12 Dec PUBLIC PENSION CORNER, #24: THE END OF AN ERROR
NEWS:
I. President Trump Targets Foreign-Owned Proxy Advisors
Yesterday, the White House released the text of President Trump’s long-anticipated executive order targeting Glass Lewis and Institutional Shareholder Services (ISS), the two largest owned proxy advisory services for their “politicization” of the proxy advisory process. The “Protecting American Investors from Foreign-Owned and Politically-Motivated Proxy Advisors” reads as follows:
Unbeknownst to many Americans, two foreign-owned proxy advisors, Institutional Shareholder Services Inc. and Glass, Lewis & Co., LLC, play a significant role in shaping the policies and priorities of America’s largest companies through the shareholder voting process. These firms, which control more than 90 percent of the proxy advisor market, advise their clients about how to vote the enormous numbers of shares their clients hold and manage on behalf of millions of Americans in mutual funds and exchange traded funds. Their clients’ holdings often constitute a significant ownership stake in the United States’ largest publicly traded companies, and their clients often follow the proxy advisors’ advice.
As a result, these proxy advisors wield enormous influence over corporate governance matters, including shareholder proposals, board composition, and executive compensation, as well as capital markets and the value of Americans’ investments more generally, including 401(k)s, IRAs, and other retirement investment vehicles. These proxy advisors regularly use their substantial power to advance and prioritize radical politically-motivated agendas — like “diversity, equity, and inclusion” and “environmental, social, and governance” — even though investor returns should be the only priority. For example, these proxy advisors have supported shareholder proposals requiring American companies to conduct racial equity audits and significantly reduce greenhouse gas emissions, and one continues to provide guidance based on the racial or ethnic diversity of corporate boards. Their practices also raise significant concerns about conflicts of interest and the quality of their recommendations, among other concerns. The United States must therefore increase oversight of and take action to restore public confidence in the proxy advisor industry, including by promoting accountability, transparency, and competition.
II. UK to Regulate ESG Ratings Services
The Financial Conduct Authority (FCA) – Great Britain’s chief financial regulatory body – has announced its intention to regulate ESG ratings agencies more directly and thoroughly. Among other things, the FCA’s new rules will force the agencies to disclose conflicts of interest and explicitly detail their methodologies:
Under the proposals, the Financial Conduct Authority would require ratings firms to disclose potential conflicts, such as when they both score companies on ESG performance and advise them on improvements. Providers would also need to clarify which ESG factors they assess and publish details on how they handle complaints.
The ESG ratings industry, currently subject to a voluntary code of conduct, has boomed in recent years. However, trust in these ratings remains uneven, with investors concerned about opaque methodologies and the risk of companies overstating their green credentials.
Britain’s finance minister Rachel Reeves wants to cement Britain as a world leader in sustainable finance, including by addressing the lack of transparency behind ESG ratings. The regulator said the rules would come into force in June 2028.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“THE END OF AN ERROR”
As I try to explain in the first half of The Dictatorship of Woke Capital, the history of ESG/Stakeholderism is complex and convoluted, to say the least. Generally, most analysts place the unofficial start of the movement in 2006, with the release of the United Nations’ Principles for Responsible Investment (PRI), which launched the voluntary scheme by which investors are encouraged to consider factors other than return on investment when making capital allocation decisions. While there is considerable merit in using this as a start-date, doing so nevertheless misses the rich academic, cultural, philosophical, and religious traditions that spawned the movement and made it as potent a project as it is. As I suggest in the introduction to the book, like most of our intellectual conflicts these days, the debate over ESG and stakeholderism has its roots in the Enlightenment. Or, to take that even one step further, given the religious component of the ideology that spawned ESG, one could even go back to the Reformation and to the emergence of Calvinism.
All of that said, for my money, the most important single moment in the rise of ESG occurred not in 1530, nor 1755, nor even in 2006. Rather, it took place in 2016, when one of the most important and visible figures in global banking and capital markets gave a speech that changed the course of modern finance. I describe it as follows in the book:
On September 22, 2016, Mark Carney, governor of the Bank of England and chair of the Monetary Policy Committee, gave a speech in Berlin in which he worded the narrative very carefully and very provocatively, in language specifically chosen to reframe the case for central bank intervention in financial and fiduciary terms. “A wholesale reassessment of prospects, as climate-related risks are re-evaluated,” he warned, “could destabilise markets, spark a pro-cyclical crystallisation of losses and lead to a persistent tightening of financial conditions: a climate Minsky moment.”84 A “Minsky moment” is a market term named for the economist Hyman Minsky, and it is used to designate the point at which a bull market has become so speculative and over-leveraged that it hits a peak and then tips over and crashes. What Carney was saying, in other words, is that he believes a time will come when markets will have better knowledge of the risks associated with climate change, and they will realize, as those risks are processed, that they had speculated wildly on securities that are unsuited for the new climate reality. And then the markets will crash.
This, then, was a watershed in global finance, the moment that the big banks, the monster investment firms, and the world’s central banks began framing climate change as a risk management issue rather than good corporate social policy. By insisting that climate change is a fiduciary issue and that anyone who disagrees is betraying his clients’ trust, the giants of global finance were not only able to change the narrative but were able to do so by claiming the fiduciary moral high ground as well. Suddenly a whole new realm of risk—and reward—opened up before the central banks and their clients.
What Carney did here, essentially, was to reinforce the idea of fossil fuel resources as probable “stranded assets.” ESG and, before that, Socially Responsible Investing existed before Carney, but primarily as functions of “double materiality.” They were important and substantive, in other words, but only in the ethereal, hypothetical sense that environmental responsibility could, one day, maybe be the difference between a functional business ecosystem and one that is dysfunctional and, ultimately, destructive. Using the Misnky Moment argument as a warning about stranded assets, however, Carney made the case that ESG was relevant in the sense of traditional financial materiality as well, that it had solid, real-world, pecuniary implications.
