20 Jun PUBLIC PENSION CORNER, #3
Good morning,
If you have received this email, then you have been identified by The Political Forum or one of this newsletter’s sponsors as an important decision-maker in state government and public pension management.
Each week, the “Public Pension Corner” – a publication of The Political Forum – will bring you the latest and most important news on ESG, stakeholderism, and other threats to the financial stability of public coffers and the fiduciary responsibilities of public officials. Additionally – and most importantly – each issue of the Public Pension Corner will feature the astute commentary and forecasting of Stephen Soukup, who is the Publisher of The Political Forum, a 30-year capital-markets research veteran, an expert in ESG and stakeholderism, and the author of The Dictatorship of Woke Capital.
Please feel free to respond to this email with any questions you may have – questions about the newsletter, the problems associated with ESG, or any matters that seem relevant. Please feel free to forward this to anyone else whom you believe may find it useful. Know as well that this is but the first product offered by The Political Forum to help public fiduciaries navigate these treacherous waters.
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The Political Forum
NEWS:
I. SEC Drops Proposed Biden Rules
Last week, the SEC withdrew two ESG-related rules, both leftovers from the Biden administration, one that would have required greater “greenwashing” disclosures, and another that would have reformed the shareholder proposal submission process:
The SEC first proposed the rule to require enhanced disclosures from investment advisers and companies on ESG practices in May 2022, and Congressional Democrats had urged the SEC to finalize its anti-greenwashing rule for ESG funds under the prior administration. The final rule was initially expected in April 2024, pushed to October 2024 and ultimately went unreleased before the change in administration.
The rule would have required investment advisers and companies to make additional disclosures about their ESG strategies and practices in their prospectuses, annual reports and brochures; implemented a comparable disclosure approach for investors to easily compare ESG funds; and required environmentally-focused funds to disclose their portfolio greenhouse gas emissions, according to an agency fact sheet. …
The agency proposed its update to the shareholder proposal and resubmission process in July 2022, which would have replaced a rule from the prior Trump administration’s SEC that raised thresholds for stocks required to submit a proposal to company boards among other changes. A judge in the federal district court for Washington, D.C. recently dismissed a lawsuit from responsible investing groups challenging the Trump administration’s 2020 rule.
II. Texas Looks to Regulate Proxy Advisors
On June 2, the Texas legislature sent a bill to Governor Greg Abbott that would require proxy advisory services to alert Texas-based companies when their shareholder recommendations include ESG or other non-pecuniary considerations. The bill, which Gov. Abbott is expected to sign, will empower Texas companies to seek injunctive relief for such recommendations.
If recommendations do consider what the bill defines as nonfinancial reasons like ESG, diversity, equity or inclusion, a social credit or sustainability factors, proxy advisers would have to prominently disclose this information to clients and on their websites, and notify Texas companies and the state attorney general within 24 hours, among other provisions.
The bill would authorize an “affected party,” such as a shareholder or company receiving proxy advice, to seek a declaratory judgment or injunctive relief. It also allows the Texas attorney general to intervene in such cases after receiving notice. …
A legislative analysis of SB 2337 for the Senate Trade, Workforce & Economic Development Committee said the measure aims to address “conflicts of interest” and “deceptive practices” in the proxy advisory industry. It also raised concerns about proxy firms giving conflicting advice to different clients on the same proposal and offering corporate governance consulting services, which it said creates further conflicts.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“Is the ESG War Over?”
Just over a week ago, Texas Comptroller Glenn Hegar declared victory in the battle against ESG. According to Hegar, the forces of good and right fought hard, fought well, and achieved their goals. Now, therefore, is the time to offer a just and durable peace and move on to enjoy the spoils of war:
BlackRock Inc. was removed from Texas’ blacklist of companies that boycott fossil fuels, ending a three-year standoff over the environmental policies of the world’s largest asset manager.
