Especially Sleazy Government: Musk Cries Scam on 'ESG'

MarketWatch reports that an S&P ‘ESG’ index has dumped electric car manufacturer Tesla from its ranks. In response, Tesla founder Musk tweeted his view that the ESG label is a “scam.” Musk is of course correct. ESG stands for Environmental, Social and Governance. It is a political ranking system posing as a credit rating system, which creates various “scores” based on a variety of fashionable political factors. ESG is designed to strangle disfavored industries from access to the capital markets. Musk put this succinctly in a follow-on Tweet:

 The ESG ratings industry is rife with conflicts. Utah state treasurer recently wrote a letter to ratings agency S&P, described by energy policy expert Mike McKenna as “no doubt prefatory to eventual litigation… [and] signed by the governor, the lieutenant governor, the attorney general and the entire congressional delegation.” The letter took S&P to task for publishing ESG credit indicators as part of its credit ratings for states and state subdivisions and its “plans to publish ESG credit indicators to "augment’ its credit ratings”:

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Whatever the branding campaign surrounding it, ESG is itself reckless. It causes the reduction of available finance to firms that provide essential goods and services. Denial of those goods and services is likely to prove perverse if little consideration is given to the adverse consequences and the means of mitigating them.

Even as the Securities and Exchange Commission is preparing to impose the mother of all ESG scams on public companies, evidence is mounting that ESG is utterly insincere, and that the lobby has created an ESG bubble, which bubble may be popping. Consider several recent warnings:

[W]ith pressure to invest into the “clean energy” asset class comes the risk that capital is misallocated, as investors prioritise urgent societal imperatives and optics over pure business nous and discipline. This [reflects an] approach of “demonstration investments” to back environmental causes… a new market doctrine that “everything renewable is great and everything fossil-fuel-related is awful.” — Dambisa Moyo, “Lack of investment rigour risks creating ESG bubble.”
Financial Times, October 19, 2021

I show that the performance of ESG investments is strongly driven by price-pressure arising from flows towards sustainable funds, causing high realized returns that do not reflect high expected returns…. Under the absence of flow-driven price pressure, the aggregate ESG industry would have strongly underperformed the market from 2016 to 2021. Furthermore, the positive alpha of a long-short ESG taste portfolio becomes significantly negative. — Philippe van der Beck, Philippe, Flow-Driven ESG Returns (September 23, 2021). Swiss Finance Institute Research Paper No. 21-71,

Musk might be thankful to have Tesla untethered from the ESG label. It seems a certainty that bad times lie ahead for “ESG” investments, with harmful knock-on effects elsewhere in the market. This will all be due in part to ESG swimming, quacking and doing other things like a scam. Whatever prompted Elon Musk to express his opinion, he will be proved right.

Banks Line Up to Join ‘ESG’ Mob

In the last year, the cost of energy has increased significantly. Gasoline, diesel, and domestic electricity and natural gas prices are now past the point that many people can bear. The problem affects businesses too, including manufacturing and agriculture, with consequences for the wider economy, jobs and the cost of living. It has led to a new word, “greenflation.” Greenflation is harming those who, literally, can least afford it.

However, instead of discerning what is behind these problems, what caused them, what role the federal government had and what it can do to ease the problem, the government is simply blaming others and pressing on. Treasury Secretary Janet Yellen is not only in denial but serially insists that the problem is that the administration just hasn’t proceeded on the “climate” front fast enough.

This is governmental malpractice. But the perpetrators are not without accomplices. The investor class, and big banks foremost among them, share equal responsibility. One of the chief culprits is a pernicious and destructive concept called Environmental, Social, and Governance investing.

Yellen: in "climate" denial.

A 2016 email suggests that modern “ESG” began as anti-energy campaigning against financial institutions in 1999 focusing on hydropower, then morphed into anti-coal advocacy then soon expanded to opposing all abundant energy sources.

