08 Aug PUBLIC PENSION CORNER, #7
NEWS:
I. Red states maintain pressure on money managers
Last week, financial officers from 21 red states sent a letter to 26 asset and wealth managers, warning them to focus on their fiduciary duties and not on politics and asking them to respond to their concerns by Sept. 1:
Nearly two dozen states on Tuesday warned CEOs of the nation’s largest financial firms – including BlackRock’s Larry Fink and JPMorgan’s Jamie Dimon – to scrap “woke investing” programs focused on environmental goals if they want to continue doing business in their states….
State officials ordered these firms to take five concrete actions to demonstrate their “commitment to a fiduciary model grounded in financial integrity, not political advocacy.”
Among these steps is a commitment to abstain from “international political agendas” like net-zero climate mandates or the EU’s Corporate Sustainability Directive, which requires companies to regularly publish reports on the environmental and social risks they face.
II. Judge hands Big Three a major setback
Last Friday, U.S. District Court Judge Jeremy Kernodle denied a motion to dismiss a lawsuit filed by red states against the Big Three passive asset managers (BlackRock, State Street, and Vanguard), alleging that they colluded to kill coal production and, by extension, raised energy prices:
US District Judge Jeremy Kernodle in Texas said most of the claims brought by the states can proceed, including allegations that BlackRock Inc., Vanguard Group Inc. and the asset management arm of State Street Corp. collectively used their stock to attempt to substantially lessen competition. Kernodle dismissed part of the lawsuit that was based on alleged violations of state law.
In his Friday ruling, Kernodle said the states “have identified enough circumstantial evidence to suggest that defendants agreed to collectively pressure coal companies to reduce the output of coal in the relevant markets and disclose future output information.”…
In their lawsuit, Texas and other Republican-led states claimed the asset managers colluded to pressure coal producers to reduce their production under the guise of pursuing environmental goals. The states cite the firms’ participation in carbon-reduction alliances as evidence of a “syndicate.”
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“What Jerome Powell Tells Us about ESG”
The other day, Pete McGinnis, the director of communications at the Functional Government Initiative, penned a piece for RealClear Policy, attempting to answer the question, “What’s behind Jerome Powell’s Woke Turn?” Powell, of course, is the chairman of the Federal Reserve, first appointed to that position in 2018 by President Donald Trump. According to McGinnis, the reason for Powell’s left turn is simple: job security. He wanted to be reappointed when his term ended in 2022 and thus needed to be viewed favorably by President Biden and his economic team. In a Twitter/X thread he wrote to augment the column, McGinnis put it this way:
Chairman Jerome Powell took a hard left turn on climate change after 2020 election to get Biden to re-appoint him to another term as Fed Chairman. In 2021 Biden said Powell “made clear to me: A top priority will be to accelerate the Fed’s efforts to address & mitigate the risks – the risk that climate change poses to our financial system and our economy.”…
In December 2020, Powell announced the Federal Reserve would join the global woke group, Network of Central Banks and Supervisors for Greening the Financial System (NGFS), which is dedicated to pushing climate change and green energy policies into central banking and supervision….
In October 2021, Jerome Powell endorsed the findings of a report on Climate-Related Financial Risk by the Federal Stability Oversight Council (FSOC), which he chairs, stating, “Climate change poses significant challenges for the global economy and the financial system.”
The list, unfortunately, goes on. As the Brussels-Washington-Wall Street axis grew more and more enamored with climate policy and the integration of “sustainability” into investment strategies, Jerome Powell followed suit. The supposed “arch-Republican” put up little or no resistance to their machinations. He appeared just as eager as they were to remake banks and capital markets into enforcers of climate orthodoxy. There’s really no point in pretending otherwise.
But was it really all about a second term?
To be clear, I don’t want what follows to be interpreted as a criticism or rebuttal of McGinnis or his case against Powell. He makes a solid argument, and I have little doubt that the Fed Chairman did, indeed, adjust his positions on climate and sustainability to keep pace with the then-emerging consensus among policymakers and the movers and shakers of the financial services industry. He was one of them, after all – and on both fronts, a policymaker and a financial leader. It makes perfect sense that their opinions and his would overlap considerably.
