The Left’s Latest 'Climate Change' Trojan Horse

A few weeks ago, I alerted readers to the top priority on the SEC’s new agenda: “ESG.”  For those who don’t know, “ESG” is the latest Orwellian doublespeak for “Environmental, Social and Corporate Governance.”  It’s the latest in Marxist trends going back to the 1950s, which you might previously know as “socially responsible investing” or “conscious capitalism.”

What is “ESG,” exactly?+

“E” stands for climate change, or course.  That includes things like pollution mitigation, waste management water usage, carbon footprints, greenhouse gas emissions, deforestation, energy efficiencies, and biodiversity (because diversity apparently must extend beyond humans).

“S” (Social) stands for all things labor, although one wonders why it isn’t “L.”  This includes some important things like privacy and data protection, health and safety, supply-chain management and human rights.  But it also includes labor standards, wages and benefits, and the dreaded workplace and board diversity, racial justice, pay equity, human rights, talent management, and social justice issues.  Maybe we should just substitute “W” for “woke.”

“G” refers back to how the “E” and “S” are governed within an organization.

All in favor of diversity clap your hands.

Up until recently, all of this nonsense was relegated to choices within the business and investing communities.  If your company or board of directors decided to make these issues relevant, they could vote to do so.   If you chose to invest in such companies, or do business with them, that was your business.

Now, however, the Leftist-Marxist crowd is planning to crack down in unspecified ways around public companies that make “ESG Disclosures.”  Like all things Marxist, this will begin with an apparently harmless enforcement agenda that just wants to make sure that companies are being honest when they claim to be sufficiently woke.

What we can expect is that the SEC will bring enforcement actions not merely with the intent to create such “honest” disclosure, but become the de-facto scarlet letter should a company fail to meet its un-exact and non-specific standards.

And to be sure, the SEC’s standards will be made up as it goes.  That’s because the less information there is regarding ESG disclosures, the more enforcement actions the SEC can bring, and the more money the agency can rake in from its one-sided enforcement procedures.

What few Americans realize is that federal agencies all operate the same way.  Congress passes laws, and agencies take years to develop “rules” that more specifically interpret the law.  There is a long public comment period, during which the agencies consider the input, then finalize the rules in the Federal Register.  This is a lengthy process, during which everyone who is regulated by the given agency operate in the dark.

This assumes the agencies even bother to make rules.  When something isn’t congressionally mandated, an agency doesn’t even have to formulate the rules.  They’ll take requests for rulemaking, but you can imagine how often those requests are fulfilled and when they are fulfilled, how long it takes.

Meanwhile, agencies like the SEC are free to engage in “rulemaking by enforcement.”  If the SEC sees something it doesn’t like, it can open an investigation and bring an enforcement action if it so chooses.  The terrifying thing about the SEC and other agencies is they can do whatever they want in this regard.  They can subpoena records of just about anything from any entity.  They can demand testimony.   If someone refuses and invokes their Fifth Amendment privilege, such an invocation is considered an “adverse inference” in any administrative or judicial process. In other words, judges and juries can assume that since the Respondent refused to talk, they are guilty or liable.

Verdict first, then trial -- maybe.

Because the process is so one-sided and expensive, individuals are often forced to settle and endure onerous fines because they cannot afford to go to trial.  Most companies will choose to settle so they can just get back to business, although some opt to litigate.

Oh, and should one choose to settle, standard SEC settlement language requires them to “neither admit nor deny” the charges, but they cannot ever make a public statement asserting innocence, or even make a statement that is tantamount to such!  Yes, the CATO Institute tried to litigate this matter, but lost in the D.C. Circuit for lack of standing.

Despite all the scams being perpetrated on investors on a regular basis, the Biden Administration wants the SEC to begin enforcement of… ESG?  It makes no sense in terms of fulfilling the SEC’s mission, which is allegedly to protect investors.

But that’s the point.  Protecting investors has nothing to do with the ideological Marxism behind ESG enforcement.  The point is to push climate change requirements into the public markets.  It begins with the new SEC chair Gary Gensler’s mandate that SEC develop a rule proposal on climate change specifically, which includes:

Funny how nothing else in the ESG agenda is up for rulemaking except climate change.

Gensler had long been eyed to take over the SEC, having been a Democratic operative for years.  He was a senior adviser to Hillary Clinton’s campaign, as well as an adviser to Obama, served as  party treasurer in Maryland, was on the staffs of Maryland’s top politicians, and was part of Biden’s transition team.

Gensler will do the Leftist’s bidding and establish onerous rules that will begin with “proper” disclosure.  There will be big fines for “misrepresenting” ESG (climate change) activity in the disclosures of many big companies.  There will then come requirements to either change disclosure or “remediate” climate change policies within the companies, with emphasis on the latter. Wouldn’t a company rather be given the “opportunity” for “remediation” than pay a fine?

This is the first step.   Soon, ESG – and climate change specifically – will become requirements.

Caveat Emptor: Ready for 'ESG Misconduct'?

The Securities and Exchange Commission is the ultimate double-edged sword.  On the one hand, it is a regrettably necessary federal agency that has a legitimate purpose for existing, and it has a decent track record of punishing financial fraud.