Bank of America seems to have been captured first, vowing to not finance hydrocarbon energy (beginning with coal). Freedom of Information Act litigation showed the bank's enthusiasm for the "climate" agenda. A senior bank official, Jim Mahoney, hired former Clinton hands as consultants to get the bank close to then-Secretary of State John Kerry with offers to sponsor as much of the 2015 Paris climate talks as it could.

Yes, financial institutions sponsoring treaty negotiations. More recently, FOIA litigation produced still more craven correspondence, this time to Yellen from, among others, Wells Fargo. In a March 2021 email to a senior Treasury official, former Clinton Treasury official turned Wells lobbyist Elisabeth A. Bresee laid out the bank’s “climate” plan:

I'm reaching out to share an exciting climate change announcement. Wells Fargo just announced that we're setting a goal of net-zero greenhouse gas emissions, including in its financed emissions, by 2050. Wells Fargo believes that climate change is one of the most urgent environmental and social issues of our time and, as one of the largest financial institutions, we are committed to taking action, including aligning our activities to support the goals of the Paris Agreement.

In recent years, we've made tremendous progress in meeting and exceeding sustainability goals in our operations, working with NGOs and other stakeholders on climate-finance strategies, enhancing our transparency and disclosure, and partnering to advance clean technology innovation, community resiliency, and green jobs. We've also put in place a strong foundation and processes for managing climate risk across the enterprise and accelerating sustainable finance in our lines of business, including providing financing for utility-scale renewables and clean technologies, underwriting sustainability bonds. and innovating in ESG-linked lending.

Our path forward includes five focus areas:

The email closed by checking every box in the woke liturgy, about being—

committed to fostering an inclusive recovery from Covid-19 and to building a more inclusive and sustainable future for all.… includ[ing] supporting greater racial equity across our business and philanthropic giving and addressing evolving issues like climate change,” with a nod to the bank’s “clients and stakeholders.

This week, the bank announced it was demanding Paris-like emission cuts from companies it lends to.

This inherently conflicted, inane equivalence between and even preference for “stakeholders” (pressure groups and political interests) over shareholders and clients is, according to the Wall Street Journal, "using the ethical-custom concept to impose a progressive agenda on American businesses. It will have negative implications for investor returns.” 

Yet the costs of this public-private tag-team are far greater. For example, in late 2021 some U.S. traditional energy producers, particularly coal and related industries (e.g., rail), were unable to affordably access capital markets to purchase (or, in some cases, re-purchase) equipment to ramp up production and transport in the face of a looming energy crisis (which continues today), leading to serious energy security concerns. The companies were informed by lenders that loaning money to, e.g., coal, gave the banks an “ESG problem.” 

Wall Street, we have an ESG problem.

This resulted not from regulation but pressure campaigns including from a Biden administration that has made clear it has targeted hydrocarbon energy interests for extinction and that assisting them would not be well-received in Washington. 

Such a policy directly threatens U.S. national security. The broader consequence of greenflation has pushed prices and the cost of living upwards, and destabilized manufacturing sectors in the U.S., U.K. and Europe. It has been a major contributor to European dependence on Russian energy, undermining the West’s geopolitical position and global security. 

It has made firms worldwide increasingly dependent on China’s so-very-not-ESG manufacturing and materials. What this agenda demands of targeted industries is strongly contrary to America’s interests but is precisely as countries who wish us ill would have things.

Financial institutions draw from the same talent pool from which the Biden administration staffs itself, with the same woke priorities. This misguided partnership poses a grave danger to the U.S.

Diary of an Acclimatised Beauty: Living

I’m taking full credit for suggesting Annabel start the season off with her own, soon-to-be annual event. Truth be told I just couldn’t bear another year of last-minute Covid cancellations, and boy did they stack up. Even the brand-new Badminton Horse Trials failed to launch in its inaugural year. How utterly embarrassing. And they couldn’t get it together the next year either despite not having anything to live up to.

