Sunday Jan 29

Winter 2022

MONEY MATTERS - ESG and, oh, that pesky free market….

Once upon a time, I worked for a small foundation dedicated to environmental and economic justice. It was in the mid-seventies, and I was fresh off my first post-college gig called the “Youth Project” that worked to support grass-roots organizing work involving young people then deeply engaged in national movements. Created by a young couple blessed with inherited wealth, the foundation was wrestling with the conundrum of working for progressive change while its assets were invested in conventional markets that eschewed any concerns about where money was placed. One could be violently opposed to South African “apartheid” but money management wasn’t part of the conversation. It just chased profits, no matter the human cost.

We began to study just how we might bring the foundation’s assets and its programmatic goals into alignment. This was almost 50 years ago, but I remember talking to various asset management firms about this dilemma which inspired an almost uniform response that went something like this: “Modern portfolio theory says that any reduction in the pool of potential investments will reduce returns, and that violates your fiduciary duty….” Or some such. In other words, you go do what you will with the income, but let us take care of the serious business of investing the money. More succinctly, “go jump in the lake” was more what they meant.

This of course inspired more youthful rebelliousness on our part, and we continued to scour the field. One fund emerged under the Dreyfus group that featured over-investment in nuclear power as a way of solving pollution problems, but that quickly was eliminated even before Three Mile Island scared the living daylights out of most rational people. Later, of course, Chernobyl sealed the fate of that particularly unenlightened approach. There was one other very early player in those days – the Calvert Fund – that actually did put “socially responsible” screens on how it would invest. Its sub-manager was then called U.S. Trust Boston and survives to this day under the name Walden Asset Management, and that was where that little foundation landed. What Calvert and Walden pioneered was criticized and marginalized for years, and that is probably an understatement. But what started so small, slowly grew. And a funny thing happened on the way to the Forum….something called the “free market” began to affect the financial community. That paternalistic cold shoulder to whiney investors concerned about how companies were acting – and at times causing real problems – came under the daunting pressure of….investors themselves. Once people began telling managers they didn’t give a hoot about Modern Portfolio Theory and were perfectly happy to accept less returns if that was the way it worked out, somehow managers began to be slightly less paternalistic, and more mindful of the old adage that “the customer is always right.”

It was, needless to say, a slow transformation. Most in the field had settled on “socially responsible” to describe their efforts but this was deemed too broad or vague and not clear enough, so the field evolved and adopted the term, “ESG” or environment, social, and governance as shorthand for screening out investments that were “dirty” or in some way counterto the investor’s concerns. For some, it was “sin stocks” – gambling, alcohol, and firearms. For others, polluters or anti-union companies. But broadly it became acceptable for clients of money managers to see their values reflected in what was invested in on their behalf.

Now, it’s becoming big. So much so, that the largest asset managers in the world are avidly pursuing this growing segment of the market. Those often seen in the past as callous money-grubbing institutions like Goldman Sachs, J P Morgan, Blackstone, and Blackrock have gobbled up smaller ESG firms and with some flash try hard to attach their star to these growing concerns among their current and future customers. Larry Fink who leads the largest of these, Blackrock, with literally trillions under management, has been among the more unusually forthright voices calling for the private sector to begin helping, rather than hindering, the path to a sustainable future – a critical element in any ESG approach. Perhaps uniquely, he sees – and is willing to say – that government needs to play a role in this transition. Here is a paragraph from his 2022 letter to the CEOs of companies in which Blackrock is invested:

Capitalism has the power to shape society and act as a powerful catalyst for change. But businesses can’t do this alone, and they cannot be the climate police. That will not be a good outcome for society. We need governments to provide clear pathways and a consistent taxonomy for sustainability policy, regulation, and disclosure across markets. They must also support communities affected by the transition, help catalyze capital for the emerging markets, and invest in the innovation and technology that will be essential to decarbonizing the global economy.

Fink’s approach is in some ways a new take on what could be called “enlightened capitalism,” or the idea that when partnered with governmental guardrails, the private sector can help rather than hinder momentum toward a sustainable future or public good. The problem is that this idea is fundamentally opposed by entrenched industries that have long used political influence to counter efforts to impose those guardrails. Under the rubric of “freedom,” many in the private sector oppose literally ANY attempt to limit enterprise for social purpose. “Socialism!!,” they will scream and then use the culture wars to justify limiting government’s ability to moderate damaging consequences of unfettered enterprise. 

What is so infuriating about our American oligarchs – or plutocrats, if we’re being nice – is that they so blithely use what has been for more than two centuries the most robust, healthy democracy on the planet to undermine its own strength, largely through the stealthy takeover of the judiciary (See Sheldon Whitehouse’s absolutely remarkable book on this just out: The Scheme). They have chipped away at everything from federal regulation to basic human rights, as in the horrendous Dobbs decision, and there is more to come. From their point of view, they’d just like the “free market” to replace governmental function. No more public schools – just a marketplace of private academies. No more regulation, just the luck of the draw when it comes to everything from drug safety to seatbelts. Need clean air? Just move upwind. Need clean water? Live upstream. So, what about that stock market? It’s just up to the investors to choose wisely.

