Main Street v. Wall Street on 'ESG'

In recent weeks there have been giant strides in the effort to challenge the legality of the "Environmental, Social and Governance" (ESG) construct that has become a threatening obsession of the titans of Wall Street. Though ESG remains a unfamiliar acronym for most Americans, Main Street investors whose pension dollars are funding ESG investments are beginning to ask questions.

While constituting competing frameworks, reporting systems, and scoring systems for environmental and social reporting for companies, the ESG construct lacks any quantifiable or worthwhile measurements. Put plainly, it is an entirely subjective scheme, created and funded by political activists. Under the pretense of environmental protection and social diversity, these activists recognized that they had allies in the financial services and banking sectors who could be incentivized to do via the capital markets that which the activists knew they could never achieve using traditional market forces or democratic institutions. In short, voters would never agree to ruin their own economies, livelihoods and futures in the name of political ideology. To be successful, it necessarily needed to be stealthy and unchallenged.

Recognizing this reality, attorneys general Jeff Landry and Todd Rokita of Louisiana and Indiana issued a letter earlier this month warning their states’ pension boards that ESG investing is likely a violation of fiduciary duty and potentially opens their investment staff and investment advisers to liability if they continue allocating funds to ESG-promoting asset managers such as BlackRock.

Fink: BlackRock or black hat?

The Landry and Rokita letters follow another letter sent last month from them and seventeen other state AGs to BlackRock CEO Larry Fink. That letter warns the asset management giant that BlackRock’s ESG investment policies appear to involve what they describe as, “rampant violations” of the sole interest rule, a well-established legal principle. The sole interest rule requires investment fiduciaries like BlackRock, to act to maximize financial returns, not to promote social or political objectives.

Yet, it is clear that BlackRock and industry counterparts are doing precisely that. They are attempting to use the ESG pretext of "protecting the environment" to re-orient trillions of dollars of their clients’ capital toward what are unquestionably their own political and social objectives. This effort is borne out in the companies in which they invest and the trends they curate and then fund. As is repeatedly touted in the literature of the most prolific ESG advocates, they believe that because their asset management partners, including BlackRock, manage such a substantial percentage of the total investment market, their ESG world view is above constraint of law, or beyond the reach of the institutions that have traditionally protected investors from dubious investment schemes.

ESG reporting and scoring is a scheme initially launched over two decades ago with the creation and funding of the Carbon Disclosure Project (CDP) by the World Economic Forum (WEF), both of which advocate for political and social objectives. Out of the initial CDP funding effort has grown a network of non-profit entities, foundations, non-governmental organizations (NGOs) and, via the incentive of profit, the largest asset management firms and banks in the world. Together they constitute a validation-feedback loop. Left unconstrained, their political and social objectives will be paid for by investor capital, potentially in defiance of the best interest of their investors.

Marx: definitely a black hat.

So does this history square with Blackrock’s framing of their ESG policies? To answer, one need only start at the top, with BlackRock CEO, Larry Fink and his affiliation with the WEF, the originators of the Great Reset. The WEF, by mission, seeks to shape global, regional, and industry agendas, underpinned by so-called "stakeholder" theory, the mechanism needed to integrate communist principles into economic practice without getting sullied by the bloody history malignant socialism has left in its wake. According to the WEF:

The market mechanisms under capitalism do not provide incentives for preserving the environment. Firms are constantly threatened by market competition to cut costs and optimize profit. The environment thus falls prey to the compulsive market behaviour of the capitalist mode of production. Without the intervention of non-market entities such as the state, international organizations and social forces, capitalism as an economic system simply will not safeguard our planet.

With Fink as a Trustee Member of the WEF and an Agenda Contributor, one must assume Fink agrees with the objectives of the WEF. Is he an agenda-contributor who represents the views of BlackRock’s clients or, as it appears, is he ensuring that the Forum's agenda gets codified into and funded by the capital markets using BlackRock’s investors’ capital? Is it possible that Fink is doing the bidding of the stakeholder-focused Davoisie, in defiance of the sole interest of BlackRock’s own clients? With a recent $1.7 trillion loss in the first six months of this year in its ESG-indexed funds—the largest amount of money lost by an individual investment firm over that time period—one could certainly argue that he is doing just that.

In his 2021 Letter to CEOs , for example, Fink regurgitates key WEF concepts. “We have long believed that our clients, as shareholders in your company, will benefit if you can create enduring, sustainable value for all of your stakeholders.” Apparently, shareholders just took second seat to the stakeholders. So much for sole interest. He continues, “In January of last year [2020], I wrote that climate risk is investment risk. I said then that as markets started to price climate risk into the value of securities, it would spark a fundamental reallocation of capital.” But it turns out that capital re-orientation is a stated goal of the WEF-funded CDP too:

Through its engagement, advocacy and partnerships, CDP helps align corporate and governmental strategies with international goals, supports investors to shift capital to finance the low carbon transition; and changes expectations, ambitions and practices to pave the way to a new, restorative and sustainable society. CDP helps align corporate and governmental strategies with international goals, supports investors to shift capital to finance the low carbon transition; and changes expectations, ambitions and practices to pave the way to a new, restorative and sustainable society.

