ESG compliance by companies – all a farce?
Exclusive Poll: By Two-To-One Margin, Investors Reject Woke Companies Pushing Political Causes - "American investors — by an overwhelming margin — want companies they invest in to stop preaching and pursue profits, and they want no part of the Environmental, Social, and Governance (ESG) movement... While 29% of respondents agreed it is a “good thing” for companies to leverage their financial power for political or social means supported by executives, 58% — twice as many — said it is a “bad thing.”... The poll puts hard data behind the backlash already seen at companies like Disney, where an executive boasted of the firm’s “not-at-all-secret gay agenda,” State Farm Insurance, which reversed a plan to donate children’s books promoting transgenderism to schools, and Netflix, which recently told woke employees to look for jobs elsewhere if they object to diverse opinions... most investors recognize ESG as promoting “more liberal positions” than conservative ones. While 50% believe the former and 16% believe the latter, only 21% believe that ESG investing is neutral. When choosing their own assets, most investors prefer to focus on profits instead of ESG — and most believe that other investors should have the same opportunity."
ESG Investing Feeds Ecosystem of Rent-Seekers - "ESG is shorthand for Environmental, Social and (corporate) Governance. An ESG ETF is a fund screened to ensure that the companies in which it invests satisfies certain environmental (‘E’), social (‘S’) and governance (‘G’) standards. The ‘G’ tends to be rather less controversial than the ‘S’ and the ‘E’, but as Authers points out, citing academic research, quite what these standards are is far from fixed... One of the features of ESG is the return it offers, not necessarily to shareholders (I’ll touch on performance a bit later), but to a growing eco-system of rent-seekers ranging from investment banks peddling their own ‘proprietary’ definitions of ESG, to a host of consultancies offering their services both to companies to help them comply with these standards and to investors keen to be sure that they are putting their money in the ‘right’ sort of company. This confusion is also useful to activists, particularly those pushing the ‘E’ (and particularly those focused on climate change), for whom no degree of compliance is ever enough. As those aware of the history of some of the world’s more effective cults, whether political or religious, will know, the quest for ever greater degrees of a purity that is somehow just out of reach is a powerful way of firing up the faithful and bullying the unbeliever. Looking at performance, Authers (who is by no means unsympathetic to ESG investing) notes some research that appears to show that “ESG’s current popularity owes more to the fact that it offers a simple way to jump on the current hot stocks than to any greater desire to do good.”"
ESG Investing Is Having a Good Crisis. It's Also Killing Jobs - Bloomberg - "It is possible that ESG is undermining itself — or at least that the E and the S are in conflict with each other. Vincent Deluard, of INTL FCStone Inc., suggests that ESG funds are people-unfriendly. Tech and pharma companies tend to look good by ESG criteria, but they tend to be virtual as well as virtuous. These are the kind of companies that need relatively few workers and which churn out hefty profit margins. When Deluard looked at how the big ETFs’ portfolios varied from the Russell 3000, the results were spectacular. They are full of very profitable companies with very few employees. A further look at companies’ market cap per employee showed that investing in the current stock market darlings who are making their shareholders rich is a very inefficient way to invest in boosting employment. They include hot names like Netflix Inc., Nvidia Corp., MasterCard Inc. and Facebook Inc. Meanwhile, the companies with the most employees per unit of market cap are like a rogues’ gallery of those that have suffered from the pandemic, including cruise lines, airlines and department stores — all of which are known for employing lots of people. The problem, Deluard suggests, is that ESG investing, intentionally or otherwise, rewards exactly the corporate behavior that is creating alarm. Companies with few buildings, few formal employees and a light carbon footprint tend to show up well on ESG screens. But allocating capital to them leads to a deepening of inequality, and intensifying the problem of under-unemployment. On the face of it, they aren’t the companies that should be receiving capital if employment is to recover swiftly. If investors want to behave with the interests of “stakeholders” rather than “shareholders” in mind, and that is surely central to the ESG philosophy, then their current approach is directly counter-productive. No good turn goes unpunished. ESG has another problem. How exactly is it to be defined? Any number of different financial data groups offer their own ratings, while a number of investment houses have created their own proprietary versions. That competition has created confusion... There is worryingly little agreement over what constitutes a good company on environmental and social grounds; and almost no agreement at all on what constitutes good governance. A good rating from FTSE tells you nothing about what to expect a company’s rating to be from Sustainalytics or MSCI, and so on"
