The week of November 28, 2022: ESG, Twitter, transportation, antitrust, and much, much more.
Twitter
The investment “discipline” of ESG — someone always complains if I don’t say what those initials stand for — involves measuring companies against variably defined environmental, social, and governance standards. ESG and the closely connected doctrine of stakeholder capitalism — the idea that a company should be run for variably defined stakeholders, rather than just the shareholders who own it — are parts of a profoundly political project designed to use corporate power to advance a progressive agenda without the bother of going through the democratic process.
What this is, is a manifestation of corporatism (a word often misunderstood because of the way it sounds). Corporatism is an ideology that, to a greater or lesser extent, will lead to the subordination of conventional corporate purpose based around shareholder primacy to objectives set elsewhere. This is typically arranged in conjunction with the state or — keep an eye on regulators regardless of which party is in power — elements within it. That said, it is no surprise that the Biden administration is working alongside those pushing ESG.
In a recent (must-read) article for Law & Liberty, Samuel Gregg has this to say:
In 2021, the Biden Administration announced its intention of imposing new ESG disclosure requirements on publicly traded companies. Upon examining the requirements in question, the legal scholar Todd Zywicki found that “the disclosures advance left-wing causes such as environmentalism and race, sex, and sexuality ‘diversity’ initiatives, not issues such as the rule of law, economic development, or affordable energy policy.”
It is, incidentally, notable that the administrative state is being used in this way. Voters — and the legislators they elect — are such a nuisance.
Politicians on the right are now beginning to push back, a phenomenon that, ludicrously and predictably, has caused outrage. It is, we have been told by oligarchs, numerous Gutmenschen, C-Suite grandees, and even a former vice president, not something in which politicians (by which they really mean the wrong sort of politicians) should take an interest.
Too late. They are. And, given Democratic control of the White House and (for a little while longer) both houses of Congress, these efforts have largely been made in red states.
Here’s one recent example, via Reuters:
Florida’s chief financial officer said on Thursday his department would pull $2 billion worth of its assets managed by BlackRock Inc., the biggest such divestment by a state opposed to the asset manager’s environmental, social and corporate governance (ESG) policies.
The move will hardly dent BlackRock’s $8 trillion in assets and drew a strong response from the company, which said the action put politics over investor interests.
On the contrary, Florida’s CFO is trying to remove politics from the business of managing other people’s money. Unless the people whose money it is have stipulated otherwise, those responsible for managing money (whether state officials or those to whom they have delegated this function) have a duty to focus solely on financial return. When the E, the S, or the G are genuinely (an important adverb in an era in which convenient, but largely fictional, investment “risks” are being allowed to play too prominent a role) relevant to the performance of a company’s stock, then of course they should be considered. Otherwise not, except when: (1) as mentioned above, the people whose money it is (or will be) have specifically requested that non-financial factors be included in the consideration of how it should be invested, and (2) it is clear that they have understood that this is probably going to mean sacrificing some return.
But ESG has frequently been sold as a route to outperformance. Its promoters like to claim that it is a way of doing well by doing good (the fact that ESG funds carry higher fees is, naturally, only a coincidence). There may indeed be periods when that happy result occurs, but over a longer period this is unlikely to be the case, for two main reasons. The first is that if a high ESG score does correlate with outperformance, that will in due course be reflected in the share prices of the companies in question (markets are like that), reducing the possibility of further outperformance. The second is that ESG must, by definition, involve excluding or underweighting investment in companies (in the oil-and-gas sector, say) that fall short of the standards of whoever is setting the rules. Narrowing the field of potential investments for reasons that are (in whole or in part) non-financial must increase the chance of underperformance as against a strategy free of such restrictions.