I was happy the planet had been given a breather but I was determined to push forward and LIVE. And by the turnout it was clear I wasn’t alone. Like any good overnight guest, I am always keen to find the best gift for the hostess—even if she is your best friend and wants for nothing. Annabel truly has everything—including the annoying habit of pretending to be overjoyed by every gift when you just know the lot is going in the bin or home with her housekeeper. Daddy’s suggestion is always a bottle of something and Judith would suggest a scarf, but then she hasn’t seen the excesses I’ve seen.
 
The Faber-Castell twins, (also houseguests) did bring a bottle of something which sort of surprised me because wouldn’t you expect—pencils?  They’d been crowned this year’s  Corviglia Club glamour girls which likely accounted for the hoards of young chaps milling about Annabel’s garden. I’m sure Judith (mummy) hoped I would have chosen to be more of a society darling but the planet was always my first love—even if it means some of us are going to have to eat bugs. 

Corviglia: if you have to ask, you don't belong here.

I struck up a conversation with Raj Tanna because I was keen to get his input on ESG.  His theory is we really need to focus on the ’S’ (social) in that grouping of letters as it has been ‘the previously ignored middle child’. My motivation, having come so very close to serving on HSBC’s board, was to make sure to sufficiently leverage my stakeholder credibility next time around. My work for so many of the green oligarchs, and in the environmental sector in general, had made me an attractive addition to their board. In the end, they decided the bona fides they cared about most were BIPOC and gender identity--meaning the belief that illuminating previously-marginalised races, or sexes, would bode well for the company’s bottom line. 

I was discouraged after a chat with my father (‘these are not actual qualifications’), and the insights of Warren Buffett (‘I did not receive even three letters last year from shareholders asking for [ESG] disclosures'),  but they were what HSBC wanted. Optics. I just didn’t have enough of them. So I sought to learn from Mr Tanna in hopes of improving my chances on future boards. Sadly,  he was so much less helpful than I’d imagined. After I introduced myself he seemed only to want to talk about his real love… a glass house on the water.  He said the ‘ecological element had been so important to him and his wife’, adding, ‘We wanted the house not to interfere with nature—we wanted it to disappear’. All I could imagine was birds crashing into all sides and leaving bloody splotches all around. He went on saying, ‘Glass reflects the light and the sky and the water, so the house at times is much less visible than others’.  Wow. Snore.

I told him I’d been fascinated by his tenure in the sector and the research his company had put forth but he was unmoved. I tried stroking his ego with what I knew to be his tightly-held belief… when good companies do good things  share prices follow, but he didn’t take it up. I’d watched a recent interview in which he said the pandemic was a catalyst for change  and with that he said… ‘Oh I wholly agree’.  Agree?? They were his words! Odd. I was about to play my very last card and tell him that Annabel (our hostess) was my very best friend but his wife came by and whisked him away. Annabel’s husband James must have seen my utter shock as he came to my rescue with a glass of champagne. 

‘Interesting fellow isn’t he?’ James asked. ‘Do you know him?’

‘Do YOU know him?’ I responded.

‘Well of course’ James laughed, ‘he owns what we are calling the futuristic Versailles.  Made money in Russia—as folks tend to do. You should see the house. Very nature-y. Is that what you talked about?’.

‘No. Well maybe he did. I’m not sure. I thought he was the Raj Tanna who’s trying to put the S in ESG. Environmental, Social, Gov…’

‘Environmental?’ Ha ha. ‘No. Wrong chap, same name. Well, no harm done. By the way, did you see what someone gave us? It's like a toilet for the kitchen counter.  You put food scraps in, you flush it, and overnight it turns into dirt. Can you imagine?’ he asked, laughing hysterically.

‘No. I can’t’ I said. My face turning ashen. The gift had been mine. 

‘The only good thing is maybe we can put all the rest of the crap gifts in there’, he said, chuckling away. ‘Can you imagine?’ He laughed again. ‘In a house this size? Oh meet my little friend kitchen loo…’  

‘Hilarious', I said, downing the glass of bubbly.

