The week of June 24, 2024: ESG’s resilient ecosystem, free markets, tax, net zero, and much, much more.
The week of June 24, 2024: ESG’s resilient ecosystem, free markets, tax, net zero, and much, much more.
ESG and its symbiont, stakeholder capitalism, have been encountering more turbulence than their promoters expected. That public criticism, pushback from elected red-state officials, and other politicians has finally forced a debate on this topic represents a failure for the architects and ideologues of ESG/stakeholder capitalism, structures set up to push through radical change on the sly.
Almost exactly one year ago, Larry Fink, the CEO & Chairman of BlackRock, who became, initially to his satisfaction, but ultimately to his regret, the face of ESG, has backed away from those three letters, saying, Reuters reported, that ESG had become “too politicized,” a disingenuous thing to say, to the least. ESG was from the beginning a progressive political project, but it was to be achieved by post-democratic means (change through the C-suite and Wall Street rather than the legislature) and the hijacking of shareholders’ money.
But the basic idea behind ESG has not gone away, as Fink himself conceded:
[Fink] said dropping references to ESG would not change BlackRock’s stance. The firm would continue to talk to companies it has stakes in about decarbonization, corporate governance and social issues to be addressed…
While Fink is prepared — to his credit, under the circumstances — to admit that BlackRock will continue investing in fossil fuel companies, it will continue to “nudge” them to adopt energy transition plans. BlackRock retains the objective that by 2030 “at least three quarters of its investments will be with issuers of securities that have scientific targets to cut greenhouse gas emissions on a net basis.” Quite what that has to do with shareholder return eludes me.
And ESG does not appear to be delivering the outperformance that was once so loudly touted. From an article published in March (to its credit) by Bloomberg, generally an influential source of eco-zealotry within the financial community:
As Wall Street’s passion for sustainability began surging about five years ago, Andy King looked on with apprehension. Academics at Harvard University, the London Business School and other institutions were churning out research asserting that doing good for people and the planet was also good for company profits. The papers have been quoted in US Senate testimony, cited by regulators crafting corporate climate rules and invoked by Wall Street firms marketing funds valued at billions of dollars.
King, a professor of business strategy at Boston University, questioned the studies’ conclusions. In decades of analyzing whether companies could profitably reduce their harm to the environment, King had found the financial gains were often too small to affect the bottom line. Digging into the latest research, scrutinizing complex mathematical formulas and parsing tens of thousands of data points, he discovered what he says are flaws that skewed the results. “The evidence supporting ESG just wasn’t solid,” King says.
Other scholars are increasingly reaching similar conclusions…
There has long been plenty more to suggest, in hard numbers as well as elementary logic, that the claim that investors would do well by doing good — as the sales pitch went — was nonsense.
Investors are noticing. As the Financial Times reported recently:
Although buoyant markets are still lifting their overall assets under management — now at apparently over $1.7tn — ESG funds are suffering severe outflows for the first time in their (admittedly limited) history this year.
Even if it has to be repackaged (as, say, “sustainability”), ESG and stakeholderism offer too many opportunities for power and for money to just disappear. The ESG ecosystem is alive and well. When I scrolled down to the bottom of that FT report, there was an advertisement for a “Moral Money” summit in New York on October 15-16 devoted to the topic of strategies for better business. Better, one might ask, for whom? Certainly not shareholders.
An ‘early bird’ pass is currently going for $1,049. Moral Money is an FT section billed as “the trusted destination for news and analysis on the role of business and finance in the drive for a cleaner, fairer capitalism across the world economy.” It is also a brand.
Scroll on down to find that McKinsey, perhaps the most egregious of ESG’s many rent-seekers, is listed as a “Global Knowledge Partner,” while PwC, another repeat offender, is described as a “strategic partner.” The large law firm Freshfields is an “associate sponsor.” The Ford Foundation (but of course) is — Henry’s ghost screams — an “Industry Insights Partner,” and UNICEF is a lead partner. Where there is stakeholderism, there is, all too often, in one form or another, the United Nations.