The move means pension funds and other state-run investment accounts — which manage more than $300 billion of assets — will be allowed to purchase BlackRock shares, invest in its exchange-traded funds and hire the firm for advice and risk management. Inclusion on the list resulted in some Texas entities pulling billions of dollars of assets from the firm.
State Comptroller Glenn Hegar said BlackRock had rolled back many of its green-focused initiatives, including exiting the Net Zero Asset Managers initiative and stepping back from the Climate Action 100+, a group devoted to cutting greenhouse gas emissions.
On the one hand, it is inarguably good news that BlackRock has spent as much time, effort, and money as it has trying to repair its reputation with the Texas Comptroller’s office and to win back the right to do business with the state of Texas. Good for them. It shows that even with almost $11 trillion in assets under management, the firm is willing to do something to assuage its customers’ concerns.
On the other hand, this decision raises some questions. Indeed, it raises at least three serious questions about the very nature of the strategy employed by the states to push back against ESG and whether the results were worth the effort.
The first question we must answer is what BlackRock did to win removal from the Texas “no-fly” list. The second, which is very closely related, is whether what BlackRock did really demonstrated contrition and, more to the point, a willingness to operate differently moving forward. The third, and likely the most important question, is what states like Texas can do now and in the future to prevent having to do this again, to prevent their external fiduciary partners from using their scale and power to inject political or other non-pecuniary factors into the management of the state’s finances.
To start, according to Comptroller Hegar:
BlackRock has stepped back from full participation in the Climate Action 100+ and completely exited the Net Zero Asset Managers initiative. It has dramatically reduced the number of fund offerings that prohibit investment in oil and gas, and it shifted away from blanket policies that ignore the critical need for fossil fuel-based energy generation now and long into the future. The firm also has acknowledged the real social and economic costs, both in Texas and globally, that come from limiting investment in the oil and gas industry. In short, it is engaging in a more intellectually honest conversation.
Now, to be fair, all of this is “accurate.” Unfortunately, those scare quotes are necessary because Hegar’s language here is confusing – and likely intentionally so. Hegar writes, for example, that “BlackRock has stepped back from full participation in the Climate Action 100+….” This is true, but it’s also, paradoxically, untrue. Whereas many other American asset managers exited Climate Action 100+ entirely, BlackRock did not. It merely shifted its membership to BlackRock International. Although that is, technically, a “step back,” it is a baby step, at best. Hegar also notes that BlackRock “has dramatically reduced the number of fund offerings that prohibit investment in oil and gas.” Fair enough, I suppose – but only as long as we also acknowledge that this was strictly a market-induced decision and not something BlackRock did to appease its critics. To be blunt, the funds restricting oil and gas investments were losing money and, consequently, losing investors. If they weren’t, they’d still be open. Texas didn’t force BlackRock’s hand here. The beta associated with divestment from oil and gas did.
Additionally, Hegar writes that BlackRock has “shifted away from blanket policies that ignore the critical need for fossil fuel-based energy generation now and long into the future.” In truth, of course. BlackRock always invested in oil, gas, and even coal. Its goal – then and now – is to “engage” fossil fuel companies, just like it “engaged” ExxonMobil on behalf of Engine No. 1 and its board insurgency. Hegar either misunderstands the point of ESG strategies or he’s hoping his audience does. Either way, his decision and its justification are messy and confounding.
In the meantime, one might wonder if these comparatively minor concessions on BlackRock’s part should be considered significant enough to earn the firm a reprieve from ESG criticism. Given what’s noted above, as well as the firm’s history, one might do well to remain cautious. And then, of course, there’s all of this:
BlackRock’s response to the ESG backlash looks like an expert case of “greenhushing….
BlackRock still employs more than 700 “global sustainable and transition specialists.” It still offers at least 305 ESG-labeled funds, of which 81% include some level of exclusion of fossil fuel companies, according to Morningstar Sustainalytics. And its $12.5 billion acquisition last year of the private equity firm Global Infrastructure Partners was largely a play for energy transition-related profits: “If we are going to decarbonize the world… that creates compelling investment opportunities for our clients,” Fink said in announcing the GIP deal.