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The BlackRock/WEF cabal has also made its way into the highest reaches of government as well. Brian Deese serves as the Director of the National Economic Council (NEC). As a non- cabinet level position, it doesn’t require Senate confirmation. The confirmation process would have allowed an opportunity to challenge Deese’s obvious conflict of interest; a former Obama advisor and a passionate advocate of ESG, Deese became global head of sustainable investing at BlackRock in 2017 before joining the Biden administration.

Similarly, in June 2022, Tom Donilon, chairman of the BlackRock Investment Institute, the firm’s global think tank, was appointed by secretary of state Anthony Blinken to co-chair the Foreign Affairs Policy Board. The board advises State on "strategic competition" with Beijing. Coincidently, last September BlackRock was permitted to open a mutual fund in China, making it the first American firm approved to sell financial products there.

With a future fraught with legal questions about ESG, perhaps investors should remind BlackRock of the difference between their sole interest and BlackRock's self-interest.

ESG and the Road to Fiscal Hell

Over at The American Conservative, Kevin Stocklin has a disturbing piece on state pension fund managers investing workers' pensions in progressive ideological projects under the guise of ESG (Environmental, Social and Governance). That's the hot trend in money management, wherein money is invested based on supposedly "ethical" criteria, rather than solely on profitability projections. In other words, the ethical evaluations of the elitist liberals working in finance are being funded in part with the hard earned money of police officers, firemen, bus drivers, garbage men, and other city employees, and all without their consent. Of course, environmentalism is a key consideration for these E.S.G. enthusiasts. Here's Stocklin:

State pension fund managers who have declared that they will include environmental and social justice goals in their investment decisions collectively control more than $3 trillion in retirement assets and include the five largest public pension plans in the U.S.... Perhaps their most high-profile success came in June 2021, when CalSTRS, CalPERS, and NY State Common Retirement Fund joined three of the world’s largest asset managers, BlackRock, Vanguard, and State Street, in voting to elect clean-energy advocates to the board of Exxon and divert its investments away from oil and gas and toward alternative fuels. All of these pension fund and money managers except Vanguard are members of Climate Action 100+, an initiative dedicated to making fossil fuel companies “take necessary action on climate change.”

As big as that $3 trillion figure sounds, it is just the tip of the iceberg:

Many state pension funds outsource asset management to firms like BlackRock, State Street, and Vanguard, which are among the 236 asset managers who signed on to the Net Zero Asset Management Initiative. These signatories, which collectively control $57 trillion in assets, pledged to achieve “emissions reductions” and to cast shareholder votes that are “consistent with our ambition for all assets under management to achieve net zero emissions by 2050 or sooner.” Signatories also pledged to “create investment products aligned with net zero emissions.” True to their word, they created a lucrative industry of Environmental, Social and Corporate Governance (ESG) investment funds, ESG rating agencies, and ESG consultants.

That's a lot of scratch backing green energy projects that already have the financial and regulatory might of the federal government in their corner. You'd think that that might give them the ability to successfully compete with oil and gas, but that is not the case. Not by a long shot. The biggest problem with this, from an investment point of view, is that these ESG funds haven't done particularly well relative to the market:

A study by the Boston College Center for Retirement Research in October 2020 found that for state pensions, ESG investing reduced pensioners’ returns by 0.70 to 0.90 percent per year.... In addition, an April 2021 report by researchers at Columbia University and London School of Economics found that... that “ESG funds appear to underperform financially, relative to other funds within the same asset manager and year, and charge higher fees.”

Moreover, the Columbia/L.S.E. study also concludes that "ESG funds have 'worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds managed by the same financial institutions.' So much for ethics.

These are big problems, especially as the states are in the midst of an unfunded pension liability crisis, a slowly unfolding disaster. To remain solvent, the states need these funds to grow. Consequently, some states, like Florida, have been working hard to impose rules which "clarify the state’s expectation that all fund managers should act solely in the financial interest of the state’s funds," in the words of Governor Ron DeSantis. Hopefully others follow suit.

Luckily for us non-public workers, Congress passed the Employee Retirement Investment Security Act (ERISA) in 1974, which banned exactly this type of misappropriation of private pension funds. However, says Stocklin, while some lawmakers have called for ERISA to be extended to public funds, the Biden administration has announced that it will cease the enforcement of ERISA rules on managers who use private pension funds towards, "environmental and social goals."

Which is to say, we're screwed.