The beginning of the pitch reads (Moral Money’s emphasis) that:
The debate around sustainability in business and finance has never been more intense – or more urgent. Corporate leaders face pressure to respond to climate risks and an accelerating energy transition, and to support progress on social and economic justice – amid a growing political backlash against such efforts that is increasingly targeting private-sector companies.
ESG and stakeholderism, of course, by definition, “target” and corrupt private-sector companies, so it is reasonable for their critics, to focus their attention in that area.
And then there is this (via ESG Investor from April):
Global corporate governance and proxy voting advisor Glass Lewis has named former Morningstar Sustainalytics president Bob Mann as its new CEO. Mann served as president and chief operating officer at Sustainalytics from March 2008 until its sale to Morningstar in 2020. Following the acquisition, Mann was made president of the newly formed Morningstar Sustainalytics business unit, where he was responsible for the integration of Sustainalytics’ ESG research, ratings and data across the organization.
Glass Lewis is half of the proxy advisor duopoly (the other is ISS), which advise investment managers in how to cast their votes at shareholder meetings.
Or check out this from J.P. Morgan, possibly the world’s most powerful privately held bank:
At J.P. Morgan, we recognize that business has a key role to play in supporting the transition to a low-carbon economy. Besides working toward our own sustainability targets, we also apply our capital, data, expertise and other resources to help clients develop — and scale —green solutions.
Ultimately, a business’ sole role is to generate return for its shareholders, while, to quote Milton Friedman, “conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” If businesses are to be compelled to “support” this transition (for the avoidance of doubt, they should not be), that mandate should be democratically imposed, not agreed upon by an opaque and unaccountable oligarchy.
Scroll on down to find this from Rama Variankaval, J.P. Morgan’s Global Head of Corporate Advisory and Sustainable Solutions:
“We want to bank the right clients. We want to support the right transactions and we want to help the economy grow.”
Define “right.”
And so it goes on.
To be sure, some banks and other financial institutions have withdrawn from associations such as Climate Action 100+. That’s because participation in such high-profile groupings now runs the risk of criticism (and maybe even legal action) as well as applause. Those withdrawals are, to the extent that they are not feints, good news.
On the other hand, some of the movement continues to be in the other direction.
Global asset manager Invesco has signed up to a UK-based initiative recognising the role of investment firms in shaping an equitable and sustainable society via their processes and practices. The ACT (Action, Challenge, Transparency) Alliance was designed to identify and report on operational, social and governance factors that explicitly support progress on culture and inclusion by investment firms, and to create norms on these topics. Invesco, which has US$1.6 trillion AUM, was a founding signatory in May 2022 alongside nine other asset managers.
ESG has not been the only set of initials ranged against shareholder primacy. There is DEI (diversity, equity and inclusion), which has also come under more forensic scrutiny of late.
Jeremiah Green and John Hand, writing in Econ Journal Watch looked at a series of influential studies in which McKinsey had found “statistically significant positive relations between the industry-adjusted earnings before interest and taxes margins of global McKinsey-chosen sets of large public firms and the racial/ethnic diversity of their executives.”
However:
[W]hen we revisit McKinsey’s tests using data for firms in the publicly observable S&P 500® as of 12/31/2019, we do not find statistically significant relations between McKinsey’s inverse normalized Herfindahl-Hirschman measures of executive racial/ethnic diversity at mid-2020 and either industry-adjusted earnings before interest and taxes margin or industry-adjusted sales growth, gross margin, return on assets, return on equity, and total shareholder return over the prior five years 2015–2019.
Combined with the erroneous reverse-causality nature of McKinsey’s tests, our inability to quasi-replicate their results suggests that despite the imprimatur given to McKinsey’s studies, they should not be relied on to support the view that US publicly traded firms can expect to deliver improved financial performance if they increase the racial/ethnic diversity of their executives.
Reverse-causality?
John Hirschauer in City Journal:
Green and Hand not only were unable to replicate the studies’ findings; they also found that each of the three studies had analyzed the data backward. Instead of looking at a firm’s diversity policies in the years leading up to a given year’s financial performance, McKinsey had reviewed each firm’s financial performance in the four or five years leading up to the year in which its researchers snapshotted their executive demographics. In other words, according to Green and Hand, the positive correlations that McKinsey researchers observed may have reflected “better firm financial performance causing companies to diversify the racial/ethnic composition of their executives, not the reverse.”
