ESG investing brings political fights to the investing world: Morning Brief

ESG investing brings political fights to the investing world: Morning Brief

Our society is not just divided along political lines — media, culture, and even coffee shops have become delineated between red and blue.

So perhaps it is inevitable that these fissures would come to the world of investing.

I’m speaking about the growth of so-called ESG investing — which stands for Environmental, Social, and Governance — and the growing backlash against this trend. Battle lines are being formed in the heretofore apolitical, clubby world of money management.

The roots of social investing go back decades, when activists called for pension funds to boycott investments in tobacco stocks and companies that did business in apartheid-era South Africa.

ESG was birthed in 2004 by Kofi Annan, secretary general of the United Nations, who asked major financial institutions to help identify ways to integrate environmental, social, and governance concerns into capital markets.

This call resulted in a global compact, “Who Cares Wins,” which included Goldman Sachs and Morgan Stanley as signatories.

A decade or so later, some institutional investors and money managers, including BlackRock, the world’s largest money manager with nearly $10 trillion under management, began establishing the support of shareholder initiatives and stood up investment products that focused on ESG.

Members of United Mine Workers of America (UMWA) and other labor leaders picket about the union’s strike at Warrior Met Coal Mine, outside BlackRock’s Headquarters in New York City, U.S., July 28, 2021. REUTERS/Brendan McDermid

To a degree, BlackRock and its cohort did so in response to pressure from the political left.

Now, those same investment managers, BlackRock in particular, are facing criticism from the political right.

As you can see below, there’s been a disparate flurry of activity from conservative politicians pushing back against ESG investment initiatives:

The latter article pertains to an eight page letter the AGs wrote to BlackRock CEO Larry Fink on August 4th, complaining about his company’s ESG mandate and asking him to respond by yesterday.

“As a matter of policy, we don’t comment on our engagements with legislators and regulators,” a BlackRock spokesperson emailed us.

The oil & gas industry and red state politicians argue the ESG movement is raising the cost of capital, making it more expensive to drill and carry out other business investment, and in the process costing Americans jobs.

When I asked a veteran domestic oil and gas CEO about this, they told me: “The cost of capital has certainly gone up for the industry.”

“Bank capital is very scarce, mostly for smaller companies,” this CEO said. “Many banks that used to participate in syndicates are no longer doing any new energy lending. What commercial lending that is available comes with tighter underwriting standards. Part of this is ESG, but another is investors’ — both banks and equity holders — very recent memories of deep losses in the industry sector.”

It may be that ESG is causing some investors to shun oil and gas stocks, depressing share prices and making raising capital from public markets more expensive.

But oil and gas stocks as measured by P/Es have been cheap for years. Exxon, for instance sells at a hair over 10 times next year’s earnings, almost exactly the same as 13 years ago.

As for jobs, according to industry consulting firm IBIS World, employment in the U.S. oil and gas industry has soared to over 324,000 as of this month, the highest by far, in a decade.

Meanwhile, the energy sector has been the best performer in the S&P 500 this year. By a mile.

Through Friday’s close, the energy sector is up over 40% this year. The next best performing sector, the utility sector, is up 10%. The S&P 500 is down 11% in 2022.

With BlackRock, Vanguard, State Street, and the big Wall Street banks falling out of favor with red state politicians, Vivek Ramaswamy, a former biotech CEO and author of “Woke, Inc.: Inside Corporate America’s Social Justice Scam” saw an opportunity, creating Strive Asset Management, funded with $20 million from the likes of Peter Thiel, Bill Ackman, and J.D. Vance.

Ramaswamy says the real problem [with ESG] is “the fiduciary breach at the heart of this, using someone else’s money to advance social and political perspectives through voting power and shareholder advocacy that the owners of capital actually disagree with.”

Strive — tiny compared to the Wall Street giants — will “mandate companies not to focus on environmental issues, not focus on social issues, not to focus on political or cultural issues, but to exclusively focus on products, products and services, and thereby serve their shareholders period.”

Author Vivek Ramaswamy speaks at the Conservative Political Action Conference (CPAC) in Dallas, Texas, U.S., August 5, 2022.  REUTERS/Brian Snyder

Author Vivek Ramaswamy speaks at the Conservative Political Action Conference (CPAC) in Dallas, Texas, U.S., August 5, 2022. REUTERS/Brian Snyder

Bill McKibben, Middlebury professor and longstanding environmentalist, has a different perspective.

“This is the fossil fuel industry weaponizing their control of state governments,” he says. “It’s to be expected. It’ll be interesting to see whether the blue state treasurers and so on are up to the fight.”

Strive, which aims to have funds for institutions, recently launched an energy index ETF (DRLL) which “delivers a new ‘post-ESG’ shareholder mandate to U.S. energy companies” for retail investors.

Yes, “sin stock” investment vehicles have been around for years, such as the VICEX fund, and more recently the B.A.D ETF (BAD), but they never generated much buzz, nevermind returns, and unlike DRLL weren’t marketed as anti-ESG. That could change.

But to me, the world’s transition from carbon-based energy to other sources doesn’t lend itself to binary thinking. “We need to ban all drilling!” or: “ESG is an infringement on my freedom that must be stopped!” are viewpoints that won’t get us closer to any solutions.

Facts: Climate change is real and we have to move away from fossil fuels. But we can’t do it overnight and might need some incentives to do so.

It is also possible to believe in climate change and to invest in some drilling for the time being. And Jamie Dimon told clients as much this month.

“Why can’t we get it through our thick skulls, that if you want to solve climate [change], it is not against climate [change] for America to boost more oil and gas,” Dimon said.

Warren Buffett who believes in climate change, has invested in oil stocks, most notably Occidental Petroleum, which Berkshire appears poised to take a 50% position in.

Is it mercenary or hypocritical of Buffett to believe in the science and buy oil and gas stocks? Perhaps. It’s also arguably an unemotional middle ground.

Behaviorists will tell you that some children — and grownups, too — have trouble with transitions and will act as things shift in front of them. I guess this applies to energy transitions as well.

This article was featured in a Saturday edition of the Morning Brief on Saturday, August 20. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Follow Andy Serwer, editor-in-chief of Yahoo Finance, on Twitter: @serwer


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