ESG Didn’t Immunize Stocks Against the COVID-19 Market Crash - "Environmental, social, and governance (“ESG”) scores have been widely touted as indicators of share price resilience during the COVID-19 humanitarian crisis. We undertake extensive analyses to investigate this claim and present robust evidence that, once the firm’s industry affiliation and accounting- and market-based measures of risk have been properly controlled for, ESG scores offer no such positive explanatory power for returns during COVID-19. Specifically, ESG is insignificant in fully specified returns regressions for the first quarter of 2020 COVID crisis period, and it is negatively associated with returns during the market’s “recovery” period in the second quarter of 2020. Industry affiliation, market-based measures of risk, and accounting-based variables that capture the firm’s financial flexibility (liquidity and leverage) and their investments in internally-developed intangible assets together dominate the explanatory power of the COVID returns models. Relying on data from the global financial crisis (“GFC”) of 2008-2009, we develop parsimonious logit-based models to explain GFC period “winners” and “losers” (i.e., top and bottom deciles of returns performance), and we use these fitted models to predict winners and losers in the subsequent COVID crisis. Employing receiver operating characteristic (“ROC”) curves, we demonstrate that various accounting- and market-based models perform well both within-sample for the GFC period, as well as out-of-sample for the COVID crisis, but that ESG does not meaningfully add to the combined accounting and market models’ performance. We develop hedge strategies that go long (short) in firms during the COVID crisis that the GFC-based models predict will be winners (losers) and document that these predictions yield highly significant abnormal returns. Once again, ESG offers no enhancement to the out-of-sample returns performance. We conclude that celebrations of ESG as an important resilience factor in times of crisis are, at best, premature."
As with "diversity", firms implementing ESG strategies appear to perform well - but that's despite not because of them
Terence Corcoran: Tear down the ESG statues - "The ouster last month of Emmanuel Faber as top executive at Danone, the French international distributor of brand-name yogurt and evian water, didn’t flap the wings of many news media in North America. One wonders why, given that Faber was the poster-CEO for the global application of woke stakeholder capitalism and environmental, social and governance (ESG) objectives as the new foundations for corporate purpose... At Danone, Faber led a number of initiatives whose overall objective was to shift the corporate focus to such issues as climate, biodiversity, sustainability and other socio-political objectives. In 2019, at the UN climate summit, Faber was up front when 19 corporations — including Canada’s Loblaws and McCain Foods — signed a biodiversity pact to protect the planet. Faber scored his biggest corporatist goal in June 2020, when Danone legally dumped the primacy of shareholders and became the first corporation under new French law to adopt the “entreprise à mission” structure designed to advance stakeholder value creation... Danone also began producing a “carbon-adjusted” earnings-per-share (EPS) statement. After adjusting EPS to account for a hypothetical carbon emission price of about $50 a tonne, Danone estimated its 2019 EPS of about $5.70 would be 38 per cent lower. All of this is very cute (if one ignores the fact that Danone’s profits would be wiped out if it had to pay a $150 a tonne carbon tax). Danone was hailed as a global corporate game changer. They all laughed last June, at the event marking Danone’s transformation into a purpose-based corporation, when Faber raised his verbal fist in the air after having “toppled” the statue of Milton Friedman... Two weeks ago, however, a real investor revolt struck down Faber and sent little shock waves through Danone and across the whole ESG movement. Under shareholder pressure, Faber was ousted as CEO and a major corporate reorganization postponed... Bluebell, with only a few shares of Danone, apparently initiated investor protests over Danone’s declining profit levels as it pursued ESG objectives. Under Faber, Danone was putting purpose ahead of profit. While Bluebell’s holdings were tiny, large Danone shareholders picked up the revolutionary spirit that eventually led to a board decision to remove Faber."