Wouldn’t this methodological problem have been obvious to McKinsey researchers? Apparently, it was. Buried in the firm’s 2018 study, its researchers concede the possibility that “better financial outperformance enables companies to achieve greater levels of diversity”—in other words, that more profitable firms may pursue diversity-hiring policies as a result of their profitability. McKinsey’s public presentation of its results, however, has not been so nuanced. As Green and Hand record, Dame Vivian Hunt, a McKinsey managing partner and a coauthor on each of the firm’s diversity studies, claimed in 2018 that “the leading companies in our datasets are pursuing diversity because it’s a business imperative and driving real business results” (emphasis added).
Will findings such as these lead companies to reduce the importance they attach to DEI in order to reflect the overriding obligation that they owe their shareholders? I doubt it. Vivian Hunt, the McKinsey partner who co-authored those diversity findings, had this to say back in 2020:
Many business leaders have recently promised to shift their business model to serve all stakeholders—not just shareholders. But as Dame Vivian Hunt, a McKinsey senior partner, explained in a TED Talk this week, executives will need to put action behind their pledges to ensure investment return will no longer take precedence over the health and welfare of employees, suppliers, and even planet Earth.
By the logic of DEI, shareholders never mattered too much in the first place.
Then there are another three initials for shareholders to be worried about: PRI. These feature, not in a good way, in a new book, The Race to Zero by Wall Street veteran Paul Tice. Two must-read reviews, one by Samuel Gregg for Law and Liberty, the other by Rupert Darwall for Real Clear Energy, underline the need for a closer focus on PRI. Reaching for my (shamefully only skimmed) copy of Tice’s book, I quickly find some background:
The UN first started diversifying into the world of stock and bond picking when the agency founded is sustainable investment group, Principles for Responsible Investment (PRI), in 2006, the same year that Milton Friedman passed away…
Tice notes that “while billed as an investor-led initiative,” PRI is anything but. It is an “advocacy group sponsored by the UN” (and thus, in part, the U.S. taxpayer) “through its affiliates, the United Nations Environment Programme Finance Initiative (UNEP FI) and the United Nations Global Compact (UNGC)”. The UNEP FI was established after 1992’s Rio Earth Summit to, in Tice’s words, “start engaging the finance sector on sustainability.” “The UNGC was formed in 2000 to encourage corporate CEOs to implement universal sustainability principles and elicit business support for the goals of the UN,” tasks hard to square with the idea that the job of a corporate CEO is to maximize shareholder return. Moreover, boosting (again, opaque and largely unaccountable) transnational institutional power with, essentially, misappropriated private capital is a development that no democrat should welcome.
It would be nice to think that the work of UNEP FI and UNGC could be safely ignored as just another piece of U.N. blather, but at the time Tice was writing The Race to Zero (last year), UNEP FI’s membership included “500 financial institutions across 120 countries with an aggregate $170 trillion in assets, while the UNG has more than 23,000 corporate and other participants from 166 countries.”
The shareholders of companies should insist that their managements pull their companies out of both UNEP FI and UNGC. The clients who have entrusted companies enrolled in either with their money should, unless they specifically favor their objectives and methodology, take their business elsewhere, if they can that is. Five hundred financial institutions are a lot of financial institutions.
UNEP FI and UNGC were not content to rest on their initials. As Tice explains:
[T]he ESG acronym was first floated by the UNEP FI and the UNGC back in 2005—the former in a UNEP FI—commissioned approach prepared by the law firm Freshfields Bruckhaus Deringer—and the latter in a conference report from the UNGC’s “Who Cares Wins” initiative—and then the PRI was spun out to execute on the concept.” This was, writes Tice, “the next tentacle to be extended into the financial industry.”
The Freshfields that is an associate sponsor of the Moral Money summit is the same entity that prepared the report in which ESG first appeared.
