07 Nov PUBLIC PENSION CORNER, #20
NEWS:
I. Catholic University Launches Proxy Voting Effort
As I noted in these pages recently, the decision by Glass Lewis to abandon its house proxy vote recommendations should be seen as a sign that customized guidelines are likely the wave of the future in proxy voting. Right in cue, Catholic University announced that it has developed new faithful Catholic guidelines that align with Church doctrine and social teaching and will be offering those guidelines through both ISS and Glass-Lewis:
The U.S. Conference of Catholic Bishops has long offered advice for investing. While binding only on its own portfolio, its guidelines attest to the responsibilities Catholics have to advance the truth through their finances. In a 2021 update, the conference highlighted several principles for proclaiming the Gospel “in the midst of a complex and powerful economy.” Among them: Catholics shouldn’t invest in “companies, securities, or investment funds that produce a significant amount of revenue from immoral activities.” Strategies ought to “protect life, promote human dignity, act justly, enhance the common good, and provide care for the environment.”
Neither proxy adviser respected this counsel. Our colleagues at the Busch School of Business analyzed ISS’s 98-page “Catholic Faith-Based Voting Policy” and found significant divergence from the bishops’ guidelines. While the business stated that its votes would uphold church teaching on abortion, it made no reference to other issues involving human life, such as euthanasia, in vitro fertilization, embryonic stem-cell use, or human cloning. The Catholic Church considers these grave moral evils, and the bishops placed them at the top of their list of their “specific conference investment policies.”…
As the national university of the Catholic bishops, we approached ISS and Glass Lewis about developing guidelines that respect church teaching. It took some effort to convince them there was a sizable market for a proxy-voting service that applied the bishops’ guidelines faithfully—but to both companies’ credit, they listened and agreed to work with us. In recent months we created a set of guidelines directly based on those issued by the bishops. ISS and Glass Lewis will offer them to investors for use in the shareholder resolution season that begins next spring.
II. State Street Greets the New NZAMi by Pulling a BlackRock
State Street – the only one of the Big Three passive firms to have retained its American-based membership in the Net Zero asset Managers initiative – greeted the newly relaunched organization by following in BlackRock’s footsteps, pulling its US-based operations out, while leaving its European business in:
State Street Investment Management, one of the world’s largest investment managers, announced a significant change in its signatory status with climate-focused investment coalition the Net Zero Asset Managers (NZAM) initiative, pulling out its U.S. business from the group, with only its Europe and UK businesses remaining.
The move by State Street highlights the growing challenge facing global asset managers in dealing with increasingly disparate views over the role of ESG considerations in investment decision making, with political pressure in the U.S. leading some asset owners and funds to exclude managers with a sustainability focus and anti-ESG politicians even warning asset managers against considering sustainability factors, while European funds often require a more active sustainability focus in their mandate considerations.
State Street has found itself at the center of the anti-ESG attention in the U.S., including recently being targeted alongside its peers BlackRock and Vanguard in a multistate lawsuit accusing the asset managers of violating antitrust laws through their sustainable investment initiatives and involvement in climate coalitions.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“ESG: Sound and Fury Signifiying Nothing”
Tomorrow, and tomorrow, and tomorrow
Creeps in this petty pace from day to day
To the last syllable of recorded time;
And all our yesterdays have lighted fools
The way to dusty death. Out, out, brief candle!
Life’s but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more. It is a tale
Told by an idiot, full of sound and fury
Signifying nothing.
William Shakespeare, Macbeth, Act V, Scene 5, Lines 19-28
In the annals of ESG history, almost inarguably, the greatest victory the movement ever won took place just over four years ago, at the ExxonMobil annual meeting. A small, upstart hedge fund, Engine No. 1, managed somehow to orchestrate the partial takeover of the oil giant’s board, amassing enough support to elect three of its four outsider, fossil-fuel-skeptical director candidates. Engine No. 1 – the “little engine that could” – took on one of the biggest companies in the world and won. That victory showed the capital markets and everyone involved therein that “sustainability” was the wave of the future and that no one – not even the mighty ExxonMobil – could fight that future.
The Engine No. 1-Exxon battle has become an integral part of the ESG lore – both among supporters and detractors. US Ambassador to the European Union Andy Puzder used the story to make a point about ESG in his book, A Tyranny for the Good of Its Victims. I use it to demonstrate the interconnectedness of the biggest players in the stakeholder capital movement in my next book, tentatively titled The Dictatorship of Big Capital (which, fittingly, started out as a project with Andy Puzder). It is, in many ways, the quintessential story of ESG’s potential: former energy investors (coal, specifically) see the error of their ways, decide to fight back, assemble a coalition that agrees to do the “right thing,” and then succeeds in making a difference and in making the world a better place.