At the same time, the lessons of Powell’s climate advocacy are, I think, a bit complicated. Yes, he wanted a second term. And yes, he was willing to do whatever it took to get it. Nevertheless, his integration among the political and financial elites and the overlap between his ideas and theirs combine to tell us a great deal more about the intellectual foundations of the sustainability movement in banking and investing than McGinnis’s analysis would suggest.
It is important to note here that while Jerome Powell may have grown more aggressively supportive of climate orthodoxy while serving as Fed Chairman, he wasn’t exactly an opponent of green investing to start. Indeed, a full decade before being nominated by President Trump, Powell took a job as the managing director of a private equity and venture capital firm. It was called the Global Environment Fund, and it focused (and still focuses today) on sustainable energy and investing. GEF describes itself thusly:
GEF is a pioneer in sustainability and impact investing with a special focus on environmental and resource productivity matters. We are passionate believers and advocates that financial returns and positive impacts — both environmental and social — are not mutually exclusive. In fact, we believe that sustainable financial returns are strongly correlated with proactive management of environmental, social and governance risks.
Environmental, social, and governance risks, you say? That’s…interesting.
I’m not trying to say here that Powell was the proto-Larry Fink, an early and aggressive ESG kingpin. And nor am I trying to say that Powell was a closet leftist in 2008 but managed, somehow, to hide all of that ten years later, conning Trump into naming him Fed Chairman. I am also not suggesting that Powell was a “woke” investor before 2020 and therefore didn’t need to solicit Biden’s approval to win a second term. None of that is right. As I noted above, Powell was a solid “conservative” nominee in 2018, even despite his work history, and he “did, indeed, adjust his positions on climate and sustainability to keep pace with the then-emerging consensus among policymakers and the movers and shakers of the financial services industry.” But then, that’s kinda the point.
Jerome Powell’s early advocacy of “sustainable” investing, his belief in the risks posed to the financial world by climate change, and his increasing radicalism in the early part of this decade are all mere expressions of the groupthink that dominates American business and finance at the highest levels – and has dominated there for a long time. And as such, they lead, inevitably, to a handful of conclusions about the sustainability movement at large and the long-term risks it poses to American capital markets.
First, there was a time – and not that long ago – that everyone in the financial world’s inner circles simply believed in sustainability investing as a matter of fact. It wasn’t a left-wing thing. It wasn’t “woke.” It wasn’t political at all. It just…was. Of course climate change is going to change how everyone does business. Of course it poses a risk to the banking system and capital markets. Of course the climate crisis and energy transition will turn fossil fuel investments into stranded assets. Of course, of course, of course. One would have to be an idiot or a backward, science-denying cretin to think otherwise. What we view today as the tenets of a fundamentally political movement and the abuse of fiduciary trust were, until very recently, “common knowledge.” They were things that anyone who is anyone just knew.
Second, what this tells us in turn is that the Masters of the Financial Universe all implicitly believe in double materiality – or at least they did. Even if the American Masters never said so explicitly and never embraced the idea as wholeheartedly as did their European counterparts, they all believed it nonetheless. Again, to think otherwise was just not done. Double materiality was accepted and understood. It too just…was.
Third, people like Powell – and Fink and O’Hanley and the rest – believe, in their heart of hearts, that the pushback against ESG is the problem, not the solution. They think that this is like any other battle in the broader culture wars. They think the advance of the Left’s ideas is merely the advance of reality, the triumph of practicality over ideology. They believe, in other words, that the pushback is what made it all political. Before the resistance to ESG started in earnest, no one talked about ideology or political parties or anything as vulgar as taking “sides.” They all just did what they did – until the resistance came along and politicized everything. Six years ago, when the Business Roundtable infamously changed its definition of the purpose of a corporation, it and its members were shocked to find that anyone objected. They were stunned to learn that what they did was controversial and that serious people might find their hubris problematic. After all, who could possibly have a problem with the idea that businesses exist to serve a higher social purpose, not just to satiate man’s greed?
Finally, all of the above should serve as a warning that this fight is not over, no matter how badly ESG and its supporters may appear to be beaten. They still believe, despite their public pronouncements to the contrary, that they were, are, and always will be right about the need to temper traditional pecuniary observations with environmental and social modifiers. When the political winds shift in Washington – as they inevitably will – the advocates of double materiality will again assert themselves.
You can bank on that – Jerome Powell or not.
