19 Sep What “Investors” Want
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.
A Tale of Regulatory Hubris
For years, the good folks at the Securities and Exchange Commission – or at least the Democrat-appointed folks at the SEC – have been telling us that their ESG agenda is driven by the wants and needs of “investors.” In March 2021, for example, less than two months after the start of the Biden administration and, thus, less than two months into her stint as the acting director of the Commission, Allison Herren Lee told a gathering at the Center for American Progress that “no single issue has been more pressing for me” than addressing “investors’” needs regarding ESG. “[C]limate and ESG are front and center for the SEC,” she told the crowd, because “these issues are key to investors – and therefore key to our core mission.” Similarly, when the full-time chairman of the Commission, Gary Gensler addressed the issue of emissions reporting at an event hosted in October 2023 by the U.S. Chamber of Congress, he insisted that Scope 3 emissions were still on the table only because “investors” were demanding that they be:
What investors have told us in the comments that they’ve sent us is that understanding the emissions of a company’s supply chain – and this is from investors – understanding the emissions of the supply chain helps understand what’s called transition risk, you know what might be the future for that business. And it might be transition risk because customers may buy different products because of the emissions of a supply chain, or regulations may change, or even employees may want to work for one firm versus another.
These examples are hardly exhaustive, of course. For more than three-and-a-half years now, almost every effort the SEC has made in pursuit of greater ESG enforcement or transparency has been justified time and again as a response to “investor” demand. It’s what “the investors” want, the Commission has insisted, so who are we to tell them no?
To be fair, these are all technically true statements. Some investors did demand this type of information. Some investors did insist on this kind of climate-related transparency. Some investors did – and still do – want all sorts of data and guidance from corporations about their emissions, about their supply-chains, and about their preparations for the ever-looming energy “transition.” The catch here is that “some” does not equal “all” or even “most,” and the “some” to whom the various commissioners constantly refer have positions and perspectives that sensible, unprejudiced public officials might have acknowledged are different from the rest of their peers.
SEC officials, however, have refused to acknowledge as much. Indeed, they persist in pretending precisely the opposite. They continue to argue that the interests of “investors” can be uniformly defined by assessing and evaluating the interests of only a handful of large – and largely unrepresentative – financial professionals. In so doing, the SEC has undermined its very reason for being. It has introduced confusion to the markets. In some cases, it has distorted market outcomes to the detriment of investors. And it has encouraged, if not actually enabled, corporate governance decisions that benefit a few prominent investors at the expense of other, less well-connected corporate shareholders.
Consider the now-infamous case of Engine No. 1’s hostile partial takeover of Exxon Mobil’s board of directors. The way the story has been told – largely by the financial media – this was an instance of “the little engine that could,” the small, conveniently named hedge fund that fought a long and lonely battle to force the giant oil company to accept new blood on its board and to accept a new, less fossil-fuel-dependent strategy in planning for future energy production.
That’s not really how it happened, of course, and the true story implicates all of the SEC’s favored “investors” in a scheme to promote their own interests over those of the corporation and its average shareholders.
In truth, Engine No. 1 was never the isolated, small investor fighting for all its small investor brethren. This was never the modern-day reenactment of David and Goliath we were told it was.
You see, Engine No. 1’s then-newly hired CEO was a woman named Jennifer Grancio. Jennifer Gancio had been one of the cofounders of iShares, a massive exchange-traded fund company that was purchased in 2009 by BlackRock, the world’s largest asset manager and the public face of the ESG movement. She then served for several years as the COO of the BlackRock-owned iShares. She was, in other words, a BlackRock insider. And when she recruited her old friends at her old firm to join the Exxon campaign, they happily – and understandably – complied.
At the same time, James Penner, one of Engine No. 1’s founders, was working the phones with his old and dear friend, Aeisha Mastagni, who just happened to be a Portfolio Manager in the Sustainable Investment & Stewardship Strategies Unit at the California State Teachers Retirement System (CalSTRS), the nation’s second-largest public pension fund. Mastagni had a longstanding beef with Exxon and, therefore, was also more than happy to join the hedge fund’s efforts.
In the end, Penner and Grancio lined up all of the Big Three passive investment firms – BlackRock, State Street, and Vanguard – plus CalSTRS and CalPERS, the two biggest pension funds in the country, to join their crusade against Exxon. CalSTRS also introduced Engine No. 1 to the firms that, combined, make up Climate Action 100+, the world’s largest shareholder engagement initiative. Collectively, Climate Action’s signatories had some $54 trillion in assets under management at the time, and they too were eager to “engage” with Exxon by demolishing its board and rebuilding it in their image.
In short, “Goliath” never stood a chance.
It is important to note here that Exxon’s new directors were not energy newbies. Indeed, as Engine No. 1 proudly noted, its candidates were all experienced in the energy business. Unlike the company’s management team and its previous board members, however, the new directors saw the “future” of energy in much the same way that the Big Three saw it then and as the SEC saw it as well. They wanted Exxon – and energy companies in general – to move rapidly away from fossil fuels and to direct their efforts toward alternatives and the much-ballyhooed “transition.” This is what the SEC’s favored “investors” demanded, and it is what Engine No. 1’s slate of directors promised.
Counterfactuals being what they are, it is difficult to say whether ExxonMobil would be better off today with its original, pre-Engine No. 1 board intact or if it would be more attractive to investors if it had consistently focused on its core business of producing fossil fuel-derived energy. At the same time, however, it is less difficult to see what has happened to some of Exxon’s competitors who took the SEC’s favored investors’ advice more aggressively to heart:
BP Plc on Monday announced plans to sell its onshore wind business in the US as the oil and gas giant scales back its exposure to renewables and focuses on its core business.
Earlier in the day, the company also said it will offload part of its stake in a key natural gas pipeline to New York-based investment firm Apollo Global Management in a deal valued at $1 billion….
The company will shortly begin the process of selling BP Wind Energy, so that it can continue “to simplify our portfolio and focus on value,” it said in a statement. BP currently has stakes in 10 operating wind farms in the US. It plans to focus instead on its solar arm, Lightsource BP. The move marks an abrupt turn in the company’s renewable strategy….
BP is “preparing for the narrative shift,” said Biraj Borkhataria, head of European energy research at RBC Europe Ltd. It’s “shifting capital away from transition themes and back to the core business,” he added, noting that rival Shell Plc has pursued a similar strategy.
Huh. So, BP – like Shell before it – seeks to woo investors by moving in precisely the opposite direction that the likes of Allison Herren Lee, Gary Gensler, Larry Fink, and the lovely people at Engine No. 1 have insisted is favored by investors. Funny thing that.
There is a reason that regulatory agencies should not play politics and should, instead, stick to their legislatively approved mandates. SEC Commissioners may think that they know what “investors” want, but they know far less than the market does. Unfortunately, they lack the prudence to see and understand this.
