From “Who Cares Wins” To Pernicious Progressivism: 18 Years Of ESG

ESG by no means had it so good! For starters, discover how I didn’t really feel like I needed to spell out the acronym. Till lately that was hardly the case. Gloriously, what the letters stand for is now identified throughout the political spectrum. Not surprisingly, the which means of the acronym varies throughout the political spectrum as nicely. This illustrates how ideology infuses language. Fiduciary responsibility is one other instance, notably within the context of ESG. This can be a story for an additional day.

Professor Elizabeth Pollman has written concerning the origins of the acronym. It may be traced again to the formation of the UN World Compact and a 2004 report titled “Who Cares Wins: Connecting Monetary Markets to a Altering World.” At the moment George W. Bush was President and head of a really completely different Republican Social gathering than the one now we have at this time. Though my very own political leanings are to the left, I yearn for the times of principled conservative views. However that too is a narrative for an additional day.

Studying Professor Pollman’s glorious paper impressed me to re-read the report. It was a really attention-grabbing and informative train in mild of the virtually insane politicization that has occurred within the U.S. to ESG which I’ve written about and mentioned in a podcast with Amy Cortese of ImpactAlpha.

“This report is the results of a joint effort of economic establishments which have been invited by United Nations Secretary-Basic Kofi Annan to develop pointers and proposals on how one can higher combine environmental, social and governance points in asset administration, securities brokerage providers and related analysis capabilities. The work that led to this report occurred beneath the auspices of the U.N. World Compact.”

Twenty monetary establishments (together with Calvert, Goldman Sachs, and Morgan Stanley) from 9 international locations with $6 trillion in property beneath administration participated in and put their names on the report stating, “Endorsing establishments are satisfied that a greater consideration of environmental, social and governance components will finally contribute to stronger and extra resilient funding markets (emphasis mine), in addition to contribute to the sustainable growth of societies.”

To clarify the capital market focus of the report, it notes that “now we have avoided utilizing phrases reminiscent of sustainability, company citizenship, and so on., so as to keep away from misunderstandings deriving from completely different interpretations of those phrases.” Oh, and simply to notice, that not a single nefarious progressive NGO was a signatory to this report. Oh and to additionally be aware, the much-maligned BlackRock wasn’t a signatory both.

The report was visionary in quite a lot of methods, together with a “Goldman Sachs Vitality and Social Index” which scored oil and gasoline corporations throughout eight environmental and social indicators (Determine 3) and a graph of the potential vary of impression of local weather change insurance policies on vehicle corporations (Determine 4). So the query right here is whether or not these monetary establishments have been already sneakily starting a seditious progressive left-wing Woke marketing campaign to undermine the businesses they have been invested in (type of counterintuitive, proper?) or whether or not they have been seeing ESG as a approach to make sure long-term worth creation (which makes much more sense to me).

Okay, let’s flash ahead 18 years. How have the markets accomplished? ? The S&P 500 Index was at 1,121 in January of 2004. It peaked at 4.725 in December 2021. It’s now down to three,770, nonetheless greater than its peak throughout the Trump administration of three,234 on January 3, 2020. Simply earlier than he left workplace. Moderately unwillingly. And at this time’s index is taking account of Russia’s invasion of Ukraine which has led to excessive oil and gasoline costs, contributing to the best fee of inflation in 10 years. Doesn’t look to me like ESG has broken the markets and shareholder worth creation.

However why let information get in the best way of getting some political enjoyable and video games? Little lonely ESG has now made the Large Time and is getting used to wind up the Republican base, virtually sitting alongside weapons and abortion. On these two, I acknowledge that there are strongly opposing political opinions however a minimum of either side are speaking about the identical factor.

That ain’t the case with ESG. These Republicans who’re crucial of ESG, and I think they’re the minority though I don’t have any knowledge to show this, have had the intelligent inspiration to present it their very own definition! It’s like me defining “U.S. power safety,” which I assist, as “stopping blue states from shopping for power from pink states” after which railing towards a nefarious pink state political agenda to wreck their fellow residents. In fact I might be against this. It’s positively un-American!

I’ve beforehand mentioned the erudite Republican Research Committee memo “The Battle on American Vitality Floor Zero” which defines ESG as “ the progressive scheme by way of which the Left pressures company America to take positions on social and political points that don’t have anything to do with enterprise.” Right here they’re loyally parroting former Vice President Mike Pence who wrote in an op-ed piece to the at all times GOP-enabling Wall Road Journal stating that “ESG is a pernicious technique, as a result of it permits the left to perform what it may by no means hope to attain on the poll field or by way of competitors within the free market. ESG empowers an unelected cabal of bureaucrats, regulators and activist buyers to fee corporations based mostly on their adherence to left-wing values.”