I made my way up to the house and called my father. No answer. I texted. Nothing. Everyone was talking about St. Moritz which sounded  like the best St. Moritz season in the history of ever. I couldn’t go. Perhaps Judith was right. Perhaps this working thing was overrated. And just then someone rushed over to ask if I was the famous eco-hostess from the cover of Paris Match magazine. Why yes I was! In fact I’d circumnavigated the globe four times this last year. Perhaps there was more than one way to skin a cat. 

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 assetspledged 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.

Biden, Big Banks Declare War on Energy Sector

After more than a month of Russian bombs destroying swathes of the Ukraine, and high-minded pronouncements from the American government officials concerning everything from missile payloads to misinformation, Americans have been awakened in an unprecedented way. Revelations about our dependence on foreign sources of energy have caused many to realize the importance of the U.S. energy sector to economic vitality and national security.

While Americans were locked down and their movements constrained by Covid-19-related policies, the Biden administration has been working in the shadows, making a slew of regulatory changes fundamentally harmful to America. Because this administration lacks the necessary majorities in Congress, it has been circumventing the legislative process by using administrative rules to create oil and gas supply scarcity that almost immediately has caused the price of everything to begin to rise.

The administration’s objective is simple—create scarcity via a series of unilateral regulatory changes at various government agencies that will predictably push the prices of oil and gas toward greater parity with alternative energy sources such as wind and solar. Fully understanding that alternative energy sources fall short of meeting the current and future energy needs of the American economy, the Biden administration has persisted with its “make it hurt” strategy that necessarily ignores the impact such a strategy is having and will continue to have on the larger economy. Threatening economic security, food security and national security, this circumvention strategy is a blatant overreach by the executive branch that began when Biden took office last year.

They hate, they really hate you.

Sidestepping Congress entirely, their strategy includes using government agencies to dismantle oil and gas distribution systems, tightening regulations, and suspending leases and permits meant to impede future drilling activity. Where the administration could not sufficiently hamstring the energy sector through unilateral regulatory overreach, it sought allies to lend weight to the effort.

Enter investment bank giants like BlackRock and JP Morgan. Perhaps the most insidious element of the Biden administration’s anti-energy strategy has been its collaboration with investment banks to coerce and if necessary, force divestment in the energy sector. Like all industries, energy producers require capital in order to drill and produce oil and gas assets. By using the pseudo-sophisticated set of investments standards known as "environment, social and governance" (ESG) as the predicate, major investment banks are assisting the administration to destroy domestic energy independence by limiting available capital that would otherwise enable American energy producers to maximize oil and gas production.

The CEOs from these investment banks pronounced the death of fossil fuels in defiance of economic reality before the Biden administration even took office, with complete disregard for national security. They declared climate change an "existential threat" while boldly disregarding the actual threat their banks’ own relationships with China represent to the U.S.—and to the climate for that matter. Trying to sound socially and environmentally "woke" while being totally compromised by their own strategic decisions, these banks have helped beat back any competing views about the dangers of heedless divestment. Their self-interested efforts have unequivocally contributed to the difficult economic conditions Americans are now experiencing and the growing threat China represents to U.S. national security.

As the negative impact of the administration’s strategy has begun to be apparent to everyone, press secretary Jen Psaki has tried to lean in on the “Putin price hike” narrative, blaming Russia for the rising prices the administration’s own domestic policies have created. So desperate is the administration to convince Americans to look the other way, they have even employed never-before-used Tik Tok diplomacy to convince teenagers of their “Russia did it” narrative.

Meanwhile, serious people are beginning to understand what’s been happening since Biden took office 14 months ago. In anticipation of course correction after the mid-terms later this year, consider what the administration has done.

Last week the SEC proposed rule changes that would “standardize climate-related disclosures for investors”. The changes would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, among other reporting requirements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions. With the window still open for public comment until May, corporate leaders should be concerned about the bold overreach. After all, this kind of intervention doesn’t ever stop with one industry.

President Biden abandoned U.S. energy independence immediately upon taking office. The administration then employed un-elected bureaucrats and private investment banks to decide on behalf of all Americans what is good for America, resulting in a fundamental threat to the economy and national security.