Facebook - "ESG is a scam enabling a cartel, and this implies extortion: "There's fewer places for big companies to hide on a global stage.""
78% of woke ESG funds that Biden wants 401ks to invest in UNDERPERFORMED market average - "A study by Investment Metrics found that a whopping 78 percent of global funds focusing on the principles of environmental, social and corporate governance fell more than 15 percent below their benchmarks in the first six months of 2022. At the same time, just 3 percent of the 166 US-listed ESG stock funds reported having positive returns as of September, Bloomberg reports, as woke tech firms these funds tend to support have had to lay off employees while oil and gas companies they tend to shun have seen their profits soar as war continues to rage... Bloomberg's Global Bond Index shows that the total returns on ESG bonds dropped 15.2 percent from September 2021 to September 2022. Returns on funds that do not prioritize ESG principles, however, only plummeted 14.7 percent. Meanwhile, the Point Bridge GOP Stock Tracker, which invests in companies that support the Republican Party was only down by about 3 percent. Now, investors are starting to shun ESG funds, pouring only $4.5billion into them during the first eight months of the 2022 — after injecting the funds with more than $32billion over the past two years. At least seven funds have now been forced to shutter... Still, the Biden administration seems to be supporting these failing funds by allowing retirement plan investors to focus on ESG investing - even if they provide a lower return for Americans. The move, which was announced on Tuesday, reverses a rule imposed by Trump in 2020 that forced employers to prioritize profit when making 401(k) investments... critics say the change allows asset managers to use retirees' funds to advance the Democrats' political and social agenda without their approval...
'The Trump-era rule permitted consideration of ESG factors as long as doing so was consistent with ERISA's requirement that such investing be 'solely' and for the 'exclusive purpose' of generating financial benefits for retirees... that clearly was not good enough for a Biden administration desperate to use massive pools of private investor money to fund the businesses they like and punish the ones they don't like.'"
If the ‘godfather of ESG’ is confused, then you know there’s a problem - "Much of the past outperformance of ESG funds now appears to be a product of the investment style skewing towards big technology companies which, until recently, were booming but have sharply fallen in value as interest rates picked up. And the ability of investors to push for change has also taken a hit. Wael Sawan, Shell’s newish chief executive recently said his company “will invest in the models that work - those with the highest returns that play to our strengths”. This has been widely interpreted as meaning Shell will be focusing more on oil and gas and less on wind and solar. Forget green; black is the new black. Sawan’s predecessor Ben van Beurden often complained that however much money he invested in green technologies half of his shareholders would complain it was too much and half would complain it was too little. Sawan appears to have abandoned the near-impossible attempt to thread the needle. He has been given cover by the fact that the first war in Europe for 80 years has messed up established thinking by creating an energy crunch and rampant inflation, thereby introducing some shades of grey to the sustainable investment debate. Climate change and clean tech may very well create risks and present opportunities but there is now a broad acknowledgement that European hydrocarbons are less problematic than Gulf hydrocarbons and much less problematic than Russian hydrocarbons. In a perfect world you’d rather there was no need for arms manufacturers; in an imperfect world supplying weapons to a country defending itself against an illegal invasion has become a moral imperative. It doesn’t help that there’s plenty of ESG snake oil around. Last year, the chief executive of a Deutsche Bank subsidiary had to resign after the authorities raided the company’s offices in connection with “greenwashing” allegations. However, it was the attempt to impose moral certainty where none existed that left the investment community most exposed to a backlash. Last year, as Russian troops were massing on the Ukrainian border, the Latvian deputy prime minister