After Carney’s speech, the term “stranded assets” began showing up everywhere in investment discussions about energy, fossil fuel resources, and the importance of seeing beyond the nearest event horizon. The term had been used before, of course, but mostly by activists, environmentalists who wanted to convince the world that fossil fuels were doomed. After 2016, though, the term became a staple of investment arguments designed to highlight the energy “transition” and to shift the focus to “sustainability.” The transition is coming, ESG advocates insisted, and when it does, any prior investments in fossil fuels will be total losses.
In his now-infamous 2021 letter – the “focus on sustainability” letter – Larry Fink, the CEO of BlackRock, took up the stranded asset theme, insisting that he and his firm wanted no part of the dying fossil fuel industry and its soon-to-be worthless resources. “In the past year,” Fink wrote, “people have seen the mounting physical toll of climate change in fires, droughts, flooding and hurricanes. They have [also] begun to see the direct financial impact as energy companies take billions in climate-related write-downs on stranded assets and regulators focus on climate risk in the global financial system. And they are increasingly demanding that companies and investors take action.”
Fink followed that letter with countless media appearances and speeches in which he made the same point: the transition is coming; fossil fuel assets will be worthless. After considerable pushback from conservatives, in his 2022 letter, Fink tried to do a bit of damage control, insisting that stakeholder capitalism is real capitalism. He still, nevertheless, emphasized the same theme about the transition and stranded assets: “The physical and transition risks of climate change are increasingly clear… Energy companies are already writing down billions in stranded assets as the world accelerates toward net zero. These risks are already materializing – and they will only grow in scale and severity in the coming decades.”
As late as 2023, Faith Birol, the head of the International Energy Agency, was declaring his firm belief that all fossil fuel assets would be stranded and that investing in them was a mistake. “In the medium- and longer-term,” he said, oil and gas “may not be really profitable.”
Today, by contrast, everything has changed. Larry Fink himself long ago admitted that the transition to net zero will take far longer than activists expect and that it may, indeed, never happen. Environmental activist groups lament that governments and private actors are investing only a fraction of what is necessary to achieve net zero by 2050. Fossil fuel advocates make the same observations, although notably more sanguinely. Energy companies themselves are cutting their investments in renewables and redoubling their efforts in cheap, efficient fossil fuels. Just this week, “ExxonMobil said it would slash planned spending on low-carbon projects by a third, as oil majors pare back clean energy initiatives and pivot back to fossil fuels.”
In other words, the energy transition is stalled, which means that fossil fuel resources are far more likely to become appreciating assets than stranded assets. Oil prices may be low right now, making development of new resources a risky proposition, but it won’t stay that way forever. In any case, the centrality of fossil fuels in global energy production is not going to end any time soon. And that, in turn, means that the pecuniary justification for the “E” portion of ESG has no merit whatsoever. It’s done. Over. Finished. Or at least it should be.
Two recent news stories have generated much discussion in both the ESG and anti-ESG communities. Both demonstrate the collapse of the ESG pecuniary argument. The first, summarized by The Wall Street Journal as follows, is important in part because the study has been cited countless times, including by financial services firms like JPMorgan, seeking to justify its ESG efforts. And yet, the study is a fraud:
The study was a shocker when it was first published in April 2024. Scientists at Germany’s Potsdam Institute for Climate Impact Research projected that climate change could cause $38 trillion in economic damage a year by 2049. To put that number in perspective, the GDP of North America last year was about $31.4 trillion. The study’s finding would mean that storms, heat waves and other calamities, supposedly caused by climate change, would wipe out the equivalent of the North American economy, and then some, every year.
The study also forecast that rising CO2 emissions would cause a 62% reduction in global GDP by 2100, and that damage over the next quarter of a century would exceed the costs of mitigating global warming by six times….
The study had so many errors that Nature has now retracted it, but what an embarrassment. “Post-publication, the results were found to be sensitive to the removal of one country, Uzbekistan, where inaccuracies were noted in the underlying economic data for the period 1995–1999,” the retraction says.
The retraction is also a black eye for the Network for Greening the Financial System, a group of central banks and financial regulators that incorporated the study’s projections into its bank climate stress test scenarios. The Federal Reserve belonged to the network until Chair Jerome Powell withdrew in January.
Yikes.
The second story is even more important, in my opinion, for reasons that will be obvious (emphasis added):
[The] Prime Minister…of Canada signed a sweeping agreement on Thursday that laid the groundwork for a new oil pipeline to expand Alberta’s oil sands, exempting the province’s energy industry from several environmental laws.
The agreement with Alberta, part of [the Prime Minister’s] plan to curb Canada’s trade dependence on the United States, swings Canadian policy away from measures meant to fight climate change to focus instead on growing the oil and gas industry.
This would, of course, be a huge story about liberal Canada under any Prime Minister. That the Prime Minister in question – the man who is swinging “Canadian policy away from measures meant to fight climate change to focus instead on growing the oil and gas industry” – is none other than Mark Carney makes the story that much bigger and more important.
Even Mr. Minsky Moment has given up the fight. He may pay lip service to the idea of an “energy transition” but he doesn’t believe that it’s imminent. Certainly, he doesn’t believe that the Alberta oil pipeline will become a “stranded asset.”
The fight for “E” in ESG should, by all rights, be over. That it isn’t shows that those still in the game are zealots, mostly, not responsible fiduciaries.