The companies that sign up for PRI, writes Gregg in his review of Net Zero:
[Q]uickly discover that “they have made an open-ended commitment to an ever-changing progressive agenda.” Indeed, the PRI pressures signatories to behave in certain ways, whether it is through incorporating ESG-priority issues into their own management policies or pushing those companies in which they have invested to adopt ESG disclosure protocols. We see such pressures, for example, at work with efforts to push investment funds to avoid fossil-fuel industries that generally generate considerable returns for shareholders but which are the number one target of climate change activists.
That obviously raises questions about the fiduciary duties owed by investment managers to their clients and by company managements to their shareholders. But, as Darwall highlights in his review of Tice’s book, those duties are under sustained attack:
Evidence that advocates of ESG investing don’t believe their own arguments for ESG boosting risk-adjusted returns is shown by their campaign to destroy fiduciary duty as a binding constraint on investment managers. Tice is superb on this, writing that rules on the duties of fiduciaries are being rewritten to “not just allow but require an ESG approach by fund managers.” Thus the UN-sponsored Principles for Responsible Investment (PRI) states that fiduciary duty exists to ensure that those managing other people’s money act in the interests of beneficiaries—the omission of “sole” pointing to PRI’s sleight of hand, which comes next—requiring “investors to incorporate all value drivers, including environmental, social, and governance (ESG) factors, in investment decision making.”
… In 2015, PRI and UNEP FI published Fiduciary Duty in the 21st Century (foreword by Al Gore and his investment partner David Blood), with the intent of eviscerating fiduciary duty as a constraint on investment managers by, as Tice puts it, requiring fiduciaries to “consider the long-term interests of their beneficiaries, both financial and nonfinancial, whether known to them or not.”
In the UK and the EU, PRI/ESG has been embedded far more deeply into law and regulation than in the U.S., leading Darwall to write:
The sustainability regimes adopted by Britain and the EU are more than a license for shareholder expropriation; they are instructions for systematic shareholder expropriation. It shows that the “S” in ESG really stands for socialization of people’s savings, to be deployed to meet governmental objectives denoted by “E,” principally decarbonization, thereby exposing “G,” notionally about protecting shareholders, as a sham designed to con institutional shareholders into wholesale adoption of ESG.
In the U.S, the rot has not set in quite so far, and as discussed above, there has been considerable push back, but there is a long, long way to go before ESG is consigned to history. Even before government regulators descend (perhaps the Supreme Court’s decision reversing Chevron v. National Resources Defense Council might help fend them off for a little bit longer), ESG and stakeholder capitalism, buttressed by the opportunities that they offer for power, career advancement, and cash, have taken root within America’s financial ecosystem.
Gregg:
Business professors, management consultants, professional certification associations, philanthropic groups, and activist NGOs have successfully immersed much of America’s financial sector in a type of ESG echo chamber that disincentivizes anyone from openly questioning ESG orthodoxies. The sheer prevalence of ESG language, priorities, funds, and ratings agencies, combined with the stigmatizing of anyone who questions the worth of such things, has made it harder for financial analysts to do their job.
Or Gregg might have added, keep their jobs. The case of Stuart Kirk, whose career at HSBC came to an end after he came out with some truths about climate change and finance incompatible with climatist orthodoxy is well known (Tice refers to it, and I wrote about it here). But Kirk was an exception. There are many people working in finance who know that ESG is, for the most part, absurd, but they keep quiet because of the danger that speaking out would wreck their careers.
Tice has some suggestions as to how the pushback against ESG can be taken further. I hope to discuss them when I have had the chance to consider The Race to Net Zero more fully (translation: read it properly). But for any pushback to be truly effective, the financial sector will need to recover its intellectual self-confidence (something that should not be confused with swagger, something that financiers still have in abundance).
Gregg puts it this way:
ESG plays upon the lingering sense inside and outside the financial sector that those working in capital markets are doing something mildly useful but not especially reputable.
This has long been a burden carried by those who work in finance. Every generation of such individuals struggles to overcome it. Until, however, financial actors do a much better job of explaining the great economic and non-economic goods that flow directly from their work in capital markets, we will struggle to exorcize the ESG demon that is corrupting America’s capital markets from within.