publicly vented spleen at a Swedish bank that had refused to lend money to one of his country’s defence companies because of “ethical standards”. “I got so angry,” said Artis Pabriks in an interview with the Financial Times. “Is national defence not ethical? How is the Swedish defence industry financed - by Martians?” But it is, of course, in the US where the investment culture wars are fiercest... One of the best and most nuanced critiques of ESG has come from Stuart Kirk, who lost his job as head of responsible investment at HSBC Asset Management after raising doubts about the efficacy of the approach. He argues that it makes sense, of course, to consider how environmental, social and governance issues may affect the risk-adjusted returns of an asset but this is different from not investing in certain companies because they want to do “the right thing” with their money. Either approach is valid but they are different – one focuses on inputs (what goes into the portfolio) and the other focuses on outputs (how ESG considerations influence returns). The issue comes when managers conflated the two. Where Kirk is perhaps overly generous to his former colleagues is in suggesting the confusion is accidental. I recently spoke to the former chief executive of a UK fund manager who said he had serious misgivings about ESG. He was mainly concerned that excluding too many companies from portfolios could hamper performance. He was also unconvinced it would accelerate environmental or societal changes. However, he privately admitted it had been more than his job was worth to raise such concerns while he was in his post, as the ESG label was such an effective marketing tactic, helping his firm and the wider industry to hoover up billions in fresh assets to manage."
States move to protect retirees from risky woke capital - "Texas made the first move to remove politics from state workers' retirement money. It introduced a law to prohibit state pensions from investing in or contracting with financial firms that boycott investment in oil and gas companies. Pursuant to the requirements of the law, the Texas Comptroller must keep track of financial firms that "boycott energy companies." Over a specified period of time, state government agencies must "sell, redeem, divest, or withdraw all publicly traded securities" from the boycotting financial firm. The law provides exceptions for state governmental agencies to continue investing if they determine they will suffer losses from the divestment. West Virginia and Arkansas have also removed assets from BlackRock’s management, while Utah’s state treasurer has taken a stance against S&P Global’s arbitrary environmental, social, and governance ratings. The American Legislative Exchange Council has also designed a framework for states to adopt laws to ensure that investment advisers are maximizing pension fund returns. In Kentucky, Attorney General Daniel Cameron wrote an opinion arguing that ESG investing is not in line with state law. He said a fiduciary "must have a single-minded purpose in the returns on their beneficiaries’ investments." Like the Employee Retirement Income Security Act, Kentucky state law requires investment firms to manage funds "solely in the interest of the members and beneficiaries [and for the] exclusive purpose of providing benefits to members and beneficiaries and paying reasonable expenses of administering the system." Investment managers are paying unreasonable expenses for ESG funds. An article from the Financial Times pointed out that "investors in sustainable funds pay a premium" compared to conventional peers. States around the country are fighting back because ESG investments fail to put retirees first. However, at the federal level, the Securities and Exchange Commission is embracing climate disclosures and ESG investing"
Berkshire shareholders reject climate, diversity proposals - "Berkshire Hathaway Inc shareholders on Saturday overwhelmingly rejected six proposals for environmental, social and governance changes at Warren Buffett's conglomerate, all of which the billionaire investor and his board opposed. By margins of at least 3-to-1, shareholders voted against three proposals that Berkshire disclose more about its climate-related risks or greenhouse gas emissions and efforts to address them, and its efforts to promote diversity. They also voted down by a nearly 10-to-1 margin a renewed call for an independent director to replace Buffett as chairman."
