24 Apr PUBLIC PENSION CORNER, #40: ESG: America vs. Europe
Note: This edition of The Public Pension Corner will be a little different from usual. Given that we have two announcements at the end, we will skip the news section and jump right into the commentary. Back to normal next week. Many thanks.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“ESG: America vs. Europe”
This past Sunday, The Financial Times published an investment analysis titled “Transatlantic divide widens over investment approaches to ESG.” According to the paper, ESG remains a big deal in Europe, even as it continues to struggle and fall apart in the United States. This isn’t news, exactly, but it is interesting. It exposes a persistent rift that will, at the very least, likely affect global economic outcomes over the next several years.
Given the details reported by the Times, this story can, I believe, be interpreted in at least three different ways.
The first of these is the way the Times presents the story and, presumably, intends for its readers to interpret it: the Americans are failing on ESG, and they’re failing specifically because they led poorly by politicians who lack foresight and integrity:
The decisions [by European pension plans to fire BlackRock for being insufficiently climate focused] underscore the importance of environmental, social and governance factors, known as ESG, for large European investors when putting money to work.
However in the US, some pension funds have been clamouring for the opposite. Some schemes have pushed for investments in fossil fuel companies, in the view that they deliver superior returns, and have even pulled money from asset managers for considering ESG factors when investing.
The diverging attitudes underscore a widening divide between the US and Europe over investment approaches to ESG. Experts argue the retreat from the strategy in the US was exacerbated by Donald Trump’s return to the White House as president last year, which resulted in a series of executive orders to crack down on ESG.
Donald Trump, you see, is a problem for ESG – but he’s hardly the only one. Many other American political actors – including some of you reading this newsletter – actually have the gall to invest “in fossil fuel companies, in the view that they deliver superior returns” and even to pull “money from asset managers for considering ESG factors when investing.” That, in the estimation of the folks at The Financial Times, is incomprehensible. How could anyone in his right mind want superior returns or demand that the asset managers who work for him be focused on pecuniary factors? What are these people thinking? This approach to pension management is simply irresponsible from the FT/EU perspective. Far better to force current and future pensioners to tighten their belts a little bit than to allow corporations to focus on the core business functions at the expense of hypothetical developments on the distant event horizon.
The second way to interpret this story is to assume that FT, its readers, and Europeans more generally are intent on cutting off their noses to spite their collective face. As I have noted frequently in these pages, ESG, as it is currently practiced, constitutes an economic and commercial advantage for the United States, its corporations, and its investors over the European counterparts:
Simply by being empowered to ditch ESG and to let go of the unnecessary, costly, and time-consuming step of ESG-related engagement and compliance, American companies could thrive comparatively. In a world of uncertainty and presumably, tighter money for a longer time, this could be of enormous significance.
The third way to interpret all of this is that, in addition to becoming less and less financially and commercially competitive with the United States, Europe is on the verge of complete economic irrelevance. The longer this gap between America and Europe persists, and the bigger it grows, the clearer it becomes that the whole thing is premised not on something as insignificant as investment strategy or even political perspective, but on radically differing epistemologies.
If one looks at the rest of the FT story, and the quotes about the undeniable importance of climate consciousness and the “inevitable” energy transition, it becomes clear that even among supporters, ESG in the United States is viewed quite differently from the European version.
Americans approach ESG investing practically, empirically. Again, even some of its believers and supporters concede that the practice does not necessarily advance either risk-adjusted returns or environmental protection. It is a risk-analysis framework, at best.
Europeans clearly see things differently. The EU approach is noetic in nature. The EU taxonomy specifies in advance what constitutes sustainable economic activity – not by observing which activities empirically produce flourishing, but by deriving classifications from a prior vision of what a sustainable economy must look like. Technical screening criteria aren’t discovered through market experimentation; they’re promulgated. Double materiality explicitly asserts that a company’s impact on the world matters independently of whether that impact registers in financial reality, which is to say, the noetic order takes priority over the empirical one.
Or to put it more succinctly: the American investor asks whether ESG works, while the European regulator already knows what sustainability is and asks whether the economy is conforming to it.
The former is realistic. The latter is utopian. The former can and will adapt. The latter cannot and will, eventually, crumble in the face of reality.
Announcement #1:
The State Financial Officers Foundation and its Public Fiduciary Network will be hosting an online meeting for all public fiduciaries and other interested parties on Thursday, April 30th at 3:00 PM EDT. Anyone connected to or interested in the public pension world is invited. This month’s guest is one of my very favorite people in the investment business, Bob Doll, the CEO of Crossmark Global Investments. I have known Bob for almost 30 years. Back when I was a junior analyst, and junior analysts were not allowed by the firm to travel, I was nevertheless taken by my boss to Merrill Lynch Investment Management in Princeton because Bob was one of his favorites too, not to mention one of the firm’s most important clients. Bob’s full bio:
Bob joined Crossmark in May 2021 as Chief Investment Officer (CIO) and assumed the additional role of Chief Executive Officer (CEO) in January 2024. Bob provides strategy for the firm, oversees the management team, guides the investment teams at Crossmark, and serves as portfolio manager for multiple Crossmark large cap strategies. He uses his more than 40 years of industry experience and expertise to provide weekly and quarterly investment commentaries as well as annual market predictions. Bob is a regular guest and contributor to multiple media outlets, including Bloomberg TV, Fox Business News, CNBC, and Faith & Finance Live Radio. Prior to arriving at Crossmark, he held the roles of Senior Portfolio Manager and Chief Equity Strategist at Nuveen (2012-21) and Blackrock (2006-12), President and Chief Investment Officer at Merrill Lynch Investment Managers (1999-2006), and Chief Investment Officer at Oppenheimer Funds Inc. (1987-99).
Bob graduated from Lehigh University with a B.S. in Accounting and a B.A. in Economics. He later went on to earn an MBA from the Wharton School of the University of Pennsylvania. He is a Certified Public Accountant (CPA) and holds the Chartered Financial Analyst® (CFA®) designation, as well as the FINRA Series 7 and 63 securities licenses.
Bob dedicates his free time as choir director at his local church and also serves on a number of boards, including the Alliance of Confessing Evangelicals, Cairn University, Christianity Today, Gordon Conwell Theological Seminary, Kingdom Advisors, The Lausanne Movement, Movement.org, New Canaan Society, and Word of Life Fellowship.
Bob and his wife, Leslie, currently reside in Princeton, New Jersey, and have three children and three grandchildren.
Please join us, and please pass along this message to anyone you think may also be interested and register here.
Note: *The State Financial Officers Foundation is a sponsor of the Public Pension Corner. Stephen Soukup (the author of the Public Pension Corner) is the Scholar in Residence at SFOF’s Public Fiduciary Network.
Announcement #2:
The Public Fiduciary Network will NOT hold an online webinar in May. Instead, we will be participating in the in-person fiduciary/trustee education event held by Prospr Aligned in Anchorage, Alaska. ALL public fiduciaries are invited, and are encouraged to follow the link below and to reach out to Prospr for more information.
Prospr Aligned Fiduciary & Trustee Academy.
Note: *Prospr Aligned is a sponsor of the Public Pension Corner.
