Responsible finance put to the test

First there was West Virginia. This coal country withdrew part of its investments in BlackRock in January 2022, and six months later it announced that it would not do business with the banks Goldman Sachs, JP Morgan, Morgan Stanley, Wells Fargo, US Bancorp. These financiers didn’t like coal enough.

In August, the state of Texas outdid itself by blacklisting ten banks (including BNP Paribas) and 348 investment funds committed to renewable energy, announcing that Texas pension funds and municipal bond issuers could no longer call. In the name of oil – shame because Texas is also America’s leading producer of solar and wind energy!

Cabal

Finally, Florida passed $2 billion invested in BlackRock in December. “If Larry or his friends on Wall Street want to change the world, let them run for office. Let them form an association. That they donate to support causes close to their hearts” – in other words, that they don’t do it with savers’ money – this ultra-conservative state’s financial watchdog takes aim at BlackRock CEO Larry Fink, an alleged champion of “shareholder capitalism”.

Since the end of the health care crisis, corporate social, environmental and governance responsibility, also known as “ESG,” has been challenged by the American conservative right. The financial groups that promote this with their investments are the first victims of this cabal that worries them but cannot stop the course of history.

As ESG is a relatively new idea with just 1.3% of assets under management in the US, the charge is even harsher against 19% in Europe at the end of September, according to Morningstar.

In addition, demand for oil, gas and coal has grown rapidly since 2021, boosting the stock market value of fossil fuel producers. The trend was highlighted eleven months ago. After the invasion of Ukraine, Europe ran out of gas and pump prices suddenly exploded for American drivers.

In this context, is hydrocarbon production really “responsible” for underfunding? And invest less in the companies that will deliver the best returns to shareholders?

It awakened capitalism

Asset managers should ask themselves all these questions. At their 2022 AGMs, BlackRock, Vanguard, Fidelity Investments and State Street approved only 20% of resolutions promoting the energy transition, compared to 32% in 2021. Vanguard and BlackRock are clearly the largest shareholders of five global oil companies (ExxonMobil, Shell, TotalEnergies, BP and Chevron).

In a country where pensions are largely invested in the stock market, opponents of ESG, who are widely heard, have therefore scored a point.

At the center of this political maelstrom is BlackRock. In a strange moment in history, the world’s leading fund manager – 8.6 trillion in assets – has become an emblem of Wall Street’s “awakened” capitalism. This pejorative term singles out leftists and climate activists or racial and sexual minorities for their supposed extremism.

At the group’s headquarters in New York, we witnessed the deployment of a national media and advertising campaign all the way to Times Square. Resisting an attack far more difficult than the looting of buildings by far-left activists in France two years ago.

S for “devil”.

“Over the past year, BlackRock has been the target of campaigns suggesting that we are either too progressive or too conservative in managing our clients’ money. We are neither one nor the other. We put our clients’ interests first and provide them with the investment options and performance they need,” the spokesperson said.

“The narrative has become obscene; it’s a massively polarizing narrative,” Larry Fink said in January at Davos, worried about the growing personal attacks directed at him. Dissident Twitter chief Elon Musk rhymed the “S” of ESG with “satanic” — not surprisingly, after he fired half his staff overnight comes from an entrepreneur who can extract.

On defense, the fund management giant, which is more accustomed to negotiating with financial regulators (SEC, FDIC, Fed, etc.) than with parliamentarians, had to triple the size of its lobbying group in Washington last year. – now they are about fifteen years old. . its total federal lobbying spending increased 63% to $2.4 million in 2022, now lobbying in Texas and Florida.

The American media has really covered the painstaking work of advocacy groups like the American Legislative Exchange Council (Alec), which specializes in drafting bills. This business lobby, fiercely opposed to “awakened capitalism,” went on the attack when demand for oil collapsed due to the health crisis. Texas oil and gas SMEs could no longer borrow. The classes were depressed. The sector bounced back in the following year, but the anti-ESG war machine was turned on and nothing could stop it.

Various organizations in the Republican nebula have taken over: the ultra-wealthy, like Leonard Leon’s Marble Freedom Trust, or the well-established Public Finance Officers Foundation, a “pro-market, pro-growth” association of elected officials — especially conservative treasurers.

But so far, the communications operation of the American conservative right has caused more fear than harm. BlackRock did its math: withdrawals motivated by the anti-ESG fight amount to $4 billion, with $400 billion inflows reported in 2022. “Black rock” did not budge even an inch. For example, withdrawals in West Virginia did not exceed $20 million.