But did it? Did Engine No. 1 succeed? Did the coalition it assembled – which included the largest public pensions in the country, CalPERS and CalSTRS, as well as the Big Three passive asset management firms – change the world? Did the greatest victory in the ESG movement do anything? Anything at all?
Today, if you visit Engine No.1’s website, you’ll learn that the firm proudly proclaims that it is dedicated to building and investing “in companies that are powering innovation and driving the reindustrialization of the United States.” Maybe it’s just me, but that last bit, “reindustrialization,” doesn’t sound especially ESG-friendly. So, what does that mean? Apparently, it means investing primarily in…fossil fuel projects (and being grateful to President Trump for making that possible):
Engine No. 1 and Chevron U.S.A. Inc. (NYSE: CVX) announced today the formation of a partnership to build a new company to develop scalable, reliable power solutions for United States (U.S.) based data centers running on U.S. natural gas. Early actions of the Trump Administration are setting the critical foundation to encourage investment leveraging America’s energy abundance to enable America’s AI leadership. The joint development, in conjunction with GE Vernova (NYSE: GEV), aims to establish the first multi gigawatt-scale co-located power plant and data center during President Trump’s second term….
Chris James, founder and chief investment officer of Engine No. 1, said, “Energy is the key to America’s AI dominance. By using abundant domestic natural gas to generate electricity directly connected to data centers, we can secure AI leadership, drive productivity gains across our economy and restore America’s standing as an industrial superpower. This partnership with Chevron and GE Vernova addresses the biggest energy challenge we face.”
Oh.
It’s worth noting that Chris James, cited above, famously told the media that he founded Engine No. 1 and launched its attack on ExxonMobil because his high-school-aged son guilted him into doing so by asking him over dinner one night what he was doing to solve the “climate crisis.”
It’s also worth noting that Engine No. 1 is not the only player in the famous battle for the soul of ESG that has been generating headlines lately. ExxonMobil has also been in the news – for reasons related to ESG. Last week, for example, Exxon’s CEO Darren Woods warned the European Union that its persistent meddling in and distortion of the marketplace through climate regulation may chase its energy suppliers – Exxon included – away from the continent:
Executives at two of Europe’s top gas suppliers, ExxonMobil and QatarEnergy, on Monday warned they could stop doing business with the European Union if it does not significantly loosen a sustainability law that could impose fines of 5% of their global revenue.
Exxon CEO Darren Woods told Reuters on the sidelines of the ADIPEC meeting in Abu Dhabi that the EU’s Corporate Sustainability Due Diligence Directive would have “disastrous consequences” if adopted in its current form….
“If we can’t be a successful company in Europe, and more importantly, if they start to try to take their harmful legislation and enforce that all around the world where we do business, it becomes impossible to stay there,” Woods said.
That declaration comes on the heels of a different, albeit equally aggressive statement by Exxon of dissatisfaction with an aggressive government seeking to impose its climate radicalism extraterritorially:
Exxon Mobil sued California late Friday claiming that two new state laws that aim to fight climate change would violate the oil company’s free speech rights.
The two laws, passed in 2023 and known as the California Climate Accountability Package, would require thousands of large companies doing business in the state to calculate and report the greenhouse gas emissions created by the use of their products, along with the business risks that climate change represents for the companies….
For oil companies like Exxon, the new rules, which begin to take effect in 2026, mean calculating and then reporting the emissions caused by activities like the use of gas or diesel in cars and trucks.
Think about all of this for a minute. Less than five years after the biggest victory in ESG history, both parties in the tale – the conqueror and the conquered – are aggressively undermining the foundations of ESG and the entire stakeholder movement. The victor is busy promoting fossil fuel projects, while the supposedly vanquished is using its market might, trying its darnedest to upend climate-focused regulation on two continents.
As I say, this really is the quintessential story of ESG – although not in the way most people assumed it would be four years ago. It is not the story of ESG’s massive potential, but rather of ESG’s lack thereof. As ESG’s opponents have been saying for years, the entire strategy is premised on fantasies, on the idea that by focusing on something other than shareholder primacy, investors and corporations can do well by doing good. In the end, the good is largely imagined, while doing well requires a return to reality.
Engine No. 1’s hostile partial takeover of ExxonMobil – and the entire stakeholder/ESG movement, in turn – really is a tale full of sound and fury signifying nothing.
.
