16 Jan PUBLIC PENSION CORNER, #27: ESG and the Maginot Line
NEWS:
I. CalPERS Doubles Down on Politics
The California Public Employee Retirement System (CalPERS), which is the largest public pension plan in the country, as well as one of the poorest performing, has decided to compound the decade-plus politicization of its investments by hiring a new Chief Diversity, Equity, and Inclusion Officer to help integrate DEI into the firm’s investments:
CalPERS, which faces an estimated $166 billion shortfall, insists the position won’t influence financial choices. Shari Slate was hired for the job with base compensation of $221,580, though neither her Linkedin profile nor the news release indicate she has any experience in the finance industry.
CalPERS’ May 2025 state paperwork for the position says responsibilities include “integrating DEI principles into CalPERS’ investment practices, where the Chief DEI Officer collaborates with the Investment Office,” and “collaborating with investment groups to integrate DEI into financial decision-making, advocating for equity-driven investment strategies, and ensuring that CalPERS’ investment portfolio reflects its commitment to sustainability, social responsibility, and equitable outcomes.”
The document also says the chief DEI officer will recruit talent with expertise in “DEI to support investment strategies, including proxy voting,” and “Environmental, Social, and Governance (ESG) to enhance CalPERS’ ESG investment strategies.”
II. In ESG-Friendly Europe, Nuclear Weapons Now Qualify
Just before the end of the year, the European Union published a document clarifying what types of weapons do and do not qualify under its “sustainable” investment label. And as it turns out, nukes are ESG compliant:
On the second-last day of 2025, the European Union published a Commission Notice to advise on which types of defence investments fit its sustainable finance framework.”…
The only four categories of weapons expressly outlawed by majority of EU states are personnel mines, cluster munitions, biological and chemical weapons. Atomic bombmakers get a pass because, while all members are anti proliferation, only Austria, Ireland and Malta have signed the Treaty on the Prohibition of Nuclear Weapons.
The change in wording also allows the ESG label to be applied to companies that handle depleted uranium (controversial because it’s used by mostly US defence contractors for anti-tank ammunition) and white phosphorus (highly toxic, but not considered to be a chemical weapon).
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“ESG and the Maginot Line”
The Trump administration has been very active and very strong in responding to the problems and risks associated with ESG. In particular, its recent executive order addressing the proxy advisory services – Institutional Shareholder Services (ISS) and Glass Lewis – and its efforts to rescind and rewrite the Biden administration’s Labor Department rule on ESG in ERISA-governed plans have been exceptionally valuable in the long struggle to protect investors and clarify the fiduciary duties of investment professionals.
I mention all of this for a reason, namely because I don’t want any of what follows to be misconstrued as criticism of the administration generally or especially its Labor Department, which is doing yeoman’s work in addressing the issues related to the politicization of business and capital markets.
Nevertheless, I can’t help but shake the feeling that we – all of us who are pushing back against ESG – are, perhaps, still fighting the last war, like the French with their Maginot Line, losing sight of the bigger threat and the broader risks to free and fair capital markets.
Consider, for example, the long, continuous slog to alert the political class, average investors, the financial media, and everyone else about the risks posed to the world by Larry Fink and BlackRock. For years, it has been clear to everyone, everywhere that Fink is the Sauron of the investment world (and BlackRock his Mordor). BlackRock has been rightly vilified for forcing ESG on American markets and for only half-heartedly walking it back in the face of the backlash. Every Tom, Dick, and Elon knows that BlackRock is bad and Fink is its wicked leader.
And yet…
BlackRock ended December 2025 with a record $14.042 trillion in assets under management, up 21.6% year over year…. BlackRock continues to outperform most of its traditional asset management peers from an organic AUM growth perspective, as its mix of index funds and exchange-traded funds appeals more to investors than its active products…. Net long-term inflows of $268 billion in the fourth quarter represented an annualized organic AUM growth rate of 8.6%, well above our annual target of 3%-5%.
Almost a decade of pushing back against Fink and BlackRock, making them the center of the American campaign against ESG, and…well…Larry keeps laughing all the way to the bank.
And if you think that $14 trillion is AUM sounds like a lot of money, just wait until you add in Vanguard’s $11 trillion and State Street’s $6 trillion. Combined, the “Big Three” – also the target of an extended anti-ESG campaign – have more than $31 trillion in assets under management. For perspective, that’s about 12% of all the investable assets (equities, bonds, gold, etc.) in the world. And their share is only going to keep growing:
Around $1 trillion was pulled from active equity mutual funds over the year, according to estimates from Bloomberg Intelligence using ICI data, marking an 11th year of net outflows and, by some measures, the steepest of the cycle. By contrast, passive equity exchange-traded funds got more than $600 billion….
The exits happened gradually as the year progressed, with investors reassessing whether to pay for portfolios that looked meaningfully different from the index, only to be forced to live with the consequences when that difference didn’t pay off….
Contrary to pundits who thought they saw an environment where stock picking could shine, it was a year in which the cost of deviating from the benchmark remained stubbornly high.
As I have argued elsewhere, there are serious problems associated with passive investing in general – short-circuiting of the market’s price-discovery mechanism, decline in intra-sector competition (the common ownership theory), etc. The biggest problem of all, however, is the concentration of capital and the concentration of power that the ongoing passive revolution enables:
In 2018, John C. Coates, the John F. Cogan Jr. professor of law and economics at Harvard Law School, wrote an essay called “The Future of Corporate Governance Part I: The Problem of the Twelve.” He argued that passive index investing would lead to major distortions in corporate governance and corporate behavior. “The effect of indexation,” he wrote, “will be to turn the concept of ‘passive’ investing on its head and produce the greatest concentration of economic control in our lifetimes.”
That same year, Jack Bogle wrote an op-ed for the Wall Street Journal in which he wondered if, perhaps, his creation had become too successful for its own — or anyone else’s — good. The passive investment revolution he inaugurated had, unintentionally but inarguably, given enormous amounts of capital and, by extension, enormous economic and political power to a very small collection of men and women. “Three index fund managers,” he wrote, “dominate the field with a collective 81 percent share of index fund assets,” a condition that he deemed unwise, uncompetitive and ultimately unhealthy for the function of free and fair capital markets. Bogle was unflinching in his assessment, despite the fact that one of those “fund managers” was the company he had founded forty-four years earlier. He knew that those firms — Vanguard, BlackRock and State Street, known collectively as “the Big Three” of passive asset management — had become so big and so powerful that they could intimidate corporate executives into doing exactly what they insisted, whether it was ultimately good for the company and its shareholders or not.
In other words, Larry Fink and BlackRock pushed ESG on the markets because they could, because they had the power to do so. They survived the pushback and even thrived in its wake because they could, because they had the power to do so. And they are continuing to grow, to amass the power to do whatever they want, to accrue the wherewithal to survive any negative reaction if they make a mistake.
Or to put it bluntly: just because they lost (or are losing) the tussle over ESG, that doesn’t mean they’re beaten. Indeed, they’re getting stronger, even as they “lose.”
Unless and until we, collectively, find a way to counter the power of the Massive Passives, we will live with the knowledge that they can do whatever they want, whenever they want, whatever that might be.
Beating ESG is great – and we should all be grateful for the valiant efforts of our allies in this fight – but it’s only the beginning, not the end of the struggle.
