The week of May 9: BlackRock’s tricky path, inflation, carbon tariffs, baby formula, and much, much more.
The notion that either ESG (the variant of “socially responsible” investing, under which actual or potential portfolio companies are measured against various environmental, social, or governance guidelines) or the closely related notion of stakeholder capitalism has reached some sort of high point is such an alluring prospect that it is difficult, sometimes, to resist (less so, if you have a properly pessimistic conservative temperament). Sadly, the opportunities for profit and power offered by ESG and stakeholder capitalism, not to speak of those presented by the eminently exploitable climate millenarianism that plays such a role in both, mean that we are a long, long way from that happy day.
There are plenty of examples to make that point, not least the planned extension of the SEC’s reach into this area, an example of regulatory mission creep (or, rather, gallop), that, if it goes through, will at least have the merit of a certain grotesque novelty. To watch an agency allegedly dedicated to investor protection embark on a course that will, not least through the burdens it puts on the companies in which they have invested, actually penalize shareholders is a reminder of just how far the madness of crowds can take those who know how to steer or surf it.
It might be thought that, at least when it comes to the “E,” the mess in which the West finds itself today might lead to a bit of a rethink. After all, the combination of repeated technological disappointment, soaring energy prices, and the recklessness (see Merkel’s Germany for one example of just how reckless) of the way in which the West’s energy transition is being arranged is not only threatening economic mayhem but has also created an immense geopolitical opportunity for our opponents. It is an opportunity they are not neglecting, but that, on our present course, will only grow.
That ought to lead a major course correction, but there are few signs of it. For example, earlier this week, there was this piece of news (via CBS):
The Biden administration has canceled one of the most high-profile oil and gas lease opportunities pending before the Interior Department. The decision, which halts the potential to drill for oil in over 1 million acres in the Cook Inlet in Alaska, comes at a challenging political moment, when gas prices are hitting painful new highs.
In a statement shared first with CBS News, the Department of the Interior cited a “lack of industry interest in leasing in the area” for the decision to “not move forward” with the Cook Inlet lease sale.
Pure speculation on my part (I don’t know anything about the geology in that area), but could it be that some of that lack of interest reflected the fact that those who might have otherwise put in bids did not relish the thought of the legal, regulatory, and political fights that would have accompanied their attempts to develop any promising fields? The additional thought that some of the battles to come could well have come from shareholders (frequently managing the money of unconsulted others) committed, one way or another, to an ESG agenda would have been more discouraging still. Possible bidders might also have been put off by the fear that the rules by which they thought they were playing would be radically changed halfway through the new projects’ lifetime, an all too reasonable fear in our current political and regulatory environment.
But wait, wait, what’s this from those ESG and stakeholder evangelists over at, yes, BlackRock?
The Financial Times (my emphasis added):
BlackRock has warned that it will not support most shareholder resolutions on climate change this year because they have become too extreme or too prescriptive.
The world’s largest money manager, with nearly $10tn in assets, said in a stewardship update that new US rules had allowed a wider range of proposals on proxy ballots. It added that Russia’s invasion of Ukraine had also changed the environment, requiring more short-term investment in traditional fuel production to boost energy security.
The group said it was particularly wary of proposals to stop financing fossil fuel companies, force them to decommission assets or set absolute targets for companies on reducing emissions in their supply chains and their customers.
“We do not consider them to be consistent with our clients’ long-term financial interests,” the company wrote.
Well, that would be right. And it gives rise to some questions that ought to be put to those investment managers (for anything other than funds specifically designed for investors prepared to give up some economic return in exchange for, allegedly, saving the planet) that do vote for such resolutions. If their job is to maximize investment return (on a risk-adjusted basis) for their clients, what do they think they are doing? Alternatively, if they don’t believe that is their job, have they informed their clients?
These are questions that are unlikely to be asked. If they are asked, the replies would, I suspect, be illuminating only thanks to their inadequacy.
The admission by BlackRock that the war on Ukraine had changed things is worth noting. The counterargument that Russia’s fossil-fuel advantage only reinforces the case for the energy transition is — and there is no way to put this politely — nonsense. It was, to take perhaps, the most infamous example (back to Germany again, I’m afraid), Angela Merkel’s Energiewende that gave Russia an even stronger grip on Europe’s energy market.