In a honest effort to assist clarify ESG investing to Mr Pence and his mates I identified that ESG is about managing materials dangers to worth creation. As in described in “Who Cares Wins.” For instance, utilizing steerage from the Sustainable Accounting Requirements Board (of which I used to be the founding Chair), the fabric danger components for an oil and gasoline exploration firm are proven within the determine under. I’m certain the rising listing of ESG haters would grant me that worker well being and security, enterprise ethics, administration of the authorized & regulatory setting, crucial incident danger administration, enterprise mannequin resilience, and human rights and neighborhood relations are vital danger components.

That leaves the buggy boo of environmental points: GHG emissions, air high quality, water & wastewater administration, and ecological impacts. There are legal guidelines about all of those points. However let’s faux there weren’t. Are they saying that an oil and gasoline firm really devoted to shareholder worth creation can and will ignore these matters with impunity?

Florida governor Ron DiSantis, one other aspiring GOP Presidential nominee, has additionally jumped on the anti-ESG bandwagon to burnish his conservative credentials. Since he’s a governor he can truly cross some laws which he did on August 23, 2020. Alongside together with his fellow Trustees of the State Board of Administration (SBA) he handed a staunch decision that state funds ought to be invested “with out contemplating the ideological agenda of the environmental, social, and company governance (ESG) motion” based mostly on “social, political, or ideological pursuits.”

This does put the Florida pension funds in a clumsy place. In the event that they take heed to the Guvnor, they may ignore materials danger components and harm the funds’ returns to the detriment of their beneficiaries. In the event that they don’t, who is aware of what is going to occur? I imply, he would possibly put them on a aircraft to Martha’s Winery!

The Republican ESG enjoyable and video games proceed! On September 20, 2022, Retiring Senator Pat Toomey (R-PA), a graduate of Harvard Faculty and the Rating Member on the Senate Committee on Banking, Housing, and City Affairs despatched a letter to 12 ESG score companies: MSCI, ISS, Bloomberg, Sustainalytics, Moody’s, Carbon Disclosure Challenge, S&P World, FTSE Russell, RepRisk, FactSet, Refinitiv, and Arabesque S-Ray. Enjoyable reality. Mr. Georg Kell is the Chairman of Arabesque Companions and was the founding Government Director of the UN World Compact.

I’m certain Mr. Pence may be very happy with this investigation since in his letter mentioned above, he likens the ESG scores score companies give to corporations as no completely different from “the social credit score scores issued by the Chinese language Communist Social gathering.”

Query 11 asks, “Does an organization’s involvement in a authorized but politically disfavored business (e.g., fossil fuels, firearms, tobacco) negatively impression its ESG score? If that’s the case, please listing the industries.” Ummm. The reply is “No.” Mr. Toomey would have identified this if he learn the RSC memo letter because it expressed the exasperation (be aware the irony) that Tesla acquired a decrease ESG score than ExxonMobil. If it will be useful to Mr. Toomey, he can learn my clarification for this.

Query 12 is, “How do you establish which industries warrant a damaging scores impression and which of them don’t?” Simply FYI Mr. Toomey, the scores are of corporations not industries. It additionally would possibly make him really feel higher to know that not simply oil and gasoline corporations, however tobacco corporations (a lot to the consternations of this business and ESG critics) may get excessive ESG scores.

Query 13 asks, “In assigning ESG scores, how do you consider, if in any respect, donations to organizations that promote political causes reminiscent of voting rights, police reform, racial justice, local weather change activism, and abortion rights? If such donations are thought-about, how do they impression an organization’s ESG score? Please listing any corporations whose scores have been positively impacted by the consideration of such donations.”

Honest sufficient to ask the query of whether or not political donations are a consider these scores though the listing screams out Mr. Toomey’s political opinions. In fact, none of those are components in ESG scores. However how about asking if these score companies about proper wing political causes? I’m simply guessing that in the event that they did, and you bought ESG Brownie Factors for being towards voting rights, police reform, racial justice, coping with local weather change, and abortion rights, Mr. Toomey could be simply advantageous with that.

Eleanor Terret of FoxBusiness couldn’t be extra excited by what Mr. Toomey is doing. As she writes in her piece “Toomey Leads Cost Towards ESG scores corporations,” Mr. Toomey is “offering a blueprint for the way a possible GOP majority can defang the trouble to push controversial “ESG” mandates on company America.” He’s planning on turning over his findings to his GOP colleagues who “are promising to mount investigations into the ESG motion armed with subpoena energy if Congress runs pink after subsequent week’s midterms, individuals near the matter say.”