And while the picture is confused by conflicting and opaque definitions of what ESG actually is — and how it should be scored — the numbers seem to back up this logic. In his article for Law & Liberty, Gregg refers to research by Aneesh Raghunandan and Shivaram Rajgopal in which they found that ESG funds underperformed financially relative to other funds within the same asset manager and year. And that is far from being the only analysis that leads to a similar conclusion. While it is true that there have been periods of outperformance by ESG funds, even then ESG has not — the odd green bubble apart — been the winning ingredient. Thus, ESG funds have typically been overweight tech stocks (which, with a relatively light environmental footprint, often carry a high ESG score). A year or so ago, tech stocks were hot, something that helped the performance of the ESG funds that held a lot of them. But the appeal of those companies arose out of their growth prospects. It had nothing to do with the fact that they happened to emit fewer greenhouse gases than companies operating in other business areas.
Under the circumstances, the claim that ESG is a way of doing well by doing good is hard to defend, and those responsible for managing other people’s money — a state pension fund, say — would be right to keep clear of an investment manager that has embraced ESG in anything other than pools of money specifically reserved for that purpose. And that ring-fencing may be less clearcut than is often assumed, something that will matter not only when it comes to stock selection, but also with respect to the way that the investment manager votes the shares of the companies in which it has bought positions with the money entrusted to it.
The question of voting is of particular interest when it comes to index funds. The investment manager must buy every stock in that index, but what if he takes it upon himself to use the fund’s stake in those companies to steer them in a direction that reflects the ideas and principles running through ESG? Some indexes have been crafted with ESG in mind, in which case there is no problem — this, presumably, is what the clients would want — but others (an index tracking the S&P 500, say) have not. In that latter case the investment manager’s only aim should be to cast its shareholder votes in a way designed to maximize investor return, but is that really what it is doing?
It should be said that, to its credit, BlackRock has, when it comes to how it votes the shares in its funds’ portfolio companies, now taken a lead in recognizing that the real shareholders in those companies are not the funds themselves, but those who have invested in them. It is developing mechanisms that are allowing an increasing number of its clients to vote the shares in a company that they (indirectly) hold through a BlackRock fund. Vanguard, another investment giant, is following suit.
Vanguard’s ESG stance, meanwhile, has embroiled it in a different kind of battle with a number of Republican states.
Fox Business, November 29, 2022:
A coalition of 13 Republican attorneys general filed a rare motion Monday, asking a top federal energy regulator to prevent a financial institution from purchasing shares of publicly listed utility companies.
The state officials, led by Utah Attorney General Sean Reyes, asked the Federal Energy Regulatory Commission (FERC), to hold a hearing examining whether Vanguard Group should be given blanket authorization to purchase large quantities of public utility stocks due to its support for environmental, social and governance (ESG) investing. ESG standards broadly promote investments in green energy over fossil fuels.
As it and other major financial institutions do every three years, in February, Vanguard asked FERC for the green light to own more than $10 million worth of public utility shares. Under the Federal Power Act, FERC is required to periodically review and approve or deny such applications.
“The Commission granted the 2019 Authorization based on assurances from Vanguard that it would refrain from investing ‘for the purpose of managing’ utility companies,” the state officials wrote in the filing Monday. “Vanguard also guaranteed that it would not seek to ‘exercise any control over the day-to-day management’ of utility companies nor take any action ‘affecting the prices at which power is transmitted or sold.’”
“Now, Vanguard’s own public commitments and other statements have at the very least created the appearance that Vanguard has breached its promises to the Commission by engaging in environmental activism and using its financial influence to manipulate the activities of the utility companies in its portfolio,” the filing continued.
The filing stated that the FERC should at least hold the requested hearing to examine the previous authorization it granted Vanguard in 2019.
With FERC controlled by a Democratic majority, I somehow doubt that this effort will get very far. Nevertheless, this story is yet another reminder to asset managers that playing politics with other people’s money is increasingly going to subject them to the political pushback that such games deserve. With Republicans about to take control of the House, those fighting this fight in red states are likely to receive some reinforcement, quite possibly in the form of hearings on Capitol Hill. They ought to be worth watching.
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 the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 95th episode David is joined by Dr. Alexander Salter, a professor of economics at Texas Tech University and a scholar at the American Institute for Economic Research. They do a deep dive into monetary policy, revisit mistakes of the past, and offer differing as well as agreeable perspectives on a host of Fed-related topics. This is a fun episode for those who find central banking fun — which is all of us.
