The Week of Monday, December 4: The ESG debate (continued), labor, fiscal policy, antitrust, and much, much more
The Week of Monday, December 4: The ESG debate (continued), labor, fiscal policy, antitrust, and much, much more.
ESG may be an insult to shareholders and an offense to democracy, but it is too useful a tool to ideologues and rentseekers to be consigned to where it belongs in the ashcan of history, and so while some of its original proponents start to sidle off (BlackRock’s CEO Larry Fink has, on the surface, appeared to be moving away from it, although there are doubts about real this retreat is), it still has plenty of defenders.
They include Bill Lueders, writing in The Bulwark last month. Take a look at the whole article to judge for yourself, but it’s worth highlighting a few points.
Lueders:
The modern Republican Party has met the enemy and the enemy is . . . any and all efforts to use the levers of government to address the existential threat of climate change, advance social issues, or promote the common good.
The enemy has a name: ESG. That stands for environmental, social, and governance. It is pegged as a concerted leftist plot, onerous to businesses and disastrous to the economy…
People can and do disagree about how to respond to climate change (here, incidentally, is an interesting comment on whether it is existential or not from the new head of the IPCC), and they can and do disagree over which “social issues” should be advanced, or, for that matter, on what the “common good” is. In a democracy, such disputes should be resolved in legislatures, not the C-suite. But, ESG (and its equally repulsive symbiont, stakeholder capitalism) is a way of using corporate power to circumvent the usual democratic process in the interests of an agenda set by, well, it’s not always easy to say who. Lueders writes about “the levers of government,” but that’s not what ESG pulls. While government may back it up (with, say SEC regulations), ESG is, in many respects, the privatization of policymaking. Making matters even worse ESG harnesses corporate power by hijacking other people’s money, whether the money belonging to the underlying shareholders in a company or the money belonging (or promised) to savers or future pensioners.
Is ESG a “plot”? Not in the conventional sense. For most part, it is something more organic, an idea which has been emerging (or, in the case of stakeholder capitalism, reemerging) over time. Its spread sped up in the wake of the financial crisis, and sped up again when people realized how fruitful a source of profit and power it could be. And is it “leftist”? Well, it is better regarded both as an expression of corporatism, and the use of corporatist techniques to achieve broadly leftist aims. Roger Shaw, a progressive writer active in the 1930s, would have understood. Observing the original New Deal, he described it as “employing Fascist means to gain liberal ends.”
Lueders quotes one critic of ESG, who had warned “darkly”:
that 96 percent of the world’s 250 largest companies by revenue based on their Fortune 500 ranking “have ESG reports, with many employing large teams dedicated exclusively to that cause.
“One might,” adds Lueders, “think that a system embraced by nearly all of the world’s wealthiest companies might actually be good for business.”
Well, one might, I suppose, if one were very trusting. It’s no revelation that company managements often act in their own interests, even if they are at odds with the interests of those for whom they are supposed, ultimately, to be working — the shareholders of the companies that employ them. This is despite shareholder primacy (the principle that companies should be run for the benefit of their shareholders) having been well established in U.S. law since at least the early years of the 20th century. In the 1970 article in which Milton Friedman famously reiterated the case for shareholder primacy, he recognized (and regretted) that managements might pursue their own interests, but suggested that they could only go so far before shareholders would step in:
[C]an [a manager] get away with spending his stockholders, customers’ or employes’ money? Will not the stockholders fire him? (Either the present ones or those who take over when his actions in the name of social responsibility have reduced the corporation’s profits and the price of its stock.)
The problem now is that shareholders in public companies are not what they once were (a trend already well underway in 1970). Most are funds run by institutional investors paid to manage (even, if in many cases, passively) other people’s money. Legally, those funds are the shareholders in a company, even if economically the “real” shareholders are those who have invested in the funds that invest in the companies. The managers of these funds tend to be drawn from similar backgrounds to (and, often, share ideologies and ambitions with) those managing today’s corporations. They are natural allies in the effort to subordinate the economic interests of, respectively, clients and shareholders to their own economic, social and political agenda.
Other managements, of course, subscribe (sometimes not very sincerely) to ESG as a way of ensuring a quiet, well-paid life, maybe raking in some extra benefits while they do.
The Financial Times (August 27, 2023):
A growing number of blue-chip US companies are using environmental and social factors to decide bonuses for top executives, but investors are worried the metrics are being gamed to increase payouts.
Three-quarters of S&P 500 companies have disclosed that environmental, social and governance metrics contributed to executives’ pay, up from two-thirds of companies in 2021, according to data from The Conference Board and Esgauge, an ESG data analytics firm.