Congressional leaders must earnestly begin the work of regaining control of the legislative branch. They should begin by introducing legislation that would require Congressional ratification of all regulations annually. Regulations must be able to withstand normal congressional scrutiny and their impact considered in the light of day. Meanwhile, ESG standards must be relegated to the marketing departments of corporate America and the influence of investment banks constrained from horse-trading America’s global dominance in exchange for their own financial gain. Only then can America take back its destiny.

Manchin Slams Door on Greens at the Fed

Soaring gas prices may have claimed their first victim. Sarah Bloom Raskin -- Joe Biden's nominee for Vice Chair for Supervision at the Federal Reserve -- was forced this afternoon to withdraw herself from consideration for the position.

This is because her pre-nomination calls for environmental activism among banking regulators came to the attention of the senators considering confirming her. In the past, Raskin had argued that regulators must "leave their comfort zone" and "think more imaginatively" in considering how "their existing instruments can be used to incentivize a rapid, orderly, and just transition away from high-emission and biodiversity-destroying investments." Translation: she believes they must co-opt existing laws and procedures -- using them not as they were intended to be used -- to deny capital investment in oil and gas producers and to encourage "green" investment.

When those positions came out, senate Republicans, got spooked. After all, they know that their voters are extremely concerned about the rise in oil prices and are annoyed at the decisions of the federal government that have contributed to it. Consequently, they announced their plan to oppose Raskin, making her confirmation math very tight. Democrats argued that the Republicans were irresponsibly blocking the president's Fed's nominees at a time of soaring inflation -- essentially the central bank's raison d'etre. But the ranking Republican on the senate banking committee, Pat Toomey, countered with an offer to confirm every one of Biden's nominees but Raskin. Said Toomey, “Ms. Raskin’s repeated and forceful advocacy for having the Federal Reserve allocate capital and choke off credit to disfavored industries is alone disqualifying.”

Sensing that her dream job -- a plum ten-year political appointment with limited oversight from the people's representatives -- was slipping away, Raskin changed her tune. During her confirmation hearing last week, Raskin asserted that “it is inappropriate for the Fed to make credit decisions. Banks choose their borrowers, not the Fed.” Senator Toomey joked about her about-face, saying “this is one of the most remarkable cases of confirmation conversion I have ever seen.”

Best GOP senator, ever.

The final nail in the coffin, however, came from the other side of the aisle. After refusing to commit one way or the other, Senator Joe Manchin, the last sane Democrat, released a statement on Monday, explaining that he has "carefully reviewed Sarah Bloom Raskin’s qualifications and previous public statements" and has concluded that her "statements have failed to satisfactorily address my concerns about the critical importance of financing an all-of-the-above energy policy to meet our nation’s critical energy needs." Consequently, he would not be giving her his vote, dooming her nomination in a divided senate.

He went further, however, explaining that going forward he plans to oppose the Fed's "woke capital" drift in the hopes of restoring the bank to its intended purpose:

The Federal Reserve Board is not an institution that should politicize its critical decisions. This is a 10-year term to perhaps the most important independent body that is tasked with ensuring the stability of the American economy. At this historic moment for both the United States and the world at large, it is imperative the Federal Reserve Board preserves its independence and steers clear of any hint of partisanship. Instead, the Federal Reserve Board must remain hyper focused on ending the inflation taxes hurting working families and getting more workers off the sidelines and back into the economy. The time has come for the Federal Reserve Board to return to its defining principles and dual mandate of controlling inflation by ensuring stable prices and maximum employment. I will not support any future nominee that does not respect these critical priorities.

Hopefully some of Manchin's colleagues—even those across the aisle, on the Republican side!—recognize his good sense and similarly decide to support only nominees who understand the responsibilities, and limits, of the roles to which they're being appointed, rather than trying to hijack them on behalf of their ideological enthusiasms.

What Price 'ESG'?

