22 Aug PUBLIC PENSION CORNER, #9
NEWS:
I. Texas Attorney General Blames ESG for Wildfires
Last week, Texas Attorney General Ken Paxton publicly blasted Xcel Energy and two of its contractors, announcing that he and his office are investigating the utility in connection with wildfires that burned a large part of the state last year:
Xcel said in a statement that it will work with state officials to better understand the cause of the fires, though the company disputes claims that it acted negligently. Xcel has already paid $123 million in settlement agreements to victims of the Smokehouse fire. An Osmose representative didn’t respond to a request for comment….
Texas restricts government work with companies that discriminate against firearms entities or boycott oil and gas companies. The ESG push at investment firms, pension funds and law practices has faded somewhat, partly because of efforts to avoid attacks by President Donald Trump and Republicans.
Xcel has set a goal of net zero carbon emissions by 2050, which is common among utility companies. The company faces lawsuits from victims of the Smokehouse fire, and is set to go to trial next month over its role in the 2021 Marshall Fire in Colorado, which it denies sparking.
II. Canadian Think Tank Disparages ESG Ratings
Last week, the Fraser Institute, a Canadian think tank, issued a report advising investment firms that ESG ratings are unreliable. The report – “A Lawsuit Waiting to Happen: The Use of Non-Financial Metrics by the Investment Industry,” – was authored by Bryce Tingle, the N. Murray Edwards chair in Business Law at the University of Calgary, who argued that even the use of ESG ratings is inconsistent with investment professionals’ fiduciary duties.
[Tingle] highlights one of ESG’s wildly inconsistent ratings which can mean that the same firm can be ranked as a leader by one agency and a laggard by another. “Many ESG factors are purely subjective, such as employee happiness … [and] incommensurate even across a single dimension,” the paper notes.
According to the paper, corporations can spend up to US$480,000 annually answering rating requests, with some firms hit by as many as 250 surveys per year and boards are increasingly devoting management time to satisfying ESG raters. Tingle concludes that the ESG disclosure treadmill often represents “a dead loss of time and money.”
The biggest warning comes on the legal front with the report highlighting that investment managers are fiduciaries, legally bound to act in the best interests of their clients, but if the tools they use are demonstrably flawed, they may be in breach of that duty.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“The Long March Continues”
My dad was an engineer, an electrical engineer. More than that, he was possibly the engineer-iest engineer ever to live. He liked things clear, stable, and straightforward. He was about as linear a thinker as God ever made.
Just over four years ago, he read an advance/review copy of my book, The Dictatorship of Woke Capital, and then, naturally, offered me his assessment. “I didn’t understand the first half of it, but the second half was interesting.” From that point on, he would tell anyone who asked to “skip the first five chapters.” Those chapters – the first half of the book – contain background information on “woke capital,” “stakeholderism,” ESG, or whatever you wish to call it. They include some history, some philosophy, and some political theory, that is, the less concrete, more ethereal components of the narrative. That didn’t suit him. He much preferred the rest of the book, which was mostly straight reporting – the who, what, why, when, and where of woke capital.
What my dad didn’t understand, however, was that there was a method to my madness. There were good and important reasons I included all of that history, philosophy, and political theory in the book. The best and most important of these is that it’s all necessary to place the stakeholder movement in context, to enable a proper accounting of the phenomenon and, by extension, of the appropriate responses.
Thirty-five years ago, the intellectual polymath Roger Kimball penned an essential and powerful book of his own, Tenured Radicals, in which he explained how the cultural Left had successfully mounted the “long march through the institutions” that it promised at its inception in the 1920s. Specifically, Kimball focused on how the Left had taken complete control of higher education and had corrupted it with politics.
I viewed my book as a sequel of sorts to Kimball’s (and not just because he and Encounter Books had agreed to publish it). The rise of woke capital is very much the story of how the cultural Left, in combination with the administrative state, has tried to take similar control of business and capital markets, the last of the great American institutions of cultural transmission that it had yet to conquer. The politicization of business was, I argued, the last frontier for the cultural Left, meaning that the pushback against that politicization was our last chance to save Western Civilization from complete cultural domination.