No Free Lunch
David has also launched a new six-part digital video series, No Free Lunch, here on the website. In it, we bring the debate over free markets back to “first things” — emphatically arguing that only by beginning our study of economics with the human person can we obtain a properly ordered vision for a market economy.
The first video in the series is now up, and it features David in conversation with Father Robert Sirico, co-founder and president emeritus of the Acton Institute.
The Capital Matters week that was . . .
Fiscal Policy
Although divided government after the midterms might offer a glimmer of hope for weary fiscal conservatives after years of endless spending, we’re not out of the woods yet. If history is any guide, in fact, the coming lame-duck session won’t be good for taxpayer . . .
Republicans now have an opportunity to put an end to the excessive spending that’s contributing to rising prices. Banning earmarks should be their first step . . .
Tax
For all the bungling the IRS sometimes displays, the agency’s special agents are not among the bunglers. They are highly trained professionals who are singularly focused and know exactly what they are doing. If you have crypto profits, do not make the mistake of believing that the IRS cannot or will not find them. The agency is making these cases a priority in 2023 . . .
Industrial Policy
An op-ed from Senator Marco Rubio (R., Fla.) says, “Amoxicillin Shortage Shows the Need for Domestic Drug Production.”
It does not, in fact, show that . . .
Transportation
In a statement today, President Biden called on Congress to pass legislation to avert a rail strike. Biden requested that lawmakers “adopt the Tentative Agreement between railroad workers and operators — without any modifications or delay — to avert a potentially crippling national rail shutdown.”
The “Tentative Agreement” is the deal that the administration helped broker in September. It adopts the recommendations from the Biden-appointed presidential emergency board and includes some additional concessions to unions on the issue of sick leave . . .
The House of Representatives today voted overwhelmingly to prevent a nationwide freight-rail strike. The vote was 290–137, and it adopted the tentative agreement that unions and railroads negotiated in mid-September under the supervision of the Biden administration with no modifications.
In a separate vote, the House narrowly approved a resolution to amend the tentative agreement to include seven days of paid sick leave, a bonus gift to the unions. That vote was 221–207, almost strictly along party lines . . .
Senator John Cornyn (R., Texas) today said, “I think it’s a bad idea for Congress to try to intervene and renegotiate these collective bargaining agreements between labor and management.”
He’s correct, and Republicans should follow his lead . . .
Rubio’s continued insistence on the deal’s not having the support of workers is not as clear as it may seem. There are twelve unions covered by national bargaining, with 13 separate contracts between them (the largest union, SMART-TD, has one contract for a small segment of its membership and another for the remainder). All twelve unions must approve all 13 contracts to avoid a strike because if even one union votes to strike, the other eleven would not cross a picket line . . .
Each of these unions’ positions is contrary to President Biden’s, which is that Congress should pass the tentative agreement that his administration negotiated in September, without modifications.
Nobody — not the railroads, not the unions, and not the administration that brokered the deal currently at issue — wanted to extend the cooling-off period . . .
The Senate today passed a resolution from the House by a margin of 80-15 to adopt the tentative agreement that railroads and unions negotiated in September under the supervision of the White House. It will now go to President Biden for his signature.
In the absence of a deal, a nationwide freight-rail shutdown due to a strike or lockout would have been possible starting December 9. With passage of the resolution, the labor agreement based on the independent recommendations of the presidential emergency board, plus a few concessions on sick leave from the deal brokered by Secretary of Labor Marty Walsh in September, will become the new national freight-rail labor contract once Biden signs it . . .
Doing the right thing in the end is better than not doing it at all, and we should all be grateful that large, bipartisan majorities in Congress acted quickly to prevent an economy-crippling strike. But it shouldn’t be forgotten that unions and left-wing politicians brought us to the brink of that disaster in the first place.
Unions and railroads could have stayed in mediation for longer and hashed out their differences there, but unions asked to be released from that process, and Democratic appointees obliged them. After mediation, the parties could have gone to binding arbitration, which the railroads accepted, but the unions rejected. They could have made agreements based on the independent recommendations of the Biden-appointed board, which the railroads agreed to do, but the unions did not. Congress could have put a stop to the madness in September, which Republicans wanted to do, but Democrats did not. Unions and railroads could have made agreements based on the deal Walsh brokered, which the railroads agreed to do, but the unions did not.
