12 Sep ESG as Competitive Advantage, Part III
The following commentary/analysis is one I wrote in my capacity as a senior fellow at “the nation’s oldest consumer protection agency,” Consumers Research, where, among other things, I compile a weekly letter for public pension-fund managers. I am sharing it here today because I thought it might be useful to some of you.
Madison Saves the Day…Again
According to its fans and supporters, ESG is inarguably beneficial to investors, businesses, and a whole host of other stakeholders. About this, they will brook no dissent. It’s good because they feel it’s good, and don’t you dare say otherwise.
Unfortunately, for them, dissent is, nevertheless, a real phenomenon – and it’s growing more substantial by the minute. Consider, for example, the following from Bloomberg:
For TotalEnergies SE Chief Executive Officer Patrick Pouyanne, the difference in the performance of his company’s stock and that of Exxon Mobil Corp., the largest US producer of oil and gas, is in no small part explained by an acronym: ESG.
Exxon’s aggressive oil and gas strategy has been rewarded by investors, with its shares more than doubling in the past three years. For Europe’s second-biggest oil company, in contrast, pressure on the region’s asset managers to invest using environmental, social and governance standards has capped gains and prompted Pouyanne to flirt with the idea of listing shares in the US.
The French oil giant isn’t alone in pointing to the skewing effect of ESG regulations that critics say have put European businesses at a competitive and valuation disadvantage to their US peers, with potentially long-lasting effects for the bloc’s economy. Companies from Mercedes-Benz Group AG to Unilever Plc are pushing back. The European Round Table for Industry, whose members have combined annual sales of €2 trillion ($2.2 trillion), says overly stringent regulations are “accelerating loss of competitiveness” and warn that members’ prospects “are better outside Europe.”
Oh.
I hate to say I told you so, but….well…Actually…check that. I love to say I told you so, but only if you had the good sense to heed what I told you. In any case, I did tell you so, back in February:
It is important to remember here that as American asset managers are retreating from ESG, European asset managers are not. They are, in fact, moving in the other direction. Likewise, as the Biden Administration’s “whole of government” approach to climate, sustainability, and Net Zero is hampered by divided government, constitutional restraints, and pending litigation, the European Union’s much more aggressive approach to these matters is not. The EU is, indeed, moving more slowly today than it was last summer, but it is still scooting down the road to economic oblivion at comparatively breakneck speed.
In practice, what this means is that ESG could place American companies at a competitive ADVANTAGE, relative to their European and even many Asian counterparts. Simply by being empowered to ditch ESG and to let go of the unnecessary, costly, and time-consuming step of ESG-related engagement and compliance, American companies could thrive comparatively. In a world of uncertainty and presumably, tighter money for a longer time, this could be of enormous significance.
Before I head off to be installed in my new position at Delphi, I should note a few additional details.
First, when I referred above to “pending litigation,” I specifically meant Loper Bright v. Raimondo, which was decided in the plaintiff’s favor in June. This ruling effectively overturned the Chevron Doctrine, making it notably harder for administrative agencies to impose their will on American companies. In this particular case, that means it is even less likely that the SEC’s pending-but-suspended carbon/sustainability reporting rule will be allowed to stand without explicit Congressional approval. Because of this, the gap between the United States and Europe has already grown enormously since I made the forecast above.
And speaking of growing regulatory gaps, last week the Australian House passed a bill requiring mandatory Scope 1 and 2 emissions reporting to begin for “large and medium sized companies” on January 1, 2025. The Senate passed the bill this past summer, and it is now set to become law. Scope 3 emission reporting, which is exceptionally onerous, will begin later in the year. A report from ESGToday contends that “Investor groups welcomed the passage of the new climate reporting legislation.” If that is indeed the case, then “investor groups” have either lost their minds or have decided to invest exclusively in American companies. My guess is that neither investor groups nor Australian businesses are particularly happy about this, and nor should they be.
Finally, this competitive advantage for American corporations is hardly guaranteed to remain permanent. Right now, almost all the action in ESG-world is taking place in government. The EU and the Australian legislature are the current villains of the story – at least as far as European and Australian corporations are concerned – but that’s not to say that the American government/administrative state can’t become a villain as well and thereby nullify the nation’s current global advantage.
To that end, the hero of the present hour for the Americans is James Madison, father of the Constitution, whose checks and balances have, thus far, proved to be the only thing that has saved American business from the fates of its European and Australian cohorts:
[W]hat is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions. This policy of supplying, by opposite and rival interests, the defect of better motives, might be traced through the whole system of human affairs, private as well as public. We see it particularly displayed in all the subordinate distributions of power, where the constant aim is to divide and arrange the several offices in such a manner as that each may be a check on the other that the private interest of every individual may be a sentinel over the public rights. These inventions of prudence cannot be less requisite in the distribution of the supreme powers of the State.
Unified government in Washington or an extended period of one-party control (and thus a remaking of the federal judiciary) could easily upend the status quo that has, thus far at least, stymied the sustainability statists.
In the meantime, the people would be well-served if American corporations and asset managers (ahem!) would utilize their advantage while it persists. “After all,” as President Calvin Coolidge noted, “the chief business of the American people is business.” Let them thrive.