That was then, but for the West now to speed up a transition away from fossil fuels (and particularly its fossil fuels) that is already divorced from any credible economic or technological reality will only increase its vulnerability to authoritarian regimes. Even bringing on more nuclear power, one good way forward (if not, it seems for Germany), will take time. And no, rushing this transition will have little or no material impact on the climate, given that China and other large greenhouse-gas emitters have not the slightest interest in following the West’s leap off the cliff. They will, however, be happy to buy Russian fossil fuels, especially at a favorable price.
But if the West is to leap off that cliff, it would be better if the people making the decision to do so were its elected representatives.
That’s not how it’s working out.
Rupert Darwall, writing in Real Clear Energy last month:
As the West grapples with the energy implications of a hostile Sino-Russian alliance, the steering group of the Net-Zero Asset Owner Alliance, whose members manage over $10.4 trillion of assets, issued a statement urging Western governments not to sacrifice climate goals for energy security. “The world is still heading for an excess of fossil fuel-based energy use that will vastly exceed the carbon budget needed to meet the 1.5° Celsius Paris agreement goal. This trend must be halted,” the United Nations-backed alliance said in its April 8 statement, arguing that “the national security argument for accelerating the net-zero transition has strengthened considerably.”
What, one might ask, is the standing of asset managers to opine on national security matters?
The answer to that, I suppose, might be that anyone can opine on anything, however foolishly. But these asset managers are not just opining, they are throwing enormous amounts of other people’s money behind an effort aimed to create something approaching a national climate policy in the U.S. and a number of other countries (a policy with potentially dangerous geopolitical implications for the U.S., and, indeed, the broader West — something that would, incidentally, not normally associated be with healthy stock markets).
To be sure, it’s true that asset managers are supposed to vote their shares but (other than in the cases of funds specifically created with wider objectives in mind) they are meant to vote those shares in a way designed — to return to the point made above — to generate shareholder return. But that’s not what is happening here. These asset managers are voting their shares (often in the same way, an example of groupthink or worse that in some cases might raise some interesting-to-think-about antitrust issues) in a manner designed to advance a political agenda, rather than with the objective of generating increased investor return. And that brings us back not only to the questions listed before but also to others about democratic legitimacy. Climate policy is being determined by unelected asset managers, unelected corporate managers, unelected NGOs, unelected regulators, and, of course, here in the U.S., executive orders. The voters themselves are not given much of a say, but then that’s the way it can go in a corporatist regime of the type toward which we are being herded.
But back to BlackRock, which is having to tread a delicate path. After all, it was Larry Fink, the firm’s chairman and CEO, who used his firm’s weight to push climate to the top of the stakeholder/ESG agenda. In its report the FT contrasted the extent of BlackRock’s support for climate-related resolutions last year with (it seems) a more selective approach this time round. That said, the newspaper’s reporter, Brooke Masters, noted how BlackRock’s “stewardship team” (a term so revoltingly sanctimonious that it was difficult to type without feeling a little nauseous) argued that BlackRock’s position has not changed:
it would continue to vote in favour of proposals that called for improved [climate] disclosures or pushed companies that did not have a transition plan to come up with one.
Where BlackRock plans to part ways with activists is on proposals that it considers micromanagement or against the financial interest of shareholders.
At Australia’s Whitehaven Coal, for example, the money manager said it voted against two directors “to signal persistent concern that the company is not proactively or ambitiously managing the climate risk” but also voted against a shareholder proposal that required detailed disclosure on how it would manage down its coal operations.
Asked for comment, BlackRock said it is “interested in companies’ strategies and plans for responding to the challenges — and capturing the opportunities — of the energy transition, because they will have a direct impact on our clients’ investment outcomes”.
“Voting on both director re-election and well-crafted shareholder proposals can be helpful expressions of investor sentiment,” it added.
BlackRock is not the only money manager to flag the increase in shareholder proposals. The Conference Board has warned “that a new (and potentially more intense) wave of [shareholder] proposals is coming” and studies early in the US season suggested that a record number had been filed.
BlackRock also has company in increased scepticism about activist proposals. Shareholders in Occidental Petroleum last week overwhelmingly rejected a proposal calling on the company to set more detailed emissions reductions targets. The company had fought the proposal by pointing out that it already had the US oil industry’s most ambitious climate targets.
Something tells me that Fink’s effort to moderate the damage that his crusade has caused — and is causing — is not going to be easy. Revolutions devour their own and all that. Then there’s the small matter of all those who, one way or another, have a vested interest in pushing back hard against even the mildest deviation from what has become the party line.
