Week 34: Is it over?

In this issue: ▸ Putting up a fight ▸ Not putting up a fight ▸ The Republican war against ESG ▸ Twitter, Musk and ESG ▸ Typical greenwashing ploys

ESG on a Sunday

Aug 28, 2022

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Dear all,

This week, a man sitting next to me in the subway proclaimed with a calm, low voice: “It is over.”

He was reading one of the articles about the worst drought in Europe in the last 500 years. A small article on page 3 or 4. The top news, taking up all the space on the front page, was about the upcoming elections in Sweden. More specifically, it was about the fact that the second biggest political party in Sweden has Nazi-roots. In Sweden.

We looked at each other for a brief moment in silence. He flipped further and went on to read something else. The subway train continued to move its metal body through the dark tunnels underground. It is over. The words left me paralyzed for a moment while the rest of the people in the wagon continued flipping through their phones, like any other day. Early morning, tired faces, sleepy looks. Maybe he was right.

What made my angry as I resurfaced from the subway and onto the streets was this feeling that we are not even trying to put up a fight when we see that we are losing. Millions of people in Europe are affected by the alarming climate crisis, and most likely this is just the beginning.

Calm and unaware, like animals lined up for slaughter, we are moving through our own precious real or digital realities, shrugging our shoulders. What can we do. What can we possibly do. Freedom is just a another word for when you have nothing left to loose. Our intersubjective, we. Maybe he was right, the man on the subway.

Still, at least we can put up a fight. “An appeaser is one who feeds a crocodile – hoping it will eat him last,” Winston Churchill said. I think we can do better.

Putting up a fight

And still there are those who are trying to put up a good fight. Federated Hermes, a champion of environmentally friendly investment strategies, is coming under increasing pressure to explain its sponsorship of a coalition of senior US public officials that opposes action on climate change.

Three Danish pension fund clients of Federated Hermes are demanding to know why it agreed to act as a gold sponsor for the State Financial Officers Foundation, a Republican group that has threatened to remove state pension assets from financial companies that do not support fossil fuel industries. The foundation, which draws support from senior elected financial officers from 23 US states, has lobbied aggressively against Biden administration policies aimed at slowing global warming and opposed proposals by US regulators to introduce new climate risk disclosure standards for institutional investors.

The clash highlights a tension between approaches to ESG standards on both sides of the Atlantic. Support for stricter ESG standards across the corporate sector has been much stronger among investors based in Europe than in the US where opposition to action on climate change is widespread among Republican party supporters.

In response to growing criticism of its sponsorship of SFOF, Federated Hermes said last week that the relationship “does not serve as an endorsement of any organisation’s particular perspective on any issue”.

Sure, we actually never landed on the moon. And Elvis is, most likely, still alive.

Not putting up a fight

US and UK financial institutions have been among the leading investors in Russian “carbon bomb” fossil fuel projects, according to a new database of holdings from recent years. Campaigners in Ukraine said these institutions must immediately end such investments, to limit the funding of Russia’s invasion of Ukraine and to avoid climate breakdown.

Carbon bombs are fossil-fuel extraction projects identified by researchers to contain at least 1bn tonnes of climate-heating CO2, triple the UK’s annual emissions. Russia is a hotspot, with 40 carbon bombs, 19 of them operated or developed by Russian companies backed by foreign finance. The companies are Gazprom, Novatek, Lukoil, Rosneft oil company and Tatneft.

Financial institutions in the US hold almost half the foreign investment in Russian carbon bomb companies, with 154 institutions holding $23.6bn. The largest combination of investment and credit – $10bn – was provided by JPMorgan Chase, which other analyses have also identified as a leading funder of fossil fuels.

The biggest single investment in the Russian carbon bomb companies was the $15.3bn in Rosneft held by the Qatar Investment Authority, Qatar’s sovereign wealth fund.

The UK was third in the list of investing nations, with 32 financial institutions holding $2.5bn in investments. HSBC had the largest investment and credit total, at $308m.

Financial groups in Japan, Norway, Switzerland and the Netherlands also held significant investments, while Chinese and Italian institutions provided $45bn in credit between them.

The war in Ukraine has made it really clear that when you don’t care who you’re doing business with, it does translate into human suffering and lives lost. It’s also clear that we should not be investing in new fossil fuel projects, as the International Energy Agency has confirmed. Anybody involved in these projects should be really questioning what they’re doing.