The fundamental corruption of this system of plutocrat-driven governance is that the free market is a great way (in their view) to replace regulation…except when the market wants to penalize their private domain for making bank. THEN, well, let’s use government to keep the market from steering capital in ways some sectors – oh, let’s say oil and gas for instance – might find adverse to their interests. And this is precisely what has happened to that slowly evolving, entirely non-government phenomenon known as ESG investing. It may have taken 50 long years for those snot-nosed, uppity investors to figure out that they could have their savings invested in a manner that matched their values, but once enough of them did, whew, watch out.

In truly Trumpian fashion, the first line of attack is to label ESG as “woke capitalism” which apparently means that behind it is some diabolical conspiracy to harm the petroleum industry. (So far as my research has gone, “Q” has not yet opined on this, but you get the idea.) That font of wisdom known as “The Epoch Times,” the propaganda arm of Falun Gong, described the resulting daring actions this way:

Texas joined a group of Republican-led states accusing BlackRock Inc. of putting woke investment criteria above shareholder profits in state pension funds.

In a letter to BlackRock CEO Larry Fink, 19 attorneys general, mainly from conservative states, challenged his company’s reliance on environmental, social, and governance criteria at the expense of investor returns.

Texas Attorney General Ken Paxton said in an Aug. 8 news release that ESG climate goals harm Texas’s oil and gas economy and state pension fund performance. The release said that BlackRock’s actions might also violate state and federal law.

So, there you have it. Get the gosh-darned government out of our free-market play pen…except when those pesky investors wanna prioritize limits on having their own money invested in dirty pollution-causing companies causing climate change. Perish the thought that a financial company might want to accommodate these suckers. No, let’s keep them from even competing to manage pension funds or other state supervised investments – where no ESG policies have been implemented or even discussed. What’s a particularly ironic twist is that Paxton who is leading the charge, is under SEC investigation for hiding compensation from a tech company for which he raised money, saying the 100,000 shares he received was a “gift.” Those startups are just so bloody generous, you know?

I do not have huge confidence that ESG investing will move the needle much in helping address climate change, financial corruption, or human rights. These challenges will all take much more than simply steering a portion of investment capital in socially positive ways. As Larry Fink argues, government must play a prominent role if the likes of Paxton and the checkbooks of plutocrats can somehow be contained. Given the precipitous decline of our judicial system, and the plummeting trust in the Supreme Court, it’s hard to see how the swirling drain gets plugged. But ESG investing is one small way that process can begin. Even that citadel of spiritually guided financial malfeasance, the Catholic Church is seeing the light with their recent report with the catchy title: “Mensuram Bonam” (which means “a good measure”). It was summarized by the NY Times (11/25/22) this way:

The Holy See considers certain funds bad investments, no matter how lucrative. Companies that contradict church doctrine, on areas like abortion or contraception, are such offenders. But the guidelines also suggest that the faithful avoid investments harmful to workers or ones that strip natural resources, potentially producing economic migrants who undergo inhumane conditions to reach Europe…Cardinal Turkson said that while some women’s religious groups in the United States had divested from oil and gas companies, the Vatican approach was to push for investments in sustainable energy and to urge the industry to move other local churches in that direction.

Maybe now that the newly re-elected, perhaps soon-to-be-indicted, Texas AG might want to sue the Catholic Church as well? After all, he seems to like attention and headlines….The point is, things are changing. Despite all the dark money, the influence of ESG offenders is in decline.

One example of how this plays out is Tesla. Reams have been written about Elon Musk and his ham-handed takeover of Twitter, but that occurred just months after a grueling shareholder meeting of the public company that featured one of my favorite ESG firms, Nia Impact Capital. This is from the NYT story on the event:

Shareholder proposals have received significant support in the past. Last year, 46 percent of shareholders voted in favor of a proposal challenging a Tesla policy that requires employees to resolve complaints of discrimination and sexual harassment before an arbitrator rather than in court. The resolution was filed by Nia Impact Capital in Oakland, Calif.

The New York chapter of the Sisters of the Good Shepherd filed a resolution this year asking Tesla to do more to ensure it is not using cobalt mined by children in the Democratic Republic of Congo.

Kristin Hull, the chief executive of Nia Impact Capital, said activist investment firms like hers were taking the lead in confronting Tesla management while big institutional shareholders, with far more clout, had stayed in the background.

“It’s the smaller asset managers and women-led asset managers and the nuns that are leading this,” Dr. Hull said. “The big shareholders,” she said, “just have to pick up the phone.”

For at least the near future before the “free marketeers” manage to erode any effective SEC role over companies, public companies will be subject to the kind of pressure that Kristin Hull and others will continue to apply. The plutocrats will slowly retreat into their redoubts with giant moats to protect them from the hordes of social investors intent on making them do good despite themselves. But in a democracy, if indeed we are able to keep it, numbers matter. When management faces 46% of its shareholders on the other side of an issue, one would think they’d pay attention.

Drummond Pike a frequent Organizers’ Forum participant and contributor to these pages, was the founder and CEO of Tides in San Francisco, and continues to be involved in philanthropy and social change.