In retrospect, I think events have shown that my assessment was prescient. Whether the Left knows it or not, there has been a shift in the cultural zeitgeist. “Woke” is now almost universally understood as a pejorative, and the social and political excesses extant in the early part of this decade have moderated considerably. Moreover, I think it’s fair to say that this moderation was very much the result of the pushback against the politicization of business first and foremost. By raising awareness of the stealth attack on capitalism via the manipulation and distortion of fiduciary duties known as “ESG,” we were able to stave off complete defeat. Like the Brits at Dunkirk in 1940, Western Civilization has pulled off a miraculous escape and, as a result, lives to fight another day.
But that’s not to say the entire war against woke capital itself is over. Far from it. Indeed, it’s only just begun.
Another reason I included the history, etc. in my book is that I believe it’s important that everyone understand what we’re up against and how successful the long march has otherwise been.
Allen Mendenhall and Daniel Sutter, respectively the Senior Advisor for the Capital Markets Initiative at The Heritage Foundation and the Charles G. Koch Professor of Economics at Troy University, have recently published research that is also a sequel of sorts to Kimball’s Tenured Radicals. Their work shows that the radicalization of higher education – once largely contained to the humanities and social sciences – has spread and now dominates even in business schools, where capitalism formerly reigned supreme. In a recent article for City Journal, Mendenhall and Sutter summarized and explained their dispiriting findings as follows:
Business schools were once temples of market wisdom, teaching future executives how profits fuel prosperity and voluntary exchange lifts societies out of poverty. Yet our research suggests that these institutions today would rather pursue social change, preaching progressive doctrines with the zeal of converts.
In business schools across the globe, this transformation is well underway. Environmental, social, and governance (ESG) initiatives have proliferated. Diversity, equity, and inclusion programs have become regular fixtures. The “stakeholder model” of corporate governance, which encourages corporate boards to weigh the interests of non-shareholders, has displaced the traditional shareholder-primacy approach. Corporate Social Responsibility (CSR)—the practice of companies aligning with social and environmental causes, often to enhance their public image and manage risk rather than to drive genuine change or accountability—is presented not as an optional add-on but as an essential component of business strategy….
Business schools’ embrace of social activism has extended beyond curricula to research priorities. Academic journals and other publications have seen a dramatic increase in papers addressing ESG, DEI, and CSR. The acronym ESG has appeared in approximately 259,000 Google Scholar results since 2015—147,000 of them from 2021 onward, with 22,400 this year alone—reflecting a dramatic and accelerating surge in academic attention to the topic. While legitimate subjects of inquiry, the uniformity of perspective is troubling. The AACSB’s own magazine, for example, published an article celebrating institutions that champion “people over profit” without addressing the potential costs of stakeholder capitalism or the efficiency advantages of traditional profit maximization.
What this research does is confirm that the battle for the heart and soul of American business – and, by extension, the battle for the heart and soul of Western Civilization – is far from decided. And the recent shift in the cultural zeitgeist notwithstanding, those of us who wish to preserve profitable American business and free and fair capital markets are still losing. We may have convinced this generation of investment professionals to slow or reverse their politicization of the engine of capitalism, but all the while, the cultural Left has been working hard to convince the next generation (and the generation after that, and the generation after that, ad infinitum) to do the opposite. The capture of higher education – and business schools in particular – means that this is a struggle we will continue to have to wage repeatedly and relentlessly for the foreseeable future.
Ironically, my dad, who retired from academia roughly 15 years ago, understood this in practice, even if he didn’t grasp the larger implications for business and markets. He knew that even the hard sciences were being infiltrated and corrupted by politics, and he hated it. If he knew how all of this fit together and what it meant for the West and its economic vitality, then he might have found the first half of The Dictatorship of Woke Capital more edifying, more practically applicable.
In any case, long march continues. We may have escaped, and we may live to fight another day, but we will have to fight. Of that you can be sure.