In March 2019, Norway’s Government Pension Fund Global (GPFG) announced that it would sell off around $7.4 billion ( £5.7 billion) worth of stocks held in oil and gas exploration and production companies that according to the government had thus far failed to invest in renewable energy. In the days following, the combined market capitalization of Tullow Oil, Premier Oil, Soco International, Ophir Energy and Nostrum Oil & Gas fell 3 percent, or about $168.8 million (£130 million).

Then this past February, as supply was overtaking demand in the global oil markets, Goldman Sachs and JP Morgan both announced green investment strategies. That’s right, the fast-living, meat-eating, boat-owning, McMansion-dwelling investment bankers found God, or least least Gaia.

Goldman will place restrictions on coal mining and coal fired power plant investments while JP Morgan would stop funding E&P exploration in the Arctic and would target $200 billion in green financing in 2020. It was a curious business decision since a slew of their private banking clients attained their wealth through O&G royalties and since both banks were underwriters in the Aramco IPO that yielded investment bank fees totaling around $90 million.

While the specifics of any one of these examples are not significant by themselves, they are illustrative of a trend within certain quarters of investment banking and on executive boards to pander to a set of criteria that at best are squishy and at worst represent Wall Street wokeness.

‘ESG’ is an acronym for 'environmental, social and governance'. It describes a set of often broadly- interpreted, rather fluid investment criteria (data and factors) applied by reflexive investment bank boards and activist investors to companies’ operations.

Choose one or the other.

While almost all are in agreement of the importance of good governance, the other elements of this criteria are frankly little more than ‘feel-good’ foolishness, open to any and all interpretation and activist pressure. Think symbolism over substance. Consider the following:

In May 2020 a Google spokesperson confirmed that the company will stop building custom AI/ML algorithms to facilitate upstream extraction in the oil and gas industry. After all, goes the narrative, working with O&G companies impedes stated climate goals and accelerates the climate crisis. There was no mention by the Google representative about whether they would also be removing the light fixtures, carpet, paint, tile, toilets, chairs and desks from their offices since petroleum products are part of the manufacturing process for those products.

The Google representative further clarified that Google Cloud only generated approximately $65 million in revenue from oil and gas company contracts in 2019, accounting for less than 1% of total Google Cloud revenue… as if the small percentage diminished the grievous nature of their environmental breach by working with the O&G industry.

Using AI in O&G after all would create business efficiencies that would make fossil fuel extraction faster, more safe, more accurate and less expensive. Imagine the societal damage brought by such a reality. Job stability, and increased tax revenue for the communities in which oil and gas plays are located would underpin this dystopic future that would emerge were Google to continue to develop AI technology with the O&G industry. What courage it must have taken for Google to reach such an important decision.

Greenpeace, an evangelizer from the religious-right of the church of EGS was there to celebrate Google’s decision. After all they had helped apply the thumb screws to Google. The narrative was predictable -- the EGS crowd won a moral victory against an immoral industry.

However, the same EGS advocates, the ones with more holy insight into what ‘E’ and ‘S’ should represent in the EGS pact had no comment or moral opinion about Google’s collaboration with the Communist Chinese regime only months earlier. They had nothing to say about Google’s efforts to develop a Chinese version of Google’s already creepy search engine. Known as “Project Dragonfly”, Google worked quietly developing the search engine that would censor searches by Chinese citizens of terms that the dictatorial Chinese Communist regime determined were acceptable. It wasn’t until The Intercept broke the story in July, 2019 that Google reluctantly abandoned the effort.

Don’t fret though, Google still has offices in China. They are now focused on developing AI technology and manufacturing for Chinese government-controlled companies. That’s right, the thing they abandoned with U.S. oil and gas because of its immorality they are now doing on behalf of the tyrannical Communist Chinese government. What letter should be used to describe that kind of moral and intellectual flexibility?

And no backing up!