Oh.
Finally, one must address the broad issue of whether it benefits Texas – and the states more generally – to make peace with “banned” financial services firms in the long run. To this end, it’s important to remember that consolidation in banking and asset management has been a reality for the last several decades. It has accelerated significantly since the turn of the century, and since the Great Financial Crisis, especially. More to the point, it is largely inarguable that this consolidation – the “centralization of capital” – is less than an ideal condition, in that it places immense power in exceptionally few hands.
As I have noted elsewhere, it is the centralization of capital and power in the hands of only a few men and women that enabled the ESG/stakeholder phenomenon in the first place: “The wokecapital/ESG movement is a problem, however, because its ideology is embraced not just by a handful of small and moderate-sized firms but by the biggest investment firms in the world…with the power to coerce corporations to bend to their will.”
What this means in practice is that the no-fly lists/blacklists created by the states in response to ESG are important, and not just as the means to punish ESG-adjacent asset managers. They can also be revolutionary. If state financial officers commit to maintaining their blacklists, even in the face of intense lobbying (such as was conducted by BlackRock in Texas), then they can boost their fiduciary bona fides, even as they take a small step to reorient the asset management business. By encouraging the decentralization of asset management, the states can find and employ asset managers using strategies that consistently beat the passive benchmarks, and they can empower smaller managers to compete more effectively with the Big Three (or the Big Ten or…whatever). They can strike a small but important blow against the concentration of capital.
As for banks, the dynamic here is a little different. The reconciliation of the big banks with the states – whether initiated by the states or the banks – is likely inevitable. For starters, banks, generally, are less aggressively immersed in the ESG/stakeholder world than are asset managers. Additionally, as providers of credit, ESG-aware bankers have tended to focus on criteria that are more traditionally material than political (at least by comparison to asset managers). Finally, many of the big banks seem more earnestly dedicated to the process of reconciliation. They recognize that they need the states just as much as the states need them. And to this last point, states do, in fact, have capital needs that require them to do business with national banks, which is not the case with asset managers.
In the end, then, if state financial officers and other public fiduciaries truly want to make a difference, if they truly want to ensure that their states and their constituents are well served and will not be coerced again in the future by financial services companies, then they would be wise to consider following a path rather different from Glenn Hegar’s. “Yes” to making efforts to reconcile with the big banks. “No” to similar efforts with big asset managers. If the latter want to reconcile, then their burden should be on them to make 100% of the effort.
NEWS:
I. SEC Drops Proposed Biden Rules
Last week, the SEC withdrew two ESG-related rules, both leftovers from the Biden administration, one that would have required greater “greenwashing” disclosures, and another that would have reformed the shareholder proposal submission process:
The SEC first proposed the rule to require enhanced disclosures from investment advisers and companies on ESG practices in May 2022, and Congressional Democrats had urged the SEC to finalize its anti-greenwashing rule for ESG funds under the prior administration. The final rule was initially expected in April 2024, pushed to October 2024 and ultimately went unreleased before the change in administration.
The rule would have required investment advisers and companies to make additional disclosures about their ESG strategies and practices in their prospectuses, annual reports and brochures; implemented a comparable disclosure approach for investors to easily compare ESG funds; and required environmentally-focused funds to disclose their portfolio greenhouse gas emissions, according to an agency fact sheet. …
The agency proposed its update to the shareholder proposal and resubmission process in July 2022, which would have replaced a rule from the prior Trump administration’s SEC that raised thresholds for stocks required to submit a proposal to company boards among other changes. A judge in the federal district court for Washington, D.C. recently dismissed a lawsuit from responsible investing groups challenging the Trump administration’s 2020 rule.
II. Texas Looks to Regulate Proxy Advisors
On June 2, the Texas legislature sent a bill to Governor Greg Abbott that would require proxy advisory services to alert Texas-based companies when their shareholder recommendations include ESG or other non-pecuniary considerations. The bill, which Gov. Abbott is expected to sign, will empower Texas companies to seek injunctive relief for such recommendations.