That, of course, includes the FT, which has carved out a nice niche for itself in the climate/stakeholder capitalism/ESG ecosystem.
And so turn to the discussion by the FT’s Lex columnist of the way that BlackRock “has given itself a pass on knotty environmental issues.”
Please read the whole thing, but here’s the last paragraph:
Whether or not BlackRock’s rationale is disingenuous is beside the point. For many investors, the one-time climate champion’s abdication represents a big step back. It in effect grants permission to other investors to relax their grip. More worrying still, it puts corporate boards on notice that they can breathe a little easier when irksome proposals appear on the slate.
For many investors?
Here’s an interesting news item, which I cited in a post last month:
Climate-related financial risks are getting growing attention — but a new survey from BCG casts doubt on how seriously institutional investors are taking them. Just one in 20 investors polled by the consulting firm said that climate and ESG-related issues were among the three risks they took most seriously. And only 11 per cent of the 150 investors polled indicated that ESG is a primary consideration in day-to-day investment decisions.
The source of that story? The FT.
And more on that “growing attention” (from Bloomberg, May 12):
This year’s rally in oil prices, fueled in part by Russia’s invasion of Ukraine, has hurt those betting against oil and gas companies, among the biggest contributors to global warming. At the same time, investors have been pulling cash from environmental, social and governance-labeled funds after plowing cash into them in recent years.
Some of the largest climate-focused exchange-traded funds, for example, have seen steady outflows this year, including the $1.8 billion Invesco Solar ETF, which has had a net $230 million of redemptions, according to data compiled by Bloomberg . . .
But to return to some of the language used in the final paragraph of that Lex column. There’s the idea that investors need “permission to relax their grip.” Well, if investors (who are, for the most part, managing other people’s money) “need permission” from any third party when deciding how to vote “their” shares, they ought perhaps to be in another job. As indeed they do if that grip is designed to do anything other than (except in the case of those funds with wider objectives) encourage their portfolio companies to generate, yes, maximum risk-adjusted shareholder return. And note, too, the wording of the last sentence in which Lex refers to boards’ being able to “breathe a little easier” when it comes to “irksome” shareholder resolutions, an adjective that conveys the idea of an aristocrat disdainfully brushing aside some deserving request. But the real “aristocrats” are those activist investors, attempting to advance a political agenda with other people’s money but without the electorate’s vote, while the court press cheers them on.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 66th episode David is joined this week by Steve Forbes, supply-side hero and flat-tax pioneer, who is the co-author of a brand new book on inflation. Steve and David go deep into the weeds of what matters in American economic policy, and, as always, the objective is intelligible, reasoned discourse, not platitudes and false prophecy.
The Capital Matters week that was . . .
Inflation
The claim that China tariffs need to be cut because they’re inflationary isn’t serious. In the trade-policy world, there is close to a bipartisan consensus that the tariffs are not responsible for inflation and that cutting them would do nothing to stop its rise. The labor-aligned Economic Policy Institute concluded that cutting the tariffs would yield only a onetime 0.3 percent reduction in consumer prices. Meanwhile, the Peterson Institute, famously supportive of free-trade policies, published its own finding that the tariffs “only marginally contributed to inflation.” The tariffs don’t affect enough goods and don’t impact consumer prices directly enough to make a meaningful contribution to inflation.
Ultimately, it doesn’t take a think-tank white paper to arrive at that conclusion. The tariffs were in place by 2019, well before the recent inflation spike, and prices on many tariffed goods had already come back down to pre-tariff levels by 2020. As Senator Cotton pointed out, blaming these tariffs for inflation is a little like blaming “Putin’s price hike” for rising gas prices. It’s a politically convenient pretext.
A good way to think about inflation currently is to go through Goldwein’s list on both sides. First, for each item, ask, “Is this happening?” If the answer is no, ask whether that item is likely to happen in the future, and if so, how far off in the future. Then, based on what’s happening and what isn’t, weight each item by how important it could be in determining the inflation rate.
The first step of that process is one where many economists and economic observers will agree a lot. We have data on excess savings, inflation by sector, labor markets, consumer spending, bond markets, etc. We can read the Fed’s projections and the explanations it gives for its decisions.
The disagreement comes in the second step . . .