The regime, known to forcibly sterilize and imprison its minority Muslim population known as Uighurs began disappearing and re-educating these innocents. It is now believed there are around 380 detention facilities to which anyone who pushes back on the tyrannical regime is sent. Instead of supporting the job-creating, liberty-centric O&G industry, these gentle-hearted EGS-minded investors and investment banks are content with this genocide of the Uighurs. What’s the letter for that?

Then just yesterday a former Facebook employee revealed that the censorship giant employs an Orwellian team in Seattle known as ‘Hate Speech Engineers.” Imagine the pride of ESG-minded investors when they found out that six members of this elite team of censors are Chinese expats in the U.S. on H-1B visas. Who better to be censoring all sorts of legitimate news stories than those who are expert at exploiting false narratives back in their motherland and on behalf of their motherland?

To the executives in the O&G industry, standing silent in the face of what is clearly politically correct wokeness, your silence will lend to the destruction of the one industry in North America that has single-handedly changed the geo-political landscape of the world and delivered the U.S. energy independence. To those in the investment banking world who favor the ESG standards and their random application to good versus bad industries, perhaps a new letter should be added to the criteria. How about “F” for fraud?

When 'Social Justice' Comes to Investing

Trillions of dollars sit in private trusts, pension and retirement accounts, and charitable endowments, and they are targets of those who wish to reshape domestic investments, corporate governance and means of energy production. I recall years earlier when people and outfits who wished to accomplish such things bought stock and made pests of themselves at shareholders meetings, or ran well-funded public relations campaigns against investment in South African companies or nuclear energy, to take two historical examples of “active shareholding.” In recent years they’ve devised another means: pressuring trustees of these funds and fiduciary investment managers to consider Environmental, Social and corporate Governance (ESG) analyses in their investment buys. A quick Google search shows a number of providers vying to assist (for fees ) trustees in making such investments.

The most detailed explanation of the history and pitfalls of this strategy—economic and legal—is in this Stanford Law Review article:  The authors, Max M. Schanzenbach and Robert H. Sitkoff, are writing for a very specific audience and you are encouraged to read it all if you want a more complete analysis, but here’s a short take on it as it involved institutional investors, index funds , endowments and trust companies. Such investing may well place trustees at risk of violating their fiduciary duty of loyalty under which they must consider only the interests of the beneficiary.

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Fiduciaries motivated, even in part, by any other thing—sense of ethics, benefit to third parties, for example -- violate their duty of loyalty. While trustees of a charitable endowment whose settlor or beneficiaries okay such considerations, might do this without violating the rule of loyalty, trustees of institutional investors, trust companies and even index funds run a risk if they do.
In the first place, the very concept ESG investing lacks precise definition.

All told, the fluidity of the ESG rubric means that assessment and application of ESG factors will be highly subjective. Like any form of active investing, risk-return ESG investing necessarily involves subjective judgments in the identification of relevant factors, assessing whether they are good or bad from an investor’s perspective, and how much weight to give each factor. However, this subjectivity makes both application and empirical evaluation of ESG investing challenging and highly contextual. As some astute commentators recently noted, “the breadth and vagueness of the factors as a whole, and the likelihood that different factors bear on different investments, present barriers to their widespread use as investment guides.

What are the social and environmental impacts of a firm’s products or practices? Is a gas pipeline better for the wildlife in the area it runs through than a solar or wind farm? (No one’s surveying the views of the caribou in Alaska who seem to love the pipeline, or the avian communities fried or turned to pate by solar and wind farms.)What are the environmental costs to producing the glass and aluminum to create solar panels or the cost of disposing of no longer useful wind turbines ?

The favorable empirical results regarding environmental and social factors, however, are not uniform. A significant concern is that managers may invoke ESG factors to enact their own policy preferences at the expense of shareholders—an agency problem for which there is also some empirical evidence. Another concern is that the extent of a firm’s regulatory and political risks may not be reflected in its ESG scoring. For example, companies pursuing alternative energy sources may score high on ESG factors but still face significant political and regulatory risk owing to heavy reliance on current government policy. Indeed, one of the Commissioners on the Securities and Exchange Commission (SEC) has suggested that the SEC has not yet taken a position on ESG disclosure in part because defining ESG factors is value laden and would involve confronting contentious political issues.