ESG
Bundling E, S, and G makes little sense. Indeed, there are circumstances in which the E and the S can conflict with each other.
However, whether alone or together, neither E, nor S, nor G is compatible with investing in China, and yet that’s what CPPIB continues to do . . .
Electric Vehicles
In the course of a Wall Street Journal article on the future of electric vehicles, a future, I reckon, that is likely to be included in the ever-growing list of history’s great central planning disasters, two nuggets were too good not to be posted now . . .
So, the high energy costs that are (in part) the result of the EU and German efforts to curb climate change will make it more likely that Germany and the EU will miss out on an important part of the value chain that goes into the manufacture of electric vehicles also, it is claimed, necessary to protect the climate.
I’m not sure that either Berlin or Brussels has thought this all through, but central planning is like that . . .
Healthcare
Elections have consequences. Republicans’ failure to capture the U.S. Senate means that the Senate Committee on Health, Education, Labor, and Pensions — known as the HELP committee — will be chaired by Senator Bernie Sanders (I., Vt.).
Sanders will replace Patty Murray (D., Wash.), who, by the standards of today’s Democratic Party, is relatively moderate in her views and temperament. “Moderate” is not in Sanders’s lexicon . . .
I do not know if there is any truth to the rumor that Apple is considering removing Twitter’s official app from its walled-garden App Store. I do know that such a move would be absolutely ludicrous . . .
Best guess is that what lies ahead for Twitter will be an attempt by the EU to force the company to maintain an ideologically “acceptable” content-moderation policy. To this end, Brussels will likely use various lines of attack, including sustained bureaucratic harassment, to wear Musk down . . .
Energy
It’s not exactly news that, so far as the Biden administration is concerned, climate policy trumps both human rights and America’s strategic interests.
Even so, with its latest opening to Venezuela, the White House has combined disdain for human rights with a degree of geopolitical stupidity impressive even by its own dismal standards . . .
Many of the world’s solar panels are partly manufactured by forced slave labor under the Chinese Communist Party (CCP), according to new research from the environmentalist Breakthrough Institute. But few on the political left, despite their ostensible commitment to labor rights, seem to care . . .
Antitrust
Reflecting on the decades of merger challenges brought to that point under the Clayton Antitrust Act of 1914, Justice Potter Stewart observed in 1966 that “the sole consistency I can find” is that “the Government always wins.”
Mercifully, U.S. courts and antitrust-enforcement agencies have largely followed a different path in the years since Justice Stewart’s trenchant observation. Acknowledging that American antitrust jurisprudence had lacked defining principles, beginning in the 1970s, they turned toward economic reasoning to develop a consistent framework for determining antitrust violations. The result has been the elevation of consumer welfare as antitrust regulation’s fundamental concern. Based on this criterion, economic analysis is applied to business conduct alleged to be anticompetitive to determine the likely impact on consumers. Higher prices for goods or services, lower quality, or less output are the characteristic harms to be avoided.
Unfortunately, the Federal Trade Commission (FTC) under chairwoman Lina Khan wants to rewind the clock . . .
The Pandemic
The spread of Covid-19 around the world prompted extraordinary, although often untested, steps by individuals and institutions to limit infections. Schools, restaurants, entertainment venues, and many other places of business were required to close under the compelling theory that infectious diseases spread more quickly when people congregate. As the end of the pandemic’s third year approaches, China continues to require millions of people to stay at home.
With more than two years of data now available, it is apparent that even the critics of lockdowns — isolating large groups of people who are more than 99 percent likely to be uninfected — underestimated the costs and overestimated the benefits . . .
Regulation
With Republicans set to control the House of Representatives in 2023, President Biden will no longer be able to count on passing large legislative packages to achieve his policy aims. If he continues the practices of his predecessors for decades, that will mean an increased reliance on executive orders, regulations, and guidance from federal agencies.
In other words, expect a redux of President Obama’s “pen and phone” strategy . . .
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