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 176th episode, David is joined by Andrew Beck of brand consultancy firm Beck & Stone for a discussion of business and ideological distinctions, the debates amongst the right about trade, markets, and so much more. This is a worthwhile discussion covering a wide gamut of important issues.
The Capital Matters week that was . . .
ESG
And who are these dangerous entities that pose such a threat to Mastercard? Organizations such as the State Financial Officers Foundation (SFOF), a group of financial officers from red states working to oppose environmental, social, and governance (ESG) investing and stand up for doing their fiduciary duties. “Mastercard’s support for SFOF has drawn scrutiny for ‘pandering to a handful of pro-fossil fuel US politicians’ and fueling the fight against ESG investing,” the proposal says. The only real crime that’s been committed is standing up for shareholders in the face of demands from corporate activists. For this, Mastercard is supposed to drop SFOF to stay in the good graces of ESG ideologues. What appears on the surface a mere request for transparency is actually a veiled demand to defund conservatives and red-state financial officers. The activists have made their demands to Mastercard, Wells Fargo, and other companies, but they have yet to succeed…
Demographics
For much of modern American history, the support enjoyed by the two main political parties has hewed to a particular ethnic pattern. Republicans, notes political historian Michael Barone, have largely been the party of “white Protestants,” while the Democrats have been largely “a coalition” of disparate groups: Catholic ethnics, Latinos, blacks, Jews, and working people of all races.
Today that paradigm is shattering…
Trade
Sooner or later the EU was going to have to confront the reality that its rush to force drivers to switch to electric vehicles (EVs) threatens disaster for its auto sector (which still accounts for about 6 percent of its workforce) thanks to the opportunity it has given EV Chinese manufacturers to enter the European market. It may now be beginning to do so…
Energy
The administration’s irresponsible decision to “pause” new liquefied-natural-gas export permits was a gift to Putin and a blow to our allies, and it damaged the reputation of the U.S. as a reliable energy supplier and ally. The principal winners from this pause were Putin (both economically and geopolitically) and other LNG suppliers such as Qatar, which will simply step up production to meet demand. The climate effect of a perpetual pause will be zero.
Tax
As part of settling a lawsuit, the IRS has issued a public apology, something it almost never does, despite there being a lot for the agency to apologize for…
Each year, millions of citizens required to file tax returns fail to do so. According to a 2020 analysis by the Treasury Inspector General for Tax Administration (TIGTA), the number of suspected tax-return non-filers grew from approximately 7.5 million in 2010 to nearly 11 million in 2016. I can only assume the numbers are much higher now, given the economic grief the nation has suffered since March 2020…
Let us examine the Trudeau government’s statements in defense of its increase in Canada’s capital-gains tax, which raises the tax inclusion rate from one-half to two-thirds on corporate capital-gains income and individual income above a $250,000 threshold in a given year. (Capital-gains income is taxed at one-half the income-tax rate; the change raises it to two-thirds on individual capital gains over $250,000.) …
Markets
Sean Alvarez, Vincent Geloso & Macy Scheck:
The past decade has not been kind to proponents of free markets. In France, Hungary, and Italy, a rising illiberal Right is promoting protectionism and greater state intervention in the economy. Simultaneously, most European countries have also seen the rise of an aggressively illiberal Left that promotes the same policies but with a different spin. In the United States, the presidential election is shaping up to be a contest between two candidates who have different versions of economic illiberalism…
Net Zero
Under its former, unlamented prime minister, Jacinda Ardern, New Zealand had already taken steps to introduce a “burp tax” on livestock, but those were scrapped by the country’s new center-right government. Undaunted, Denmark, which has an important agricultural sector (it is the fifth-largest pork exporter in the world), is, pointlessly, puritanically, and self-destructively, stepping up, so to speak, to the plate…
Climatists believe that people have been flying around too much for the good of the planet, and so this piece of news out of Germany was no great surprise…
Labor
Policy-makers must not work from false narratives when making policy. That will lead them to wrongheaded conclusions that would make things worse. Building on success is a different task from correcting failure. There has been a whole lot of success over time in the U.S. labor market, and it shows in workers’ own opinions of their jobs. Don’t screw it up…
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