If recommendations do consider what the bill defines as nonfinancial reasons like ESG, diversity, equity or inclusion, a social credit or sustainability factors, proxy advisers would have to prominently disclose this information to clients and on their websites, and notify Texas companies and the state attorney general within 24 hours, among other provisions.
The bill would authorize an “affected party,” such as a shareholder or company receiving proxy advice, to seek a declaratory judgment or injunctive relief. It also allows the Texas attorney general to intervene in such cases after receiving notice. …
A legislative analysis of SB 2337 for the Senate Trade, Workforce & Economic Development Committee said the measure aims to address “conflicts of interest” and “deceptive practices” in the proxy advisory industry. It also raised concerns about proxy firms giving conflicting advice to different clients on the same proposal and offering corporate governance consulting services, which it said creates further conflicts.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“Is the ESG War Over?”
Just over a week ago, Texas Comptroller Glenn Hegar declared victory in the battle against ESG. According to Hegar, the forces of good and right fought hard, fought well, and achieved their goals. Now, therefore, is the time to offer a just and durable peace and move on to enjoy the spoils of war:
BlackRock Inc. was removed from Texas’ blacklist of companies that boycott fossil fuels, ending a three-year standoff over the environmental policies of the world’s largest asset manager.
The move means pension funds and other state-run investment accounts — which manage more than $300 billion of assets — will be allowed to purchase BlackRock shares, invest in its exchange-traded funds and hire the firm for advice and risk management. Inclusion on the list resulted in some Texas entities pulling billions of dollars of assets from the firm.
State Comptroller Glenn Hegar said BlackRock had rolled back many of its green-focused initiatives, including exiting the Net Zero Asset Managers initiative and stepping back from the Climate Action 100+, a group devoted to cutting greenhouse gas emissions.
On the one hand, it is inarguably good news that BlackRock has spent as much time, effort, and money as it has trying to repair its reputation with the Texas Comptroller’s office and to win back the right to do business with the state of Texas. Good for them. It shows that even with almost $11 trillion in assets under management, the firm is willing to do something to assuage its customers’ concerns.
On the other hand, this decision raises some questions. Indeed, it raises at least three serious questions about the very nature of the strategy employed by the states to push back against ESG and whether the results were worth the effort.
The first question we must answer is what BlackRock did to win removal from the Texas “no-fly” list. The second, which is very closely related, is whether what BlackRock did really demonstrated contrition and, more to the point, a willingness to operate differently moving forward. The third, and likely the most important question, is what states like Texas can do now and in the future to prevent having to do this again, to prevent their external fiduciary partners from using their scale and power to inject political or other non-pecuniary factors into the management of the state’s finances.
To start, according to Comptroller Hegar:
BlackRock has stepped back from full participation in the Climate Action 100+ and completely exited the Net Zero Asset Managers initiative. It has dramatically reduced the number of fund offerings that prohibit investment in oil and gas, and it shifted away from blanket policies that ignore the critical need for fossil fuel-based energy generation now and long into the future. The firm also has acknowledged the real social and economic costs, both in Texas and globally, that come from limiting investment in the oil and gas industry. In short, it is engaging in a more intellectually honest conversation.
Now, to be fair, all of this is “accurate.” Unfortunately, those scare quotes are necessary because Hegar’s language here is confusing – and likely intentionally so. Hegar writes, for example, that “BlackRock has stepped back from full participation in the Climate Action 100+….” This is true, but it’s also, paradoxically, untrue. Whereas many other American asset managers exited Climate Action 100+ entirely, BlackRock did not. It merely shifted its membership to BlackRock International. Although that is, technically, a “step back,” it is a baby step, at best. Hegar also notes that BlackRock “has dramatically reduced the number of fund offerings that prohibit investment in oil and gas.” Fair enough, I suppose – but only as long as we also acknowledge that this was strictly a market-induced decision and not something BlackRock did to appease its critics. To be blunt, the funds restricting oil and gas investments were losing money and, consequently, losing investors. If they weren’t, they’d still be open. Texas didn’t force BlackRock’s hand here. The beta associated with divestment from oil and gas did.