Among them are American Express, Dow and Southwest Airlines.
More than half of all S&P 500 companies have diversity and inclusion components in executives’ pay, according to Semler Brossy, a consultancy. Almost half of these businesses included environmental metrics as part of bonuses, up from a quarter of companies in 2020…
“We are sceptical of ESG metrics being used in compensation,” said Ben Colton, head of stewardship at State Street Global Advisors, which manages $3.79tn. “Oftentimes they are very subjective, fluffy and easily gamed.” …
ESG in pay “enables executives to obtain extra compensation when equity pay is not rewarding”, Lucian Bebchuk, the director of the corporate governance programme at Harvard Law School and co-author of the research, said in an interview…
Oh.
Lueders:
An article by journalist Jessica Camille Aguirre in the latest issue of Sierra, the quarterly magazine of the Sierra Club, does a great job of explaining what is going on. The push to bar pension fund investors and others from taking into account anything other than monetary gains while making investment decisions is not coming from the pension fund investors or pensioners but from outside activists with an extreme and essentially anti-free-market agenda.
Contrary to the way it has been marketed, ESG is no guarantee of superior or even less risky investment return. Indeed, as, Aswath Damodaran, professor of finance at the Stern School of Business at New York University has argued, it might lead to inferior returns. And he is not the only analyst to think so. If ESG cannot be justified by its effect on returns, then, by default, it can, given its content, only be a scam or a political tool. If it’s the latter, well, in a free society, the essence of politics is debate, something which ESG activists have been keen to avoid. Now they have a debate, and they don’t like it. And they like it even less when democratically elected politicians start questioning why taxpayer provided funds are being invested for purposes other than financial return. Apparently, it’s none of their business.
As for the pushback against ESG being “essentially anti-free market,” this is an argument that was popular a little while ago, and which I discussed here, here and here. Spoiler: It’s not. Far from undermining free markets, attempting to reassert shareholder primacy against ESG and stakeholder capitalism reinforces them.
Later, Lueders discusses the views (as reported by Aguirre) of Brad Lander, the comptroller of New York City, who oversees, Lueders explains, “some $240 billion in pension fund investments”:
Lander, who is working to shift three of the five city pension funds into carbon-neutral investments, said it was his job to look beyond “short-term, one-year returns” to his pensioners’ longtime interests, which include having to live on the planet in whatever shape it’s in. Any sane person pondering the present and future consequences of global warming, including ever-increasing numbers of hugely costly weather and climate disasters, would recognize what Aguirre calls an “imperative to divest from companies whose business models threaten the future of the planet.”
Any, well, sane person ought to recognize that the investment decisions taken on behalf of New York City’s pension funds will have no measurable effect on the climate whatsoever. Equally, any person with any familiarity with basic investment discipline ought to know that focusing on long-term investment returns (a frequent excuse put forward by investment managers keen to avoid being judged) at the expense of the short and medium term is profoundly irresponsible. It is quite possible that oil and gas companies will be able to deliver superior short-term investor returns even if, as some believe, they won’t be around in another thirty or forty years. Indeed, if oil production falls over time, what is produced may become more valuable, not less, at least for a while. It is also possible to conclude that (despite their currently dismal performance) renewable energy companies are attractively priced for patient investors and that it’s worth adding them to a portfolio that contains stocks in fossil fuel companies. Good investment discipline and crudely binary decision-making rarely go well together.
And, to be clear, contrary to the suggestion made in Lueders’ article, there is no “anti-ESG” principle that involves rejecting investments in “green” companies that offer the prospect of a good economic return. Those who object to ESG object to investment decisions being taken on non-pecuniary grounds, unless, of course, the underlying investors have specified that they want ESG to be included in the decision-making process and (ideally) that they understand that this may cost them some return.
The push-back against ESG was long overdue. And like many campaigns it has made its missteps. For example, as I’ve argued before, the focus on corporate wokeness has been a double-edged sword. It has attracted welcome attention to the issue, but it has made it easy for ESG’s defenders to label ESG as just another front in the culture wars when it is about much, much more than that, none of it good.
Meanwhile, a selection of recent news stories about ESG makes for interesting reading.
The Wall Street Journal (November 19, 2023):
Wall Street rushed to embrace sustainable investing just a few years ago. Now it is quietly closing funds or scrubbing their names after disappointing returns that have investors cashing out billions…
The retreat comes after investors withdrew more than $14 billion from sustainable funds this year, leaving them with $299 billion, according to Morningstar. Conventional funds also lost money, but the pain was more acute for climate and other thematic products hit by high interest rates and other factors.