And then there’s corporate governance. Some corporate governance issues are obvious—lack of a sound auditing and accounting operation or frequent litigation losses for bad labor practices or unhealthy products. The social factors are even more subjective and not well validated by empirical evidence. The effect of sex and race diversity on the corporate board doesn’t seem measurable or even relevant to how prudent an investment might be in a company. The number of factors one might consider under this category seems inexhaustible.

The fluidity of the ESG parameters and the obvious subjectivity involved in weighing them should concern trustees. Aside from subjecting them to litigation for losses due to erroneous assessments on ESG investments, trustees can be removed, enjoined, forced to repay the trust for losses and so forth for breaching their duty of loyalty to the trust. To defend against such claims, the trustee who picks and chooses among investments on the basis of ESG strategies, must have documented analyses showing he’s made a realistic risk-loss return estimate and must also reevaluate these analyses regularly, a costly undertaking. So, to take an example near at hand, if President Obama made the cost of fracking higher through regulatory constraints on it and the trustee eschewed investing in such companies under his analysis of risk-reward, President Trump’s support for fracking certainly changes the equation. So does the I hope temporary dislocation of that market due to the Wuhan virus shutdowns. The trustee has to reconsider original action and readjust the portfolio. The risk-reward equation has shifted.

If independent analysis shows the ESG models the trustee relied upon resulted in statistically significant under-performance, the fiduciaries who relied upon those models may well have breached their duty of loyalty and be subject to litigation by the beneficiaries of the trust. And any claims that ESG investment strategies provide superior returns are far from certain. Even more troublesome in the authors’ view is this: if corporations draw a lot of ESG investment on the grounds that they are undervalued from a risk-reward standard by their lights, they may soon become overvalued. Contrarian strategies seem then to be attractive.

Going belly-up for climate change.

A few months ago, concerns were highlighted in a dispute involving the trustees of the California State Pension Fund (Calpers) and other major pension funds.

In the last two years, its directors have opposed proposals to sell stocks in private prisons, gun retailers and companies tied to Turkey because of the potential for lost revenue and skepticism about whether divestment forces social change. One of these directors is now urging the system, also known as Calpers, to end its ban on stocks tied to tobacco, a policy in place since 2000. “I do see a change,” said that director, California police sergeant Jason Perez, in an interview. “I think our default is to not divest.”

Calpers isn’t the only system wrestling with these new doubts. Rising funding deficits are prompting public officials and unions across the U.S. to reconsider the financial implications of investment decisions that reflect certain social concerns.

The total shortfall for public-pension funds across the U.S. is $4.2 trillion, according to the Federal Reserve. New York state’s Democratic comptroller and unions representing civil service workers oppose a bill in the Legislature to ban fossil fuel investments by the state pension fund. In New Jersey, Gov. Phil Murphy, a Democrat, vetoed legislation last year that would have forced divestment of state pension dollars from companies that avoid cleaning up Superfund sites by declaring bankruptcy...

The board now plans a comprehensive review, scheduled for 2021, of all of Calpers’ existing divestment policies, which include bans on investments in companies that mine thermal coal, manufacturers that make guns illegal in California and businesses operating in Sudan and Iran. 

And then there are outfits like Black Rock which seemingly to court millennial investors are weighing such factors. Is it, in danger of violating its duty of loyalty? Bernard Scharfman thinks they may be.  He hints that this virtue-signaling may be an effort to draw in Millennial investors, 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:

So 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.

If people really want to put their money into virtue-signaling instead of reasonable returns, why doesn’t someone just create a Virtue Fund? Investors would agree not to hold the managers of it accountable for losses as long as the investments tickle their fancy. That would leave those of us such as the Calpers beneficiaries who rely on secure returns to use more traditional measures of risk and reward (like debt-equity, dividends and price-earnings ratio) which have an historical measure of efficacy.