18 Apr ESG as Competitive Advantage, Redux
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.
Building Back Better
Several weeks ago, I suggested that the growing divergence between ESG enthusiasm in the United States and ESG enthusiasm in Europe would (or should, at least) constitute a significant competitive advantage for American companies and investors. It’s a simple calculation: as American investors become less and less enamored with sustainability, superficial workforce diversity, and all the other hallmarks of ESG activism, American companies will be permitted to focus more on their core business functions and will, as a result, perform better and more profitably. Meanwhile, in Europe – and Asia, perhaps – as investors and regulators continue to double down on the social engineering and central planning that animate ESG, companies centered in those regions will struggle comparatively, giving their American competitors an advantage. Specifically, I wrote:
American asset managers are retreating from ESG, [while] 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.
If you happen to pay attention to the “breaking” news in ESG-world on a daily or even weekly basis, then you may have noticed that much of the news over the week or more has been about the ongoing and expanding divergence between the United States and Europe. Reuters noted the ever-increasing gap between the two continents. Oilprice.com reported on the imbalance in the capitalization of ESG and sustainability-related ETFs between the two. Citywire cited a new report from PwC Luxembourg suggesting that three-quarters of European investment funds will be ESG-compliant within three years. And even Lifesitenews noticed the discrepancy:
BlackRock, JPMorgan Chase, and State Street recently exited from Climate Action 100+, a coalition of the world’s largest institutional investors that pledges to “ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.” The passive fund Vanguard, the world’s second largest, exited over a year ago.
These four fund managers oversee assets of about $25 trillion, which is approximately a quarter of the entire funds under management in the world….
Meanwhile in Europe, very different choices are being made. The European Union (EU) is looking to impose sustainability reporting standards on all medium and large businesses…. So, while the U.S. looks to restore an unsteady version of capitalism, Europe is heading towards some kind of climate-driven socialism.
Unsurprisingly, given all this, over the weekend, Bloomberg reported that American regional banks have dramatically increased the credit they’re providing to oil and gas companies. Even less surprisingly, this increase has largely been the result of European banks backing away from those same companies because of climate policy restrictions imposed upon them by continental regulators:
Since the start of 2022, the combined number of fossil-fuel loans provided by Citizens Financial, BOK Financial, Truist Securities, Fifth Third and US Bancorp rose more than 70% on an average annualized basis, compared with the preceding six years, the Bloomberg data show….
The development offers a glimpse of how the US banking landscape is being altered against a backdrop of stricter climate regulations across the Atlantic. US regional lenders — shaken by the crisis that followed Silicon Valley Bank’s meltdown — are participating in more fossil-fuel loans as banks in Europe begin to pull away for fear of getting caught on the wrong side of environmental, social and governance regulations and climate litigation.
All of this, in turn, promoted Russ Greene – a senior fellow in economic progress at Stand Together, a fellow critic of ESG, and my one-time co-author – to note that we may be starting to see confirmation of my thesis “that America lagging Europe on ESG is a competitive advantage.”
It will come as a shock to no one that I think Russ is right. Moreover, I think this is just the beginning.
Obviously, the financial sector has already been and will continue to be one of the biggest winners in the ESG-gap boon for American business. The energy sector will likewise benefit tremendously. Interestingly, European oil companies – Shell, BP, and TotalEnergies – produced greater equity returns last year than did their American counterparts, Exxon Mobil and Chevron. It is worth noting, however, that it was the first time in five years that they had done so and, more to the point, the European companies all improved their performance by imitating the Americans, i.e. by focusing less on renewables and more on their core business of oil production. One can expect that the outperformance will disappear as quickly as it appeared, as new regulatory barriers to production and new reporting standards go into effect in Europe.
In an ideal world, asset managers, investors, and regulators in Europe would swiftly conclude that their obsession with climate change and the central planning necessary to “prepare” the world for the energy transition are destructively presumptuous and in violation of their moral obligations to ensure the most effective and sensible use of investment capital, even as their American counterparts continue to determine the same. In such a world, the entirety of the West – the civilization that built capitalism and the modern world along with it – would rediscover its purpose while also rediscovering its financial power.
Unfortunately, that ideal world seems rather far-fetched at the moment, leaving us to hope for second-best-case scenarios. The preservation and acceleration of the American retreat from ESG and its liabilities would seem to fit nicely into that box. This isn’t a competition. It isn’t a case of hoping that American companies do better than European companies because of national pride or patriotism. Rather, it’s a case of hoping – and expecting – that the benefits of abandoning the politicization of business and capital markets will be obvious and become self-reinforcing. It is the acceptance of Voltaire’s admonition that one should not let the perfect be the enemy of the good.
A complete and total global repudiation of ESG would be perfect. In its absence, however, we should hope and prepare for the good that will be accomplished by the ongoing American retreat.