And:
Earlier this year, Pacific Financial removed sustainability from the name of three mutual funds then holding more than $187 million. All three funds subsequently saw their assets under management jump…
It would take a heart of stone not to laugh.
The Hill (November 27, 2023):
In its annual SEC report, Disney acknowledges that “we face risks relating to misalignment with public and consumer tastes and preferences for entertainment, travel and consumer products.” In an implied nod to Smith, the company observes that “the success of our businesses depends on our ability to consistently create compelling content,” and that “Generally, our revenues and profitability are adversely impacted when our entertainment offerings and products, as well as our methods to make our offerings and products available to consumers, do not achieve sufficient consumer acceptance. Further, consumers’ perceptions of our position on matters of public interest, including our efforts to achieve certain of our environmental and social goals, often differ widely and present risks to our reputation and brands.”
The Wall Street Journal (December 5, 2023):
This year has been almost universally bad for clean investments. The two worst performers still in the S&P 500 are solar companies Enphase Energy and SolarEdge Technologies, down 60% and 70%, respectively. Hydrogen stocks have fallen sharply, led by Plug Power, which warned it might not survive. Wind-farm developers have been doing so badly they have pulled out of some contracts, with Denmark’s Ørsted off 48% in dollar terms and Florida-based NextEra Energy off 29%.
Electric cars have disappointed too, hitting startups and suppliers and pushing the price of lithium ores, used to produce the battery metal, down by three-quarters or more, although market-leader Tesla’s stock has been an exception…
Sentiment can change, of course. There may be a revival in investor appetite for green stocks, but the idea that ESG is a way of improving performance or reducing risk ought, in a just world, to have been shattered beyond repair.
But we don’t live in a just world. If ESG fades, it will be back, perhaps under a different name.
The Financial Times (December 4, 2023):
A $95.2bn Massachusetts state pension fund voted last week to change the name of its ESG Committee to the Stewardship and Sustainability Committee.
Aswath Damodaran (March 28, 2022):
So, what will the next big thing be? I don’t know for sure, but I am willing to make a guess, since so many ESG experts and advocates have slipped into already using it as an alternative. It is “sustainability“, a word that can mean whatever you want it to mean.
The Forgotten Book
Capital Matters has a fortnightly feature, The Forgotten Book, which is written by our new National Review Institute fellow, the writer and historian, Amity Shlaes. We live in an age of short attention spans, and one of Amity’s objectives is to introduce readers to books or other primary sources that warrant a second look.
With her Capital Matters column, Amity will dedicate herself to sharing with Capital Matters readers older, forgotten books, along with new books that aren’t getting the attention they perhaps warrant.
Her latest column can be found here, and is devoted to the topic of a new book on George Orwell’s first wife.
An extract:
[I]s there such a thing as too much revenge? Not these days.
At least not according to Anna Funder, the author of a recent portrait of Eileen O’Shaughnessy, the first wife of that stupendous producer, George Orwell. But Wifedom: Mrs. Orwell’s Invisible Life, is not truly a biography of Eileen — indeed, there is already a fine one, Eileen by Sylvia Topp. Funder opts to try her hand at a now popular genre: the speculative, and often fictionalized, “Shakespeare’s Sister” book that focuses on the women in the shadow around those heedless creatives.
Funder intersperses her report on Eileen with her own autobiographical details, including the time she spends in her own kitchen, and the feminist tutorials she gives her daughter. “It’s hard to know how to think about it, when the world was set up to allow men to treat women badly,” Funder tells her child…
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 National Review Institute 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 148th episode, David is joined by Richard Reinsch of the American Institute for Economic Research. They talk through the arguments of “right-wing progressives” and analyze what makes them tick. They use economic thinking to unpack trade, so-called financialization, and the challenges of teenage smartphone use. It will encourage you that this is an argument the advocates of freedom will win, as “freedom is sown in the nature of man.”
No Free Lunch
Earlier this year, David Bahnsen launched a new six-part digital video series, No Free Lunch, here online at National Review. 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 series began with a discussion with Fr. Robert Sirico of the Acton Institute. Later guests include Larry Kudlow, Dennis Prager, Dr. Hunter Baker, Ryan Anderson, Pastor Doug Wilson, and Senator Ted Cruz.
Yes, the six-part series now has seven parts.
Enjoy.
The Capital Matters week that was . . .
Labor
After the unions’ doomsday predictions failed to come true, voters rewarded Walker with a full second term in 2014. Today, the state budget is in a much better place than it was pre-2011, Wisconsin has one of the only fully funded pension systems in the country, and just about everybody has moved on.
Just about everybody, that is, except the unions…
The question is why the mainstream media pretends that it’s news that a supermajority of non-UAW autoworkers in Tennessee still haven’t signed up for the UAW.
