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Low-Road Capitalism 3: How Environmentally Conscious Investing Became a Target of Conservatives

The fossil fuel lobbyist limiting consumer choice edition:
https://nytimes.com/2023/02/28/climate/esg-climate-backlash.html
It’s been a widely accepted trend in financial circles for nearly two decades. But suddenly, Republicans have launched an assault on a philosophy that says that companies should be concerned with not just profits but also how their businesses affect the environment and society.

More than $18 trillion is held in investment funds that follow the investing principle known as E.S.G. — shorthand for prioritizing environmental, social and governance factors — a strategy that has been adopted by major corporations around the globe.

Now, Republicans around the country say Wall Street has taken a sharp left turn, attacking what they term “woke capitalism” and dragging businesses, their onetime allies, into the culture wars.

The rancor escalated on Tuesday as Republicans in Congress used their new majority in the House to vote by a margin of 216 to 204 to repeal a Department of Labor rule that allows retirement funds to consider climate change and other factors when choosing companies in which to invest. In the Senate, Republicans are lining up behind a similar effort that has been joined by Senator Joe Manchin III, Democrat of West Virginia.
….It is unclear whether applying environmental and social principles to investing is actually good for business. Some studies have shown that companies that embrace environmental and social goals outperform their peers in the long run. But other studies show the opposite. And as the stock market slumped last year, oil and gas stock prices rose sharply.

Senator Sheldon Whitehouse, Democrat of Rhode Island, said he believed the Republican position on E.S.G. was more about ginning up outrage than about just how much of a financial risk climate change posed to long term investments.

“They invent culture-war provocations that drive clicks, and woke capitalism is part of that,” he said.

Mr. Whitehouse added that he believed the fossil fuel industry was responsible for funding much of the pushback. Groups like the Texas Public Policy Foundation, which has been opposing climate action around the country, are supported by oil and gas companies. And the oil and gas industry continues to donate to Republicans at a far greater rate than it does to Democrats, according to data compiled by OpenSecrets.
Of course, having a rule that merely allows retirement plan investors the choice of buying an ESG fund is a terrible threat that will destroy America in the lobbyists view. There is no definitive evidence that ESG criteria or funds either outperform or underperform in the aggregate. There are strong ESG fund performers, too, as well as low cost ones. So, why not let investors decide for themselves by giving them the option to buy one? Somehow this is allowed in the rest of the world and a hell mouth hasn’t opened.

Comments

  • Right, LB. And yet, I'm not sure, generally, that going ESG helps returns. One might do it because of their own convictions.
  • edited March 2023
    There's a lot more evidence that active management doesn't help returns in aggregate, but you see plenty of high cost active funds in retirement plans, and no lobbyist funded political campaign to block them. This campaign to block ESG funds from retirement plans ironically is limiting the free market in funds. It's saying if you work for the Texas government and have a retirement plan where you want to invest in equity funds for your future, you have to buy fossil fuel and other questionable stocks from an ESG perspective via those funds whether you want to or not. Investors should be allowed to make those decisions for themselves, but again, ironically, big conservative supposedly free-market supporting government wants to prevent investors from having the choice to consume whatever they want.
  • This is positioning by all parties - greenwashing by funds and by companies, grandstanding by politicians.

    XOM is found in many ESG funds other than ones that explicitly screen out fossil fuel companies. The oil lobby is fighting a battle of image, not of substance.

    Sometimes XOM is included in ESG funds because it is rated as one of the "best of the worst". For example, Sustainalytics scores XOM as high risk but in the best 20% of oil and gas producers. Refinitiv appears to generate a company's overall score using only within-industry comparisons, leading to an overall score of 69/100 (second best quartile)

    Sometimes because no matter how dirty a company is, the company may have good hiring and pay practices that counterbalance its other sins.

    Nov 2019, WSJ: ESG Funds Enjoy Record Inflows, Still Back Big Oil and Gas
    May 2022, UMich Ross School of Business: How a Sustainability Index Can Keep Exxon but Drop Tesla

    Ultimately I think this is all going to be meaningless. Better run companies will consider risks, including environmental risks (e.g. are their facilities at risk of rising sea levels, are their practices at risk of more stringent regulation, etc.) when making business decisions. Fund managers look at how well companies are run, regardless of whether there's an ESG label slapped onto them. And relatively few ESG funds are set up to go beyond publically available (self reporting, low grade, nonstandardized) data or to make a significant difference in the way companies operate.

