ESG as Competitive Advantage?

ESG as Competitive Advantage?

I have been writing about the bind in which ESG puts American companies for years now, dating back at least to The Dictatorship of Woke Capital, in which I mentioned that BlackRock’s twin obsessions – ESG and expanding its reach in China – put American corporations at a “competitive disadvantage.”  Most recently, I put it this way, discussing BlackRock’s relationship with PetroChina, in a piece last July:

[F]or much of [the] last ten years, the largest single shareholder of PetroChina has been Larry Fink’s BlackRock.  At present (or at least as of its latest disclosure), BlackRock owns more than 7% of the company, the vast majority of which it has purchased on the Hong Kong Exchange.

How, one might wonder, does BlackRock “engage” with PetroChina?  How does Fink hold its feet to the proverbial fire and change its behavior?

The short answer is that they don’t – on either count.  Decisions about PetroChina’s plans, strategies, and behaviors are not made at open, transparent shareholder or board meetings.  Rather, those decisions are largely made at CNP [Chinese National Petroleum]….Or to put it more bluntly, decisions about the behavior in which PetroChina engages are made by executives and directors hand-picked by and, therefore, loyal to the Chinese Communist Party.  Fink couldn’t engage the managers of PetroChina if he wanted to, and given his long-term fondness for the company, one doubts that he wants to.

What this means in practice is that ESG places American companies at a competitive disadvantage to Chinese and other foreign companies.  Not only are American companies subjected to more thorough, more transparent, and more honest accounting and governance standards, but they also have to deal with and “engage” with politically activist shareholders whose engagement positions may not reflect the best interests of the company.  And in the case of BlackRock and the other index and mutual fund companies, their engagement positions may also not reflect the best interests of the underlying owners of their funds – the individuals whose wealth the companies utilize as leverage and whose shareholder rights they usurp.  For American companies, ESG compounds compliance costs, increases the likelihood of behavior directed at non-material ends, and reinforces the old adage that too many cooks spoil the broth.

I’ve been thinking a great deal about this lately and about the slow but steady retreat by large American asset management firms from ESG.  I want to be clear about some things up front: I don’t trust Larry Fink.  I don’t trust Ronald O’Hanley.  Heaven knows I don’t trust Jamie Dimon.  I don’t believe that the retreat from ESG is sincere or complete or even especially honest.  I think that much of the retreat is being staged specifically for “our” consumption, meaning that these firms want to convince those of us who oppose ESG that they are on our side, when they’re really not.  Moreover, I believe that the struggle to maintain free and fair capital markets will continue long after ESG has ceased to be a prominent investment concern.  In short, signs to the contrary notwithstanding, we have not yet “won” anything.

That said, we are winning, at least on a superficial level, and winning has a tendency to become contagious.

The other day, I was asked in an interview where I saw the ESG issue in a year or maybe two.  At first, I sidestepped the question, using the old adage (attributed to a variety of sources) that making predictions is hard, especially about the future.  I thought about it for a second, though, and revised my answer.  The best case scenario, I said, would be for the asset managers making a show of their retreat from ESG to discover that a retreat from ESG is actually good for business, helping them, the companies whose stock they hold, and their clients.

As BlackRock deemphasizes “sustainability” as an investment criterion, for example, it should benefit both from its expanded holdings of companies that might not fit the sustainable categorization (and a greater universe more generally) and from the fact that these companies feel empowered to pursue “excellence” as opposed to environmentalism.  In turn, the companies would benefit from increased capitalization, increased productivity, and (hopefully) increased profitability, while investors would see the value of their holdings rise.  Win, win, win.

The best part about all of this winning is that it would, in turn, be compounded by the same forces mentioned above, or at least some of them.  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.

Regular readers know that we are not likely to be particularly welcome at our local Optimists Club.  Especially regarding matters that are dependent on culture, values, virtues, etc., we tend to see the glass not as half full or even half empty but as likely to shatter into a million pieces at any moment.

Nevertheless, we are optimistic on this – even in the face of the above-noted caveats.  As we say, winning is contagious, and this is all the more so, when the winning is triggered by doing less rather than more, by simply forsaking unnecessary tedium.

We’re crossing our fingers, at least.

Stephen Soukup
Stephen Soukup
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Steve Soukup is the Vice President and Publisher of The Political Forum, an “independent research provider” that delivers research and consulting services to the institutional investment community, with an emphasis on economic, social, political, and geopolitical events that are likely to have an impact on the financial markets in the United States and abroad.