Especially since pro-union Joe Biden was elected, the media have been touting a “union renaissance” that, so far, has not happened. Despite nearly two years of relentlessly positive media coverage, in 2022 the Bureau of Labor Statistics reported the U.S. union membership rate was the lowest on record, and only 6 percent of private-sector workers are unionized…
Climate
A century ago, H. L. Mencken famously characterized puritanism as “the haunting fear that someone, somewhere, may be happy.” That was true then, and it’s true now. Climate fundamentalism merely adds another twist. Malefactors will not only be consigning themselves to a ghastly fate, but they will be dooming others too as the planet, we are told, “boils,” and this externality will be used to justify the policing of your plate.
The failure to arrange things in sequence is, in part, a result of the demand that the plan be fulfilled by some (usually arbitrary) date, and that progress towards its objectives be demonstrated by reaching as many targets as quickly as possible, even if they are out of order, perhaps destructively so. Removing, say, coal-fired power plants without ensuring that adequate systems have been installed to replace the reliable power they used to generate is an example of that kind of error.
And so to the saga of New York and last year’s Storm Elliott…
Fiscal Policy
The charitable interpretation of the SLFRF is that it is a classic case of fighting the last war. During the Great Recession, state and local governments struggled to find revenue to balance their budgets. The federal government thought it had learned its lesson from that experience, and made sure to give state and local governments plenty of fiscal support in response to the Covid pandemic. That turned out to be wrong when state governments actually experienced a surge in revenue during the pandemic, with nearly every state running budget surpluses before receiving any pandemic aid.
The bigger the government, the more improper payments it makes. This is issue often escapes mainstream scrutiny. It shouldn’t. Over at EPIC, Matthew Dickerson has the most recent number: $236 billion in 2023…
Since Congress passed a continuing resolution to fund the government until February, discussion about reining in deficit spending has largely gone quiet. When policy-makers return from their holiday break, one important factor they should consider is the spike in interest payments adding to the growing public-debt burden — it’s going to get worse than most realize…
That’s on top of the debt projected by Congressional Budget Office based on current policies for the next ten years. As a reminder, in its May 2023 report, CBO projected that the U.S. would add $21 trillion of debt between 2023 and 2033. Debt held by the public would be $46.7 trillion in 2033, and, depending on what Congress decides to do about all the expiring provisions listed above, it could add much more to the debt.
Monetary Policy
The Fed responded to the pandemic crisis initially with $3 trillion in securities purchases, among other measures, with an additional $2 trillion of quantitative easing (money-supply growth) into 2022. Bank assets first jumped by $1 trillion and rose an additional $3 trillion through 2022. Since then, bank assets have plateaued as the Fed’s securities portfolio was trimmed by 20 percent. During this time, contraction in the Fed’s reverse-repo deposit facility for nonbank financial institutions has produced a flow of funds out of the Fed and back into the financial markets, which has offset the Fed’s quantitative tightening that removes liquidity from the markets to the Fed. At its current shrinkage rate, reverse repos will disappear around April 2024, which should increase the contractionary pressure of quantitative tightening on the financial markets and the economy.
For all the balance-sheet gyrations, as well as the more widely followed interest-rate hikes, both Europe and the U.S. are experiencing hoped-for disinflation. But the causality is questionable.
The Eurozone
Some 25 years after launching the euro, there has been continued divergence between the public finances and economic performances of the euro zone’s northern members and its southern periphery. While Germany and the other northern member countries have enjoyed prosperity and generally pursued responsible budget policies, income levels today in countries like Greece and Italy are practically unchanged from where they were some 15 years ago. Meanwhile, public-debt levels in the euro zone’s economic periphery have risen to record highs.
Antitrust
In the intricate realm where law meets economics, the Department of Justice’s (DOJ) and Federal Trade Commission’s (FTC) proposed revisions to their merger guidelines serve as a stark reminder of the perils that accompany regulatory misdirection. Announced in July 2023, the draft guidelines swiftly garnered criticism from all corners of the political spectrum, with legal scholars puzzled by case-law citation errors and economists dismayed at what they perceived as a significant regression in analysis…
One of the tropes of the new progressive approach to antitrust is to count the number of companies in a proportion of a given industry and repeat that fact as though it is a self-evident problem. It is generally expressed formulaically: X companies control Y percent of the market for a given good…
Electric Vehicles
Put all this together and it’s easy to envisage a situation a few years hence when voters cannot buy the cars they want, carmakers cannot sell the cars they make, and politicians are unable to reverse the effect of the decisions that set the U.S. on this course in the first place. That’s not going to make for good times.
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