Outside of BlackRock, capital continued to flow into sustainable funds in the US. After a soft spot in the second quarter of 2022, inflows rose a net $300 million between July and September, while all funds lost $87 billion, according to Morningstar.

A story of history

“In the US, there is awareness of the importance of ESG, because in order to do business in Europe, you have to comply with European regulations on this subject. In addition, a certain number of managers consider this approach appropriate for the company: ESG is an additional network of analysis to support their investment decisions”, explains the head of sustainable investment at the fund, which is present on both sides of the Atlantic.

In his view, the revolt against ESG is a historical hiccup caused by the “accelerating polarization of American society” and its “pursuit of a conservative agenda rather than economic considerations.” “It doesn’t reflect the general opinion,” he said.

I believe that some of the promulgated anti-ESG laws will never be passed.

Moreover, pro-ESG pension funds are heavier than anti: California is 3.5 times that of Texas and New York is 2 times that. “States supporting the movement have more capital, this is an important detail. I also think that some of the anti-ESG laws that have been announced will never be voted on,” he believes.

A spokesperson for a large Texan public pension fund confirms that the ban on ESG funds is not a revolution: “The law does not change the situation for those of us who invest heavily in energy,” he explains.

Further, “the ban applies only to shares and not to investment in unlisted ones. And our fiduciary duty commands us to act in the best interests of our investors”… which may involve going beyond the ban, he half-assed.

Activists against hidden power

But elected Conservatives are not alone in their attack. The rebels opened another front by directly challenging the leaders of companies engaged in greening and moralizing their balance sheets and trying to get other people to lead.

Last year, activist investor Vivek Ramaswamy criticized Chevron for underinvesting in fossil fuels, Apple for specifically seeking to hire blacks and women, and Disney for opposing gender identity censorship at a Florida school. He also wrote to Exxon Mobil to suggest names of directors who would resist “extreme social pressure on fossil fuel producers to cut production.”

Some leaders are forced by large fund managers to implement ESG standards.

Vivek Ramaswamy Activist Investor

“Some leaders are forced by big fund managers to apply ESG standards, but they won’t accept it openly,” he explains to “Les Echos”. “I am satisfied with the dialogue we have with Exxon; We will see the decisions that will be presented to the general assembly in the spring.”

The primary fault, in his view, is the turn of the employers’ association Business Round Table, which decided in 2019 to promote “stakeholder capitalism”. “Woke, Inc.” on the “fraud” of the ESG movement. brochure author created the Strive Asset Management foundation to ignite a “renaissance of a culture of business excellence.”

hidden power?

A report released in December by a minority group on the Senate Banking Committee agreed with the managers’ conspiracy. BlackRock, State Street and Vanguard will force banks to consider social progress criteria when issuing loans without informing their shareholders. Therefore, they can be classified as bank holding companies that will have a “controlling influence” and are subject to “insurmountable capital and liquidity requirements”, threatening the senators.

ESG, a hidden power? Those managers who want to be an example of transparency are accused of laughing. The decisions of the investment group, its strategy, and the general meeting are open. Managers don’t play poker with investors’ money. ESG funds account for only 15% of assets under management at BlackRock.

In an interview with the Financial Times in January, State Street boss Ron O’Hanley explained that as “the most long-term of long-term investors”, his group would continue to engage in “ESG”: “For us, it’s not a political issue. This is nothing more than the idea of ​​including climate in our network of investment risks.”

The clean energy transition will continue, Ron O’Hanley said, and “I am very confident that the majority of elected officials, regardless of party, state or region, will embrace jobs and economic impact partners.”

In contrast, Vanguard in December backed out of the Net Zero Asset Managers Initiative (NZAM), a coalition of more than 300 members that represents more than half of the world’s assets under management, pledging to reach a net zero goal. Emissions by 2050 in line with the Paris Agreement.

But Vanguard has disclosed challenging goals, especially since its funds track indexes that aren’t always ESG-aligned. However, when listed groups make promises, the Securities and Exchange Commission requires proof. He punishes those who do not keep their promises.

In the future, the police of the American stock market will be even more frantic about “green” professions of faith. The SEC is working on a “climate regulation” project that would impose transparency rules on listed companies. And help them stay on track for the long haul, even during political storms.