The news that the headline rate of inflation (CPI) had eased slightly (to 8.3 percent) was, of course, better than news that it had increased, but, like one of those days when the Entente reported having seized an extra hundred feet of mud on the Western Front in 1916, it was no real cause for celebration . . .
Well, I suppose this was inevitable.
Bloomberg’s Javier Blas tweets:
“US House Speaker Nancy Pelosi says Democrats will next week present a bill on gasoline price gouging. The bill will enable the president to issue emergency declaration making it illegal to increase the price of gasoline. “Price gouging needs to be stopped.”
Economically, this is utter stupidity. It would just be something else that discourages the increased investment in new oil and gas production that consumers need.
This proposal probably cannot (for once) be explained by the climate wars (if it can, it will eventually accelerate the greenflationary ratchet still further), but by political calculations that make sense in a way that its economic logic does not . . .
China
The word “China” and “Uyghur” do not appear in the senators’ letter; if all you knew about this issue was from their letter, you would think the U.S. Commerce Department was investigating the sourcing of these solar panels for no particular reason.
The sudden and widespread slowdown proves that the U.S. solar panel industry is, at least for now, dependent upon polysilicon from China, and likely a significant portion of that polysilicon comes from Xinjiang and exploited Uyghur labor. Americans like solar power — er, as long as the solar power projects are far away from them — but also support a tough stance on China on the issue of human rights. The solar energy industry is effectively saying that for now, the U.S. cannot have both — and that it must accept the risk of supporting Chinese abuse and exploitation of the Uyghurs in return for developing current solar energy projects.
Supply Chains
Some shippers have been anxious. The National Electrical Manufacturers Association sent a letter to President Biden and Secretary of Labor Marty Walsh in March urging them to make sure there is no work stoppage.
Edwin Lopez for Supply Chain Dive writes that both the PMA and the ILWU have been emphasizing cooperation going into the talks. In a joint press release today, they said, “Both sides say they expect cargo to keep moving until an agreement is reached.” Kuehne + Nagel, one of the world’s largest freight forwarders, also sees things as being “much calmer” than the last negotiations.
However, Lopez notes that both sides also expect negotiations to go beyond July 1. That’s been normal for the last few contract cycles (in 2014, negotiations took nine months). Just because a deal is not reached in time does not mean that work has to stop.
So far it seems that automation, as usual, will be a major sticking point in negotiations . . .
Regulation
Sir Alec Issigonis, who designed the original Mini car, famously said that “a camel is a horse designed by a committee.” The Car of the Century organization named the Mini the second most influential car of the 20th century. Why? According to Issigonis, it is due to the fact that a committee did not get in the way of his practical, yet elegant, design.
Sadly, we can’t say the same thing for 5G. Different parts of the Biden administration have been trying to undo, rewrite, or even sabotage policies from the previous administration that had the proven effect of promoting 5G and broadband at large. Feeling more political pressure from Congress, the Biden administration has started to put together a hodgepodge of policies that seek to increase 5G but, instead, have the opposite effect.
The problem? The Biden administration has no real in-house leadership on 5G deployment . . .
Elon Musk’s purchase of Twitter has many on the political right hopeful that, once under his control, the site will take down less conservative content than in the past. But to make that a reality, Musk will need the liability shield known as Section 230.
The law (more precisely, Section 230 of the Communications Decency Act of 1996) clarifies that it’s the creators of third-party content, not their digital hosts, that are legally responsible for user content. So it’s the person tweeting, not Twitter, who is liable for the speech. Section 230 explicitly states that the liability shield holds even if the host curates its platform, which wasn’t certain back in 1996, when the law was passed.
The sweeping protections conferred by the section made the explosion of third-party speech on social media possible and saved countless dollars by sparing companies the costs of bad-faith litigation. The part of Section 230 that reads, “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider,” has been called the “26 words that created the Internet” by cybersecurity law professor and author Jeff Kosseff . . .
Baby Formula
In a free market, widespread shortages shouldn’t occur. The price should rise as supply gets low, which encourages more production. The increased production should prevent a prolonged shortage before it has a chance to get started, then bring the price back down as well.
The overarching problem is that price signals in the baby-formula market don’t work well to begin with. A 2010 study from the USDA’s Economic Research Service estimated that 57 to 68 percent of all baby formula sold in the U.S. was purchased through the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC).
That means over half of the baby formula that’s consumed in the U.S. isn’t really bought and sold on a free market at all . . .