Matthew Lau: ESG is unnecessary and harmful - "One thing the ESG movement looks to destroy is business diversity, which it does by seeking to impose uniform views on a wide range of social issues onto all businesses. Under the ESG movement’s vision of stakeholder capitalism, corporations are all supposed to affirm that anthropogenic global warming is catastrophic and that various kinds of unfair discrimination are pervasive and systemic. Corporations are then supposed to reorganize their operations to deal with global warming and discrimination, while promoting equity, inclusion, and workers’ rights — not as these things really are, but as they are misunderstood by university administrators and Liberal and NDP activists... Apart from being duplicative, the ESG model introduces conflicts of interest to, and reduces accountability in, corporate decision-making: anybody who squanders company resources has the excuse that they achieved some sort of social improvement or fulfilled obligations to some group of stakeholders. Even worse, imposing ESG principles abrogates shareholders’ rights by redistributing their assets to whoever claims to be a business stakeholder. This effective change in ownership results in capital allocations based increasingly on political interests instead of financial considerations — a recipe for economic harm. The ESG movement also runs contrary to one of the greatest aspects of commercial life: its voluntary nature. Having adopted all sorts of mistaken ideas about economics and dubious stances on social questions, the ESG movement often calls on government to enforce and promote its values"
BlackRock’s (BLK) ESG Troubles Mount as Missouri Pulls $500 Million - Bloomberg - "Missouri withdrew $500 million of pension assets from BlackRock Inc., criticizing the firm for prioritizing ESG concerns over shareholder returns... Earlier this month, Louisiana’s treasurer said his state would pull $794 million from BlackRock funds, part of a growing backlash over the firm’s stance on sustainable investing"
‘We Are Capitalists’: BlackRock CEO Pushes Back Against ‘Woke’ Influences - "BlackRock chief executive Larry Fink said that being “woke” has no place in his business. In his 2022 Letter to CEOs, Fink instead lauded “capitalism” as the driver of relationships between stakeholders... Fortune 100 companies allocated more than $37 billion for “racial equity” initiatives following the death of George Floyd. For example, Alphabet — Google’s parent company — added to subsidiary YouTube’s $100 million equity fund with $175 million in new grants. The company is working to improve “Black+” representation at senior levels by 30% over the next few years. However, one survey from The Brunswick Group found that business leaders are “out of step” with the public on speaking about social issues. While only 36% of voters “agree unequivocally that companies should speak out on social issues,” 63% of executives believe the same... “even Biden voters think corporate executives need to weigh in less.”"
The ‘Stakeholder Capitalism’ War on the Enlightenment - WSJ - "No one appreciated the power of capitalism more than its greatest antagonist, Karl Marx. Born of the Enlightenment, embodied in the Industrial Revolution, capitalism, according to Marx, “accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts, and Gothic cathedrals . . . achieving more massive and colossal productive forces than have all preceding generations together” in “scarce one hundred years.”... In the communal world of the Dark Ages, the worker owed fealty to crown, church, guild and village. Those “stakeholders” extracted a share of the product of the sweat of the worker’s brow and the fruits of his thrift. Growth stagnated as the rewards for effort and thrift were leached away. The 18th-century Enlightenment liberated mind, soul and property, empowering people to think their own thoughts and ultimately have a voice in their government, worship as they chose, and own the fruits of their own labor and thrift. As Enlightenment economist Adam Smith put it, “the property which every man has in his own labor, as it is the original foundation of all property, so it is the most sacred and inviolable.”... These Enlightenment ideas spawned the Industrial Revolution and gave birth to the modern world... the idea that rich capitalists own corporate America is largely a progressive myth. Some 72% of the value of publicly traded companies in America is owned by pensions, 401(k)s, individual retirement accounts, charitable organizations, and insurance companies funding life insurance policies and annuities. The overwhelming majority of involuntary sharers in stakeholder capitalism will be workers and retirees. The mantra that private wealth must serve the public interest has been boosted by one of capitalism’s great innovations, the index fund. What investors gained in the efficiency of the index fund’s low fees, they are now losing as index funds use the extraordinary voting power they possess in voting other people’s shares... Stakeholder capitalism imperils more than prosperity, it imperils democracy itself. Self-proclaimed stakeholders demand that workers and investors serve their interests even though no law has been enacted imposing the ESG agenda."