    Trump's anti-ESG regulations had already been somewhat tempered by removing "ESG" and instead merely emphasizing pecuniary factors. And that's all that most funds marketed as ESG are doing.
    https://www.plansponsor.com/dol-issues-final-rule-softer-stance-esg/

    This is PlanSponsor's summary of the the newer (2022) version of the rules that are being opposed.
    https://www.plansponsor.com/esg-now-permissible-not-required-erisa/

    Now if you want to invest in a fund that truly tries to make a difference, that's another story.
  • There's a lot more evidence that active management doesn't help returns in aggregate, but you see plenty of high cost active funds in retirement plans, and no lobbyist funded political campaign to block them. This campaign to block ESG funds from retirement plans ironically is limiting the free market in funds. It's saying if you work for the Texas government and have a retirement plan where you want to invest in equity funds for your future, you have to buy fossil fuel and other questionable stocks from an ESG perspective via those funds whether you want to or not. Investors should be allowed to make those decisions for themselves, but again, ironically, big conservative supposedly free-market supporting government wants to prevent investors from having the choice to consume whatever they want.

    Yessir. I lived for a while in a little town in B.C. with a smelter. It's gone, now. The air always smelled awful, evil. When I said something about the air, protests erupted in my face. "You're talking about our JOBS!" Well excuse me. I thought there might be a way to have good clean air AND jobs. Duh.


  • edited March 2023
    @msf The problem is images have their own reality in 2023. Fake news can lead to real election results, so ESG becomes a prop in the culture wars. And those results matter a great deal to the oil lobby.

    There is also long-term climate risk assessment done by those relativist ESG funds that still hold XOM and those assessments make the fossil fuel industry nervous. They do not want there to be any acknowledgment that climate change is a material financial risk to their businesses which requires either divestment or changes to their business policies such as leaving certain assets in the ground.

    In the short term there is much greenwashing and saber rattling. In the long term these matters are of grave importance, and retirement plans must think both short and long term about risk. For the sixty year old employee there is perhaps little financial risk in holding fossil fuel companies and perhaps rewards, but for the thirty year old employee in a retirement plan the risks are substantial.

    What the DOL rule is about on a more granular level is allowing plan sponsors to consider climate risk as a material financial risk in their selection of funds and those funds investment strategies. That makes the fossil fuel industry uncomfortable.
  • @LewisBraham; @MFS doesn't tag to anyone here (although that is a fund complex). You meant @msf. This may be a common mistake. (-:)
  • edited March 2023
    Thanks, Yogi. Updated. I didn’t know these tags were case sensitive. Or did I have the letters rearranged? Looks like I did.:-)
  • @LeWisBrAhAm - what Yogi is referring to is transposition of letters (mfs vs msf); I believe tagging is case insensitive. We'll know if you see this post as tagged.

    And while I'm not a fund, I'd like to think that I'm a bit complex, too.
  • edited March 2023
    Nice one. You are indeed complex— in a good way. I don’t think I was tagged with the cap letters, but I may have missed it on my screen.
  • The hypocrisy of "freedom loving, little government" conservatives using state governments to force companies to do their bidding is jaw dropping. DeSantis and Disney is the worst example, but the "ban-ESG" movement has bigger financial implications for most Americans.

    There is some rationality being brought to the fight however. I turns out bankers do not like being told what to do

    https://www.washingtonpost.com/climate-environment/2023/02/28/climate-change-wall-street-investments/

    There are already documented instances of bond proposals costing towns and cities millions of dollars more in Florida and Texas because sales were delayed or postponed because of anti-ESG laws and the number of underwriters is much less.

    There was also another article today ( which now I can't find, of course) that illustrates how "anti-ESG" conservative Governors are more than happy to take money for their states from renewable energy subsidies. I think Texas has the largest solar and wind farm footprint in the country.
  • Cutting a low-cost provider like BlackRock out of the bidding to run state retirement plans makes no sense financially, and it's easy to see how costs for plan participants would tick higher as a result.
  • None of it makes sense other than to rile up the base and try to keep the GOP in power as it looses its' voters to age and Covid.
  • Amana Funds may be the next target.
  • @Lewis,,, higher costs for participants… like lots of other maga/repug actions the suckers continue to vote against their own dwindling pocketbooks. They never learn. They even vote for tax cuts for their own oppressors. At least Covid thinned the herd.
  • @PRESSmUP, add in funds like Ave Maria and Eventide--off the top of my head.

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