rock seems to have made out very well There’s more than one sucker born every minute.