Taxation
The truth, however, is that small-business owners and self-employed people will always be key targets of IRS enforcement, enhanced or otherwise. That is because the IRS believes that small-business owners cheat on their taxes — virtually across the board. In the IRS’s opinion, small businesses are the primary contributors to the so-called tax gap: the estimated difference between the tax legally owed and what is actually paid. Estimates place that figure at about $390 billion annually.
In September 2019, the IRS released a research report in which it claimed that almost half of the tax gap is attributable to self-employed people and small corporations, even though they account for about only 15 percent of all tax returns filed. Though the report was drafted under the Trump administration, this remains the IRS’s philosophy, because it was written by the career bureaucrats who populate federal-government agencies and rarely (if ever) change with administrations. Proof of this lies in a September 2021 article written by the Treasury Department’s Natasha Sarin . . .
Management Consultancy
As part of the U.S. government’s ongoing effort to aid Ukraine’s resistance to Russia’s invasion of the country, the White House announced on Sunday that the U.S. will, among other things, “prohibit U.S. persons from providing accounting, trust and corporate formation, and management consulting services to any person in the Russian Federation.” According to the Wall Street Journal, many such firms, including McKinsey, had already “quit or stopped all client work” as of late April. McKinsey made the following announcement on March 3:
“Effective today, we will not undertake any new client work in Russia. We will cease existing work with state-owned entities and have stopped work for government entities. After our remaining engagements in Russia conclude, all client service in the country will be suspended.
Our office will remain open so that we may support our colleagues in the country.”
It added this a few weeks later: “Update: Consistent with this commitment, all client service in Russia has ended as of 15 April 2022.”
So now it seems the consulting firm has no business in the country. This is intended as part of a punishment of Russia. However, reviewing the company’s record — it’s fresh off helping convince CNN that CNN+ would be a good idea — I can’t help but wonder if this is actually good news for Russia. At my cheekiest, I am inclined to argue that it might be better not just to let McKinsey back into the country, but also to put it in charge of the entire Russian war effort . . .
Carbon Tariffs
Typically, a carbon tariff is used to offset a country’s own carbon-pricing regime on its domestic industry, in which case it can reasonably be called a carbon border adjustment. The European Union has such a policy in place, matching with its Emissions Trading System. The U.S., conversely, has no such unified policy. As the American Enterprise Institute’s Kyle Pomerleau explained in response to the 2021 proposal from Senate Democrats, without a domestic equivalent, a carbon border adjustment is a tariff, plain and simple. “Democratic lawmakers,” Pomerleau wrote, “are considering a proposal to apply the advantages of a border adjustment to current climate policy. The import tax lawmakers are considering, however, is not a border adjustment — it is a tariff.” Until and unless the U.S. enacts its own coherent emissions policy — a related but separate debate — the term “adjustment” will remain a misnomer . . .
Abortion
Scott’s objection to Yellen is that discussing abortion from an entirely economic point of view completely misses the point of the discussion. And he’s right. But Yellen wasn’t even considering the economic question in full.
It’s a hard sell to say that abortions, in general, have improved women’s economic prospects. The number of abortions in the U.S. has been declining for decades even as women have come to make up a greater and greater share of the labor force. There is probably no causal relationship in either direction here, but in any event, the idea that abortions make it easier for women to work doesn’t seem to be borne out by the data.
Yellen also fails to consider the other side of the ledger: women who got an abortion believing it would make their lives more “fulfilling and satisfying” and proceeded to focus on their careers, only to realize too late that they actually did want children. Much good has come from women’s participation in the workforce, but as Charles Krauthammer wrote in a 2000 column, “Like all great revolutions, feminism has its price and its victims.” . . .
Twitter/Musk
Musk’s recent purchase of Twitter has generated countless think pieces on everything from the appropriateness of rich people owning major platforms (are there any that aren’t owned by rich people?) to the Sisyphean struggle that surely awaits him (spaceflight and electric cars may be complicated, but have you tried moderating a discussion with 300 million people?). But speaking of a Canadian angle, here’s another one to consider: Hopefully the free-speech absolutist who believes that free speech is essential to a functioning democracy is aware of the alarming direction that Justin Trudeau’s government has been taking when it comes to regulating the Internet in Canada.
Consider a few recent examples . . .
Please note that both our articles that refer to Elon Musk’s purchase of Twitter were written before Friday’s news that the deal is “on hold.” More, doubtless, to follow next week.