Additionally, Hegar writes that BlackRock has “shifted away from blanket policies that ignore the critical need for fossil fuel-based energy generation now and long into the future.” In truth, of course. BlackRock always invested in oil, gas, and even coal. Its goal – then and now – is to “engage” fossil fuel companies, just like it “engaged” ExxonMobil on behalf of Engine No. 1 and its board insurgency. Hegar either misunderstands the point of ESG strategies or he’s hoping his audience does. Either way, his decision and its justification are messy and confounding.
In the meantime, one might wonder if these comparatively minor concessions on BlackRock’s part should be considered significant enough to earn the firm a reprieve from ESG criticism. Given what’s noted above, as well as the firm’s history, one might do well to remain cautious. And then, of course, there’s all of this:
BlackRock’s response to the ESG backlash looks like an expert case of “greenhushing….
BlackRock still employs more than 700 “global sustainable and transition specialists.” It still offers at least 305 ESG-labeled funds, of which 81% include some level of exclusion of fossil fuel companies, according to Morningstar Sustainalytics. And its $12.5 billion acquisition last year of the private equity firm Global Infrastructure Partners was largely a play for energy transition-related profits: “If we are going to decarbonize the world… that creates compelling investment opportunities for our clients,” Fink said in announcing the GIP deal.
Oh.
Finally, one must address the broad issue of whether it benefits Texas – and the states more generally – to make peace with “banned” financial services firms in the long run. To this end, it’s important to remember that consolidation in banking and asset management has been a reality for the last several decades. It has accelerated significantly since the turn of the century, and since the Great Financial Crisis, especially. More to the point, it is largely inarguable that this consolidation – the “centralization of capital” – is less than an ideal condition, in that it places immense power in exceptionally few hands.
As I have noted elsewhere, it is the centralization of capital and power in the hands of only a few men and women that enabled the ESG/stakeholder phenomenon in the first place: “The wokecapital/ESG movement is a problem, however, because its ideology is embraced not just by a handful of small and moderate-sized firms but by the biggest investment firms in the world…with the power to coerce corporations to bend to their will.”
What this means in practice is that the no-fly lists/blacklists created by the states in response to ESG are important, and not just as the means to punish ESG-adjacent asset managers. They can also be revolutionary. If state financial officers commit to maintaining their blacklists, even in the face of intense lobbying (such as was conducted by BlackRock in Texas), then they can boost their fiduciary bona fides, even as they take a small step to reorient the asset management business. By encouraging the decentralization of asset management, the states can find and employ asset managers using strategies that consistently beat the passive benchmarks, and they can empower smaller managers to compete more effectively with the Big Three (or the Big Ten or…whatever). They can strike a small but important blow against the concentration of capital.
As for banks, the dynamic here is a little different. The reconciliation of the big banks with the states – whether initiated by the states or the banks – is likely inevitable. For starters, banks, generally, are less aggressively immersed in the ESG/stakeholder world than are asset managers. Additionally, as providers of credit, ESG-aware bankers have tended to focus on criteria that are more traditionally material than political (at least by comparison to asset managers). Finally, many of the big banks seem more earnestly dedicated to the process of reconciliation. They recognize that they need the states just as much as the states need them. And to this last point, states do, in fact, have capital needs that require them to do business with national banks, which is not the case with asset managers.
In the end, then, if state financial officers and other public fiduciaries truly want to make a difference, if they truly want to ensure that their states and their constituents are well served and will not be coerced again in the future by financial services companies, then they would be wise to consider following a path rather different from Glenn Hegar’s. “Yes” to making efforts to reconcile with the big banks. “No” to similar efforts with big asset managers. If the latter want to reconcile, then their burden should be on them to make 100% of the effort.
