30 Aug Is ESG on it “Last Legs?”
Again, the following commentary/forecast 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.
The Report of ESG’s Death Was an Exaggeration
Over the past week or more, countless media outlets – both financial and mainstream press – have noted the “remarkable” drop in support by BlackRock for ESG proxy proposals this past shareholder season. Clearly, ESG is dying a fast and ignominious death. Moreover, BlackRock – once the evil Galactic Empire of the ESG universe – now wants to be one of the good guys, a part of the solution. Or so Charles Gasparino tells us:
ESG is on its last legs.
How do I know this? Consider the actions of BlackRock, the big money manager and one of the initial and fiercest advocates of the Environmental, Social, and Governance investing technique. Last week, the firm, its founder and CEO Larry Fink announced something courageous in my view: The company stated emphatically that the ESG movement has gone too far, and BlackRock will be part of the solution to prevent its excesses from destroying the US economy.
As I first reported, BlackRock’s missive against ESG came via an announcement that it has scaled back on its support of environmental and social shareholder demands in the “proxy” process. It voted to approve just 7% of these proposals in the 2023 fiscal year, down from 22% in 2022 and 47% in 2021.
The reason: “So many shareholder proposals were overreaching, lacking economic merit, or simply redundant,” the firm said….
Losing BlackRock is a particularly big deal in the $30 trillion-plus ESG ecosystem because of the company’s size — $9 trillion in assets under management, the largest money manager in the world. Fink once seemed hooked on ESG because he really does believe corporations can enact positive change in society. It also brought in lots of business to BlackRock, and ESG funds carry higher fees.
He’s now seen ESG’s downside and he is saying enough!…
[A] financial adviser with close ties to the firm says those ESG screens are used less and less for stock picking outside ESG-specific funds.
“ESG is still popular in Europe,” the adviser tells me. “For US investors these days it’s mostly window dressing at BlackRock. It’s not really used in decision making any more.”
Now, I don’t want to say that Gasparino doesn’t understand ESG, its advocates, or their tactics, but… Gasparino doesn’t understand ESG, its advocates, or their tactics. He doesn’t have a clue. Either that or…well…
Anyway, there are three primary reasons to think that ESG is NOT on its last legs and that BlackRock is NOT leading the counter-revolution (against the revolution it started).
First, ESG is not a proxy voting strategy. It is not even a stock screening or stock picking strategy as Gasparino and his “financial adviser with close ties to the firm” suggest. ESG is an ENGAGEMENT strategy. ESG is about convincing companies and their executives to build their long-term business plans around sustainability. It’s about convincing companies and their executives that superficially diverse boards and C-suites automatically and inarguably lead to a better-run corporations and greater profits. ESG is about convincing companies and their executives to make internal changes promoting net-zero and DEI BEFORE those issues are voted on by shareholders. Note the explanation that BlackRock gave for its drop in support for ESG proposals: “So many shareholder proposals were overreaching, lacking economic merit, or simply redundant.” The key word here is “redundant,” which, in this case, means “we already convinced management to make these changes, so the shareholder proposal is completely superfluous.” Or to put it more bluntly, BlackRock’s engagement is working, so it doesn’t have to vote for so many proposals.
Second, many high-profile advocates of ESG have discovered that sometimes, it’s easier to let government lead the fight AND draw the heavy fire from opponents. Three years ago, Larry Fink was running around the country talking about how he wanted the SEC to stay out of the sustainability/environmental disclosure discussion, insisting that he and the other ESG overlords could create better, more effective, and less intrusive standards than the government. Government should, he said, leave it to the professionals.
He doesn’t say that anymore.
Between the new disclosure rules released by the European Union (which they want to apply to any global corporation that does significant business in EU states), the new global reporting standards from the International Sustainability Standards Board (ISSB), the SEC’s always-imminent rule on environmental disclosures, and the Biden administration’s “all of government” approach to climate change (and ESG, by association), the greatest risk to capital markets now comes from federal governments and global regulators. And as BlackRock, State Street, and the rest have discovered, this works to their advantage as the first and biggest players in the game. The people who run these companies are not stupid. Indeed, they’re quite smart. And if they can get governments to do the grunt work, while they reap the benefits, they’re more than happy to do so.