Adhering to the occasion line, she helpfully explains that “ESG is a broad time period to explain an investing method that has turn into each in style and controversial in recent times as some buyers demanded company insurance policies that took under consideration societal wants, not simply maximizing shareholder worth. It seeks to power public corporations to take steps to guard the setting, create governance mandates that guarantee range and cling to ideas that higher society.” God forbid that corporations adhere to any ideas that might make for a greater society! The identical outdated blah, blah, blah that ESG hurts shareholder worth creation whereas on the similar time the left wing critics of ESG complain that it’s solely about shareholder worth creation and never making the world a greater place.

Ms. Terrett notes how dire the implications of this might be: “Firms, bullied by progressive activists, regulators within the White Home, and egged on by ESG score corporations searching for a revenue from the burgeoning enterprise, cave to ESG calls for.“ Nicely, that is certainly worrisome. Particularly given the actual fact (not that information matter to ideologues) that, as Professors Vyacheslav Fos of Boston Faculty, Elisabeth Kempf of Harvard Enterprise College, and Margarita Tsoutsoura of Washington College in St. Louis have identified in “The Political Polarization in Company America,” 69 % of the best paid executives within the corporations lined by the S&P 1500 index are Republicans and 31 % are Democrats.

I can solely consider two hypotheses to reconcile her claims with these information. The primary is that each one the Republican execs see ESG as being worth enhancing. The second is that they’re a bunch of wimps who’re caving right into a pernicious progressive motion and must “Man Up.” (Lest I be accused of gender bias by both aspect, the paper notes that throughout all events the proportion of ladies is 10.4.) If that is so, I’d wish to helpfully counsel to Senator Grassley that he ship all of those spineless Republican execs an equally stern and admonishing letter telling them they’d higher change the errors of their methods—OR ELSE!

Not desirous to be not noted of the wonderful ESG limelight, 5 different Senators {Marsha Blackburn (R-TN), Tom Cotton (R-AR), Chuck Grassley (R-IA), Mike Lee (R-UT), and Marco Rubio (R-FL) have despatched a letter to 51 legislation corporations. The listing comprises many well-known legislation corporations, however some inclusions and exclusions perplex me. An instance of the previous is White & Case which ranks as essentially the most Republican legislation agency together with Proskauer Rose proper behind them. (Nicely, I assume I’ve to present the Senators credit score for not simply choosing on Democratic-leaning legislation corporations. However I can’t assist however marvel how the Republican-leaning ones reacted to getting the letter and what they will do about it.) An instance of the latter is Wachtell Lipton Rosen and Katz, well-known for Martin Lipton’s assist of stakeholder capitalism and for its glorious sequence of “ESG Memos.” Extra on this under.

Little doubt due to Senator Cotton’s schooling at Harvard Legislation College, the letter begins with a forceful first paragraph:

“We’re writing about your agency’s Environmental, Social, and Governance (ESG) observe. Though companies would definitely be clever to lawyer up earlier than endeavor ESG initiatives, your agency has an obligation to totally inform shoppers of the dangers they incur by taking part in local weather cartels and different ill-advised ESG schemes.” Wow, local weather cartels! Clearly Senator Cotton took some programs in antitrust legislation to be taught this time period.

Within the “right here we go once more” nonsensical formulation of Mr. Pence, the RSC, and Mr. DiSantis, the letter asserts that ““The ESG motion makes an attempt to weaponize companies to reshape society in ways in which People would by no means endorse on the poll field. Of explicit concern is the collusive effort to limit the provision of coal, oil, and gasoline, which is driving up power prices throughout the globe and empowering America’s adversaries overseas.” I’ve already proven this can be a ludicrous rivalry. ExxonMobil’s market cap is at an all-time excessive of $462.49 billion and it initiatives producing $100 billion in contemporary money move over the subsequent 5 years.

And simply to indicate they aren’t kidding and are keen to take the gloves off, the letter ominously closes with:

“To the extent that your agency continues to advise shoppers concerning participation in ESG initiatives, each you and people shoppers ought to take care to protect related paperwork in anticipation of these investigations.”

Given lawyer/consumer privilege, Harvard Legislation College actually has some culpability right here. Both the notion of lawyer/consumer privilege isn’t in its curriculum, or they don’t correctly assess whether or not their college students perceive the idea earlier than giving them their a lot cherished Crimson legislation diploma to hold on their wall.

Getting again to poor ignored Wachtell Lipton Rosen and Katz, their September 22, 2022 memo “ESG, Stakeholder Governance, and the Responsibility of the Company states that “it’s important that boards function beneath a governance mannequin that allows consideration of ESG ideas and sustainable funding methods, with the assist of buyers and asset managers, to advertise long-term company worth and to fortify the enterprise towards related dangers. There ought to be little question that the legislation in Delaware and in each different U.S. jurisdiction empowers boards to observe this course for accountable company stewardship and company success.”

Let me conclude with some useful recommendation to the 5 Senators. Higher lawyer up.