But is it understandable why this is happening? Yes. Why? Well, the excess, unearned profits of the oil and gas industry are astronomical. The profits made from oil and gas were recently estimated to be around $3bn each and every day for the last 50 years. That’s $1tr a year, on average, from the pockets of you and me into the bank vaults of dictators and big oil. It may be the biggest shakedown in history.

The Republican war against ESG

Now onto the deserts of ESG and the Republican war against ESG and ‘woke’ big business.

Why aren’t they winning over investors in their war against ESG and ‘woke’ big business?

The Republicans say the political left is using ESG to advance an ideological agenda that wouldn’t stand a chance at the ballot box. They see ESG as part of a culture war. But the Republican backed shareholder push amounting to so-called ‘anti-woke’ proposals are getting almost no traction with voting shareholders.

Why? Well, it’s pretty simple. ESG is not a culture war. It’s not politics. ESG is a way to steer business and the financial system so it operates according to the real world.

“The Republican view on ESG is political hyperbole that seeks to marginalize and vilify the ideas that companies should focus on creating value for all stakeholders, address diversity and pay equity issues affecting their workforce, and take steps to alleviate the risks of climate change to their businesses,” Jon Hale, Morningstar’s director of ESG Research for the Americas, recently wrote.

Twitter, Musk and what people get wrong about ESG

To fulfil the potential of ESG, investors must understand that company executives also have a conflict of interest with their diversified shareholders. Naming this conflict is not an ethical judgment; it simply describes a market economy that channels savings to thousands of individual businesses competing for capital, talent, and margin.

But we need to identify the inherent conflict so we can design mechanisms to address it. Recognizing the conflict is also critical in responding to the accelerating political pushback against ESG investing. With the support of corporate lobbyists, lawmakers in a number of states have passed legislation that will hamper the ability of institutional investors to use ESG risk assessments in their investing practices, or even invest with managers that use ESG criteria.

Highlighting the divergent interests of corporate managers and their diversified shareholders will help explain why such legislation is so dangerous to investors. Refocusing investors on portfolio impacts may require that they demand individual companies in their portfolios make decisions that reduce enterprise value – even over the long term.

This runs counter to the “doing well by doing good” narrative that ESG activists cling to, as well as the ethos of an ecosystem that equates success with financial outperformance. But to maintain a market economy that does not violate critical social and environmental boundaries, shareholders must insist that each company account for all of the costs of its activities, including those costs that it can externalize.

Elon Musk’s attempt to purchase Twitter is an excellent example of this conundrum. Even though the offered price might have provided shareholders with the best value, the sale of a critical social media platform to one individual with very particular economic and other interests may have threatened the integrity of the public square. And because the economy depends on healthy public discourse, ensuring that Twitter is a positive social force long into the future is likely more financially material to the diversified shareholders of Twitter than is receiving a premium for their shares today.

Yet no ESG investors made this case or sought to condition support of the transaction on public-square protections. Because this critical “S” interest runs contrary to maximizing financial returns at Twitter, the ESG community has remained largely silent, even as the company tries to force Musk to follow through on his agreement in Delaware Chancery Court. As long as investors focus on enterprise value alone, they will repeat this mistake and will miss the opportunity to secure long-term portfolio value.

You can read more on this here.

The typical greenwashing ploys

As I’ve written about many times before, greenwashing is alive and well in the ESG industry. This trend undermines all the good efforts and will have unimaginable negative effects. So how do you spot it? What are typical greenwashing ploys?

Of particular concern are fund names that refer to ESG, sustainable investing, responsible investing, socially responsible investing, and similar ESG terms that are not aligned with the actual investment strategy being used.

Likewise, there are many funds holding themselves out, promoting, selling, and marketing their fund product or adviser services as ESG-focused. They are capitalizing on large and growing investor demand for these products, as evidenced by the dramatic rise in assets managed according to several types of ESG approaches.

Because ESG-related terms are not standardised and lack widely recognized meanings, such terms and related ESG sales hype can have several different interpretations and provide little or no clarity or specific information to investors when choosing a fund.

This inconsistency in terminology and lack of transparency makes it far too easy for an adviser to tout its “climate saving” credentials.

Here’s a very good article describing latest ESG greenwashing developments in the US.