Beware, The Culture Warriors Have New Strawmen: Dangers of “ESG” and “Woke Capitalism”

End of February 2023

by Hank Boerner – Chair & Chief Strategist – G&A Institute

New threats to ESG detected in America’s Red-controlled states:  The internal culture wars now include an unlikely frontal assault on the alleged “dangers” posed to institutional investors (state and city pension funds and the states; public financing) by professional asset managers who embrace sustainable investing approaches and who factor ESG analysis for their portfolio decision-making (in the management of client assets).  

Corporate sustainability leaders and savvy investment managers are asking, “huh?  “why”?

The threat of “ESG” joins such current strawmen as Critical Race Theory, “Woke” Capitalism, Don’t Say Gay (in the State of Florida), the allegations of certain “grooming” books being found in school libraries, and other specious arguments set up by political conservatives and Red state public sector leaders to gain points with the Republican base.  And with right-wing media outlets. 

The assault on ESG is mainly focused on the prominent asset management firms that serve state and city public employee pension plans and healthcare plans. These asset management firms are told to abandon ESG principles (and their focus on the risks brought by the climate change crisis to investments) and related portfolio management approaches — or lose the state and/or city investment and capital raising client.

Political leaders in such states as Florida, Texas, West Virginia, Louisiana, and Missouri are openly opposed to “woke capitalism” as they see it and have targeted BlackRock, State Street, Vanguard, and other large asset management firms embracing sustainable investment.  (Consider that these three organizations have significant levels of investments in many publicly-traded companies.)

The leading ESG ratings firms are also in the cross