21 Nov Squandering ESG’s Competitive Advantage
The following commentary/analysis is one I wrote in my capacity as a senior fellow at “the nation’s oldest consumer protection agency,” Consumers Research, where, among other things, I compile a weekly letter for public pension-fund managers. I am sharing it here today because I thought it might be useful to some of you.
The Resistance and Its Pecuniary Failures
I have not been shy about expressing my belief that the ESG movement – such as it is – will provide a significant boost for American business relative to its developed-world competitors over the next several years. It’s not that ESG itself will stimulate American commercial productivity and profitability. Quite the opposite, in fact. As ESG and its strictures lose favor in the United States, it continues to see increased support and utilization in Europe, Canada, and parts of Asia. Because ESG has proven to be a burden to business, rather than a boon, this discrepancy in its adoption has already benefitted American corporations and will do so even more extensively going forward, providing them with a profound competitive advantage.
This is not, however, to say that all Americans will benefit equally from this ESG arbitrage opportunity. Indeed, some Americans may not benefit at all – fittingly, for reasons that vindicate the opposition to ESG in the first place.
In the wake of Donald Trump’s re-election, the general mood surrounding ESG has been rather dour. In the United States, it is assumed (for good reason) that the Trump team will undo the damage done by SEC Chairman Gary Gensler and by Secretaries of Labor Marty Walsh and Julie Su. Internationally, sustainability and climate advocates have openly lamented that Trump’s environmental and economic policies will make achieving Net Zero that much more difficult and will compel them to work even harder and more aggressively to deprive industry of the energy it needs to be productive and profitable. In sum, the global consensus is that the second Trump presidency will contribute in no small amount to the arbitrage I have been predicting for almost a year. Trump will turn the drizzle falling on the ESG parade into a massive and relentless torrent.
The consensus is not unanimous, though. Some American investors – pension plans, to be specific – have taken the opportunity to reiterate or even to upgrade their dedication to ESG and sustainability investing. Unsurprisingly, one of the first and most prominent to do so is also the biggest pension plan in the country and was one of the earliest adopters of an ESG ethos nearly a decade ago:
CalPERS CEO Marcie Frost affirmed the $522.4 billion pension fund’s commitment to environmental, social and governance investing in the face of expected federal policy changes stemming from the recent election,
Election results make clear that change is coming, Frost told the board of the California Public Employees’ Retirement System, Sacramento, at its Nov. 20 meeting….
On climate, Frost said CalPERS will continue to press the companies in which it invests “to provide clear, consistent data on their climate impacts” and will continue to support international efforts to do the same.
On the opposite side of the country, Brad Lander, the New York City Comptroller, did Ms. Frost on e better and actually joined one of those “international efforts”:
The New York City Employees’ Retirement System (NYCERS) has joined the UN-convened Net-Zero Asset Owner Alliance (NZAOA), reinforcing its commitment to addressing climate change risks in its investment portfolio….
By joining NZAOA, NYCERS aligns with a coalition dedicated to transitioning investment portfolios to net-zero greenhouse gas emissions. Alliance members have set ambitious targets, reducing absolute financed emissions by at least 6% annually on average, as reported in NZAOA’s fourth Progress Report.
To be fair, Frost and CalPERS couldn’t imitate Lander’s defiance of the Trump-aware consensus by joining NZAOA because they’re already members – which only makes sense.
The problem here is that these are both overtly political acts. Both Frost’s reiteration of CalPERS’ dedication to ESG and Brad Lander’s decision to lock New York City pensioners into the same type of global organization that private asset managers are fleeing were specifically intended to serve as counters to a political event, the election of Donald Trump. Neither was done to protect beneficiaries or to increase return on investment. Both were overt declarations of a political, rather than pecuniary, agenda.
Peter Cashion, CalPERS’ managing director for sustainable investing, was less opaque than his boss in his advocacy of an investment decision based purely on political calculations. At the CalPERS’ investment committee meeting on November 18, Cashion said “pension officials would be open to investing outside the U.S. should Trump administration and/or Republican policies result in fewer [sustainable] investment opportunities in the U.S.” He also warned that “We need to be very aware and attentive to the Republican agenda,” despite the fact that under that agenda, “new energy policies could make oil and gas investments more attractive.”
As for Lander, it is worth remembering that his management of New York City pension funds is held hostage by his political ambitions. While NY Mayor Eric Adams used the election results as an opportunity to reach out to the president-elect and to reiterate his hope that the city and the federal government can work together to address the present migrant crisis, Lander rejected that outreach and explicitly criticized Trump and his policies.
Given that Lander has already announced his intention to challenge Adams for the Democratic Party nomination for mayor next year, it is not difficult to see why he would wish to draw distinctions between himself and the incumbent and to burnish his progressive bona fides. Unfortunately, his decisions regarding the investment goals of the city’s pensions appear to serve much the same purpose. Under current conditions, there is nothing substantive to be gained by joining an organization like NZAOA. It does nothing for the pension plan and even less for “the planet.” The only conceivable reason for making such a decision now is for Lander to signal his political independence from the mayor and to make the case that he is a better, more reliably leftist choice for New York City voters.
Sadly, this is just the way things work at some very large, very politically tainted public pension plans. The case against ESG has always hinged on the impression that its capitalization decisions and engagement practices serve political rather than pecuniary ends. Public pensions have, in many cases, provided all the proof necessary to support this contention, as their investment decisions reflect a desire to serve electoral and policy ends rather than the benefit of their beneficiaries.
These pension plans – and their beneficiaries – are all but certain to miss out on the profits of ESG’s American competitive advantage. That’s a shame. More than that, though, it’s a tragedy for everyone involved, most especially the voters/ taxpayers.
