10 Jul PUBLIC PENSION CORNER, #4

Good afternoon.

To reiterate:

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.

Finally, please make note of our sponsors, all of whom are and have long been dedicated to helping public fiduciaries meet their obligations fully and transparently.

Many thanks,

The Political Forum

NEWS:

I. European Investors Push Back Against ESG Deregulation

European institutional investors who are keenly interested in sustainability and ESG have been frustrated by the EU’s ongoing efforts to roll back its own regulations.  Regulations were enacted in the heady days of ESG’s triumph but are increasingly seen as burdensome by EU member nations and European-based corporations.  The regulatory relief is deemed necessary to maintain competitiveness with American corporations, yet many large institutional investors are resistant and are seeking alternative regulatory means:

After being bludgeoned in the US, ESG’s sudden regulatory decline in Europe has left institutional investors exploring new levers to force companies to take environmental, social and governance metrics more seriously.

Asset managers and asset owners based in northern Europe say they’re ready to cut allocations to companies they think are using a lack of regulations as an excuse to be less transparent about their ESG risks. In interviews with Bloomberg, they also say they’re ready to consider legal steps to protect their portfolios from climate change and human rights risks.

The development follows a major about-face in Europe, which has long been the biggest market for ESG, with more than 80% of the world’s sustainable fund assets. After taking an early lead on ESG, policymakers in the European Union are now significantly winding back earlier ambitions so that only a fraction of the companies once in scope still face sustainable reporting and due diligence requirements.

II. EU Nations Demand Regulators Cut Again

And speaking of which…

A group of 18 (out of 27) EU member states sent a letter this week to the European Commission demanding that it relax its deforestation rule, which is scheduled to go into effect in December.  As has been the case with most such requests, the member states insist that the regulation will severely inhibit their competitiveness:

Most European Union countries have demanded further changes to the bloc’s anti-deforestation law, saying some of its producers cannot be expected to meet its terms and face a competitive disadvantage, a letter seen by Reuters showed….

Brussels has already delayed its launch by a year and cut back reporting rules following criticism from trading partners, including the United States, as well as from EU countries.

Of the EU’s 27 member countries, agriculture ministers from 18 wrote to the Commission on Monday, demanding the EU rules are not applied to countries deemed to have a low risk of deforestation. They should stick to national measures instead, they said.

COMMENTARY

By Stephen R. Soukup, President and Publisher, The Political Forum

“California, ESG, and Luxury Beliefs?”

California, it seems, is struggling to maintain its role as the vanguard of the revolution (the iskra, as Lenin would call it).  Like their counterparts in Europe, California’s political leaders promised to save the world while also “transitioning” and elevating their economies (doing well by doing good, to coin a phrase).  They promised to do so by “investing” in green technology, advocating for alternative fuels, making fossil fuels prohibitively more expensive, and enacting other policies that just happened to fit perfectly with their ideological agenda.  Today, however – also like their counterparts in Europe (see above) – California’s political leaders find themselves struggling under the regulatory burdens they created, fighting to keep up with shifting priorities and hoping against hope that they can walk their onerous (but planet-saving!) rules back far enough and fast enough to salvage their economies without making their erstwhile supporters too terribly unhappy.  Politico has the details:

Stung by the party’s sweeping losses in November and desperate to win back working-class voters, the Democratic Party is in retreat on climate change. Nowhere is that retrenchment more jarring than in the nation’s most populous state, a longtime bastion of progressive politics on the environment.

In the past two weeks alone, California Democrats have retrenched on environmental reviews for construction projects, a cap on oil industry profits and clean fuel mandates. Elected officials are warning that ambitious laws and mandates are driving up the state’s onerous cost of living, echoing longstanding Republican arguments and frustrating some allies who say Democrats are capitulating to political pressure….

“California was the vocal climate leader during the first Trump administration,” said Chris Chavez, deputy policy director for the Coalition for Clean Air. “It’s questionable whether or not that leadership is still there.”

Politico – being Politico – gets the story mostly wrong here.  It attributes the rollback in climate change and other environmental policies to the same thing it attributes everything it considers negative, the omnipresent and (apparently) omnipotent Donald Trump: “Donald Trump is coming for California’s signature climate policies — and so is California.”  You see, the poor, put-upon politicians of California have no choice but to try to keep pace with the president.  They don’t want to roll back their environmental policies.  They want to push forward.  But that damn Donald Trump makes them do things they wouldn’t otherwise do.  He’s forcing their hand.

Or so the story goes.

Even when Politico gets closer to the truth, it still misses the point – and so, for that matter, do California’s politicians, political consultants, policy analysts and everyone else involved in this mess: “‘For a lot of Democrats, the 2024 election was a reality check about the importance of cost-of-living issues and affordability for Californians,’ said Mark Baldassare, survey director at the Public Policy Institute of California. ‘That’s given policymakers some pause about what is actually workable in terms of environmental policy.’”

What the political class in California – and Washington and Brussels and everywhere else left-liberals congregate – doesn’t understand is that none of this is about elections or the workability of certain public policies.  This really isn’t a political matter at all – or at least it shouldn’t be.  Rather, this is an economic matter, a financial matter, a reality matter.  The liberal establishment isn’t fighting Donald Trump here or even the electoral success he achieved by attacking their policies.  It’s fighting reality itself.

As I have noted elsewhere, radical environmental policies and ESG (Environmental, Social, and Governance investing) are “luxury” beliefs.  They don’ exist – can’t exist – in practical, sensible settings.  They constitute “an indulgence, something that occurs on a mass scale only when times are good and money is plentiful for such extraneous, non-functional…expenditures.”  When the good times and the practically free money disappear, luxury beliefs look less like smart, forward-looking practices and more like the species of corruption they really are.  Or, as Warren Buffett put it, more pithily: “Only when the tide goes out do you discover who’s been swimming naked.”

In turn, what this suggests is that California’s environmental indulgences, just like BlackRock’s dalliance with ESG, and just like the EU’s regulatory paroxysm, were largely the byproducts of the mistaken belief that economic and monetary realities could be suspended indefinitely.  For 15 years, the Federal Reserve and the rest of the West’s central banks kept interest rates artificially low, enabling both the expectation that they would always remain low and the seemingly cost-free expansion of all sorts of luxury-belief-based lunacies.  Now, the proverbial bill has come due.  Anti-ESG activist and coalition-builder Russell Greene recently and astutely put it this way on ESG specifically:

One explanation for these changes comes from Peter Earle, a senior research fellow at the American Institute for Economic Research. Earle argued in March 2023 that ESG investing was “an artifact of ZIRP” or zero interest rate policy. Low interest rates lead to bubbles, like ESG, he wrote, but “when interest rates normalize and sobriety re-obtains, cost structures reassert themselves. It’s back to the business of business.”

Another way of putting it is: When money is free, crazy ideas get funded. When money has a price, funders and investors want to see a direct link to value. That means ideological pet projects are the first to go.

Greene’s conclusion – that “ideological pet projects are the first to go” – applies whether those pet projects come in the form of business/capital markets extra-curriculars, excessive environmental ambitions, or regulatory overreach.  It is also largely inarguable.

California and its political class are only beginning to wake up to the new, more normal monetary and fiscal realities.  They will rage against these realities for as long as is possible, and they will try to shift the blame for their profligacy and fiduciary inadequacies as aggressively as media watchdogs and voters allow them.  Eventually, however, reality will win – as it always does, as it can’t help but do.  Radical environmental politics and ESG are akin phenomena.  They are luxury beliefs that are inevitably doomed in a world where luxury is fleeting.