Investing 'Ethically'? Prepare to Lose Your Shirt

It’s starting to look as if the world is emerging, albeit slowly and reluctantly, from the utopian dream of halting and reversing climate change by policies based on almost exclusively on mitigation rather than on adaptation. These two approaches have always been the practical choice between real-world alternatives. A mixture of the two leaning mainly towards adaptation is probably the best approach since the costs of mitigation—as in achieving Net-Zero carbon emissions—are huge and its benefits either modest or unachievable.

For reasons outside the scope of this short commentary, however, the world’s governments and global agencies have placed all their money on the mitigation approach. I write carelessly “their money.” It is, of course, other people’s money. And we are gradually discovering just how much of other people’s money they are investing in climate change mitigation. Prepare to be shocked.

Recently the Financial Times reported as follows:

Thirty of the world’s biggest asset managers, which collectively oversee $9tn, have set a goal of achieving net zero carbon emissions across their investment portfolios by 2050 in a move expected to have huge ramifications for businesses globally. The group, which includes Fidelity International, Legal & General Investment Management, Schroders, UBS Asset Management, M&G, Wellington Management and DWS, said they would work with their clients to cut emissions across their investments.

That attracted the attention of National Review’s Andrew Stuttaford (full disclosure: an old friend) who devoted his regular weekly column on finance to examining how and why Wall Street decided to plunge so wholeheartedly into green ink investments. It’s a real humdinger of a column because it solves a financial mystery.

Nowhere to go but down.

After all, the purpose of investment institutions is to deliver the best return on the money that they are lent by savers and pensioners. If an investment house says that it intends to make mitigating climate change one of its main aims, it’s also telling you that your money will be getting a lower rate of return than it otherwise might. That’s a clear betrayal of the fiduciary duty that agents owe to their principals—unless they level with them and admit the likely loss.

That’s exactly what happens with other ESG funds, and I’ve no doubt that this admission will appear in the middle of the voluminous fine print which warns purchasers that socially conscious investments are likely to perform less well than the average. At the same time all the great and the good of the financial, political, and regulatory world from Al Gore to Mike Bloomberg to Mark Carney are bent on assuring nervous investors that they are making a prudent decision in going green.

Their argument boils down to claiming that any investor risks from green investments are trivial compared to the risks of investing in fossil fuels which are likely to prove unprofitable investments in a world moving towards Net-Zero and which might make those companies vulnerable to expensive lawsuits and regulatory restrictions.

The fallacies embedded in that argument were challenged by me in February last year in the first column I wrote for The Pipeline—which was a criticism of Mark Carney’s strident advocacy of strong measure of financial regulation to direct investors into the “right” green companies.

Yet if these climate forecasts are either exaggerated or simply uncertain [as they are], what is the test which would tell us with some reliability that the market demand for fossil fuels is likely to fall along with the value of companies that extract them. It cannot be the additional stress tests or capital requirements that regulators may want the banks to impose on energy companies, for then the regulators would be using their own interventions as the justification for intervening. As yet, however, non-official market participants can’t seem to see spontaneous causes for this threat to the energy sector.

But my tentative point is made more vividly and powerfully by the economist John Cochrane (quoted by Stuttaford) in an address to the European Central Bank in a reply to one of its senior executives:

Let me quote from ECB executive board member Isabel Schnabel’s recent speech. I don’t mean to pick on her, but she expresses the climate agenda very well, and her speech bears the ECB imprimatur. She recommends that,

‘First, as prudential supervisor, we have an obligation to protect the safety and soundness of the banking sector. This includes making sure that banks properly assess the risks from carbon-intensive exposures. . . .’

Let me point out the unclothed emperor: climate change does not pose any financial risk at the one-, five-, or even ten-year horizon at which one can conceivably assess the risk to bank assets. Repeating the contrary in speeches does not make it so. Risk means variance, unforeseen events. We know exactly where the climate is going in the next five to ten years. Hurricanes and floods, though influenced by climate change, are well modeled for the next five to ten years. Advanced economies and financial systems are remarkably impervious to weather. Relative market demand for fossil vs. alternative energy is as easy or hard to forecast as anything else in the economy. Exxon bonds are factually safer, financially, than Tesla bonds, and easier to value. The main risk to fossil fuel companies is that regulators will destroy them, as the ECB proposes to do, a risk regulators themselves control. (My italics.)

“A risk regulators themselves control.” I hesitate to accuse a former governor of the Bank of England, a former Vice President of the United States, and a former Mayor of New York of financial legerdemain, but I think there are laws against stock manipulation of that kind—though I doubt legislators ever envisaged fraud on the scale of nine trillion dollars.

My own advice to investors and pension fund managers is to fight shy of the “watermelon investments” recommended by the great and good. They are written in Green ink today, Red ink tomorrow.

Consider tobacco companies instead. They survived the legal and regulatory onslaught, and today they’re nice little earners.