Finally – and most importantly – ESG doesn’t matter anyway.
I don’t really mean that. But I do. Kinda.
Here’s the thing: I wrote a book called The Dictatorship of Woke Capital. I did NOT write a book called The Dictatorship of ESG. And that’s because ESG, while important, is only a small part of the attack on liberty, prosperity, and free and fair capital markets.
Clearly, the definition of ESG is more than a little malleable. One thing, however, is inarguable: ESG is a TACTIC. It is a specific investment approach designed to maximize investors’ emotional fulfillment while, at the same time, purporting to hold businesses accountable for their behavior. ESG is more aggressive and coercive than traditional socially responsible investing, but it is still a socially conscious investment plan. It has general characteristics (many of which need greater clarity and definition) all of which revolve around the idea that one can “do well by doing good.”
I have long argued that the arguments underpinning ESG have been thoroughly discredited. What I mean by that is that it is reasonably clear that ESG investments neither do especially well nor do very much (if any) good. Both premises are demonstrably false.
Given this – plus the pushback from Red State governments – it’s hardly surprising that BlackRock et al. would back off the overt and aggressive use of ESG. But then, ESG is but one of many tactics in the broader STRATEGY of SHAREHOLDER ACTIVISM.
Two years ago, BlackRock, State Street, and Vanguard all threw their weight behind Engine No. 1 and its radical environmentalist candidates for ExxonMobil’s board of directors. They did so not just with the votes from their ESG funds, but with the votes from ALL of their funds. That was NOT an ESG effort, in other words. It was a case study in classic activism.
ESG is but one tactic in the shareholder activism arsenal. Shareholder activism is about changing companies’ behavior, regardless of its effect on its shareholders’ return on investment and, sometimes even, regardless of the effect on the company itself. For many years – most of them prior to the rise of ESG investing – shareholder activists introduced proposals designed to unsettle and undermine corporate managers and boards. ESG has made these proposals more successful, to be sure, but it’s only part of the process. Indeed, many of the activists who participate in this strategy don’t care one whit about the impact that their activism has on businesses, collectively or individually. Some hold shares only as long as is necessary to submit proposals and gain entrance to shareholder meetings. In short, shareholder active ism is about doing “good,” with very little regard for whether or not one does well. The ESG tactic was created specifically to make this strategy more palatable and, thus, more popular.
Among other things, in The Dictatorship of Woke Capital, I discussed ESG and shareholder activism, but I also profiled three companies – Apple, Disney, and Amazon – none of which have much of anything to do with either ESG or shareholder activism. That’s because “WOKE CAPITAL” is neither a tactic nor a strategy. It is, rather, an ETHOS.
Is your favorite phone company giving billions to Black Lives Matter? That’s woke capital. Is your favorite carbonated sugar-water company wetting its pants over voter integrity laws in Georgia? That’s woke capital. Is your favorite sporting goods company virtue signaling on guns? Again, woke capital. ALL of these things, plus shareholder activism, plus ESG, plus partnering with trans activists in deference to the Human Rights Campaign, plus de-banking Christian conservatives or Brexit supporters, plus countless other behaviors are the heart of woke capital.
To bring this back around to where we started, to Charles Gasparino’s declaration that “ESG is on its last legs”: so what? Gasparino is wrong. ESG is going underground a little bit, pulling back somewhat, being less “in-your-face.” But it is NOT dying. Even if were, however – and this is the most important thing to take away from this discussion – it would NOT be dispositive in the fight against woke capital. ESG is a tactic. If it dies – and believe us, we hope it will – the strategy of shareholder activism and the ethos of woke capital will replace it with something else.
This is MUCH bigger than support for shareholder proposals.