On the other hand, the SEC wields its disproportionate power far too readily.  The enforcement division often wrongfully targets minor offenders or innocents, puts them through the wringer, and even if they don’t bring litigation, end up bankrupting these unfortunates via legal fees.  The agency is also infamous for missing or ignoring warnings regarding massive fraud, such as that perpetrated by the late Bernie Madoff.

The SEC, particularly its enforcement division, should really be about protecting average investors.  They do very little in the way of educating the investing public, and instead engage in bureaucratic rigmarole more focused on deterrence -- which doesn't seem to work.

It's for your own good.

Regrettably, because it is a government agency, it is also subject to politics.  Theoretically, the agency is independent from any given administration, but it is highly unusual for the president to be on a completely separate page from the agency – unless you’re Donald Trump, and everyone is out to get you.

In the case of the Biden administration, the radical Leftist cabal propping up the doddering hair-sniffer is clearly dictating the SEC’s new priorities, and appointed a like-minded individual to run the show. Just look at the SEC’s new number one priority:  Climate change.  For real.

A March 4 press release trumpets an “Enforcement Task Force” focused on climate and ESG issues.  For those not up to speed, “ESG” means “environmental, social, and governmental" investing strategies. Just substitute “woke” and you get the same result.

But here’s the frightening thing: this “task force” is shaping up to be a climate change gestapo.  Per the release: “consistent with increasing investor focus and reliance on climate and ESG-related disclosure and investment, the Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct.”

“ESG-related misconduct”?  What exactly does that mean?

Worse, what does this part mean? “The Climate and ESG Task Force will evaluate and pursue tips, referrals, and whistleblower complaints on ESG-related issues, and provide expertise and insight to teams working on ESG-related matters across the Division."

Is this as ominous as it sounds? As with anything involving politics, and especially anything involving Leftists, one must read between the lines to parse the meaning.  One must also examine the totality of information provided by not just one agency, but the power players inside the Beltway. That includes speeches by the acting SEC chair Allison Herren Lee before the Center for American Progress, a Leftist NGO, in which she said:

No single issue has been more pressing for me than ensuring that the SEC is fully engaged in confronting the risks and opportunities that climate and ESG pose for investors, our financial system, and our economy…this last year has helped to clarify why the perceived barrier between social value and market value is breaking down.

I'm from the government and I'm here to help.

So, yes, it is as ominous as it sounds because this appears to be the first step in moving the SEC away from its statutory mission of protecting investors, and instead pursuing the Marxist goal of dismantling capitalism via regulation.  It will begin with making certain that “ESG disclosures” adhere to some as-yet-undetermined criteria for which failure will lead to enforcement actions. This is also consistent with the SEC’s long-term strategy to expand its power.  That’s the very nature of government agencies.

Fortunately, it will take herculean efforts on the part of the Left and the SEC to make headway. The courts have generally ruled that it is preferable to let companies and investors interface on what matters are important enough to address and disclose.

In addition, the courts have traditionally given companies wide discretion regarding what is considered material information.  Attempting to expand the definition of “material information” to issues involving "climate change" stands far outside existing case law at the Supreme Court level.

For disclosures (or lack thereof) to be considered material, there must first be a duty to disclose.  It’s one thing for an energy or utility company to make (or fail to make) statements regarding climate or environmental issues.  It’s another for a company that has little or no adjacent exposure to those issues to have such a duty.

Even then, a landmark Supreme Court case, Matrixx Initiatives v. Siracaruso, made is clear that even failed to disclose material information may not be actionable.  The court wrote, “…it bears emphasis that [securities laws] do not create an affirmative duty to disclose any and all material information. Disclosure is required under these provisions only when necessary ‘to make…statements made, in the light of the circumstances under which they were made, not misleading’.”

In another landmark case in 2011, TSC Industries, Inc. v. Northway, Inc., the Supreme Court held that “there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information available.”  Specifically, the court refers to the mix of information that investors rely upon prior to buying or selling a security.

Believe it or not, that ruling was unanimous and the opinion written by Justice Sotomayor.  One area where the liberal justices surprisingly get it right (sometimes) is on securities fraud cases.

There’s also a constitutional issue at play, generally referred to as “fair notice."  Multiple Supreme Court cases have determined that laws must give people a reasonable opportunity to know and understand what it prohibited.  Otherwise, enforcement is arbitrary and discriminatory.  That’s why agencies publish “rules” so as to provide some element of fair notice.

In what may turn out to be the height of irony, the National Resources Defense Council sued the SEC in 1978 because it wanted more expansive disclosure of environmental matters that were not mandated by statute.  The SEC actually opposed this, saying that too much disclosure would be unmanageable and expensive.

Without congressional mandate or rulemaking, the SEC stands on very weak footing as far as filing securities fraud cases in ESG matters. That's the good news. The bad news is that this doesn't mean the agency won’t try to satisfy the Biden administrations’ Leftist puppetmasters.   Naturally, this just means more resources taken away from what the SEC should be doing – protecting regular investors from genuine cases of fraud.

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.

Loader Loading...
EAD Logo Taking too long?

Reload Reload document
| Open Open in new tab

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.