Aaron Sibarium on Twitter - "NEW: From S&P Global to the London Stock Exchange, tobacco companies are crushing Tesla in the ESG ratings. How could cigarettes, which kill over 8 million a year, be deemed a more ethical investment than electric cars? One answer: Tobacco’s gone woke.🧵... The contrast highlights the hazards of a movement that lumps pressing health and environmental issues in with ideological fads. Early ESG efforts were laser-focused on "sin stocks"—companies whose core business was deemed immoral—including tobacco. But as ESG investing has ballooned, so has the number of variables used in ESG ratings, which now encompass everything from labor practices and carbon pledges to diversity trainings and human rights. That has created countless opportunities to game the system, experts say, and lets even the most sordid companies score points—and investors—by toeing the progressive line. "ESG company ratings often measure abstract woke goals that have no rational connection to companies' actual businesses," said Boyden Gray & Associates managing partner Jonathan Berry, who sued NASDAQ last year over its diversity requirements for corporate boards. "Companies score 'points' mainly by demonstrating their compliance with the latest dogmas issued by the DEI complex." Cigarettes are the leading cause of preventable death in the United States, killing more people than alcohol, illegal drugs, and car accidents combined. And their supply chain involves a litany of environmental sins... The report did not mention that smoking, like COVID-19, disproportionately kills black Americans. The paeans to DEI underscore how tobacco could exploit ESG to become a more palatable asset, profiting off the progressivism that has swept through C-suites and corporate boards... Some rating systems even encourage cigarette makers to market their products to marginalized groups. Altria has a perfect score on the Human Rights Campaign’s Corporate Equality Index, which lets companies earn points by "advertising to LGBTQ consumers." In California, tobacco kills almost as many gay and bisexual men as AIDS. LGBT youth nationwide are over twice as likely to smoke as their straight counterparts, and transgender adults smoke at three times the rate of the general public... While the ESG juggernaut is relatively new, tobacco's corporate progressivism is not. When Philip Morris began advertising in gay periodicals in the 1990s, it dismissed critics of the move as bigots opposed to "inclusion." (I’m not kidding.)"
Jamil Jivani: The Conservative MP who's fed up with the menace of woke corporations - "Corporations are generally considered woke when they engage in social activism that is beyond the scope of their business purpose. It is controversial because it is inherently undemocratic when wealthy officers and directors exploit the unique legal status of a corporation in order to marshal significant resources toward their preferred political agendas. Canadians have had reasons to worry about woke capital for years: ESG (environmental, social and governance) investment policies have undercut our oil and gas industry; businesses have embraced Black Lives Matter, despite serious concerns about the group’s ethics; and multinational corporations have imported American culture wars into our country... Kmiec is currently drafting a private member’s bill to amend Section 122 of the Canada Business Corporations Act (CBCA), which is focused on the duty of care that officers and directors owe to their shareholders. If passed, it would ensure that officers and directors prioritize the interests of shareholders above political agendas that are unrelated to the company’s business purpose... Wisely, the bill would not prevent companies from making statements on political or social issues, but would require a firm’s board of directors to seek approval from shareholders first. Kmiec’s office hopes that such a mechanism will “make corporations think twice before opining on something beyond their stated corporate purpose.” Legislation that promises to protect democracy from corporate power is bound to make some people uncomfortable. The proposed changes to the CBCA promise to loosen the grip that woke liberals have over corporate Canada, which will receive push-back from some quarters. Some critics will also argue that businesses should be free to be activists and governments shouldn’t have a say in the matter. For its part, Kmiec’s office argues that the bill is in fact pro-business by being pro-shareholder, since, at the moment, “Shareholders have no say over these statements and, if backlash occurs, are left on the hook suffering with pecuniary losses through no fault of their own.”"
To liberals, corporate involvement in politics is only an issue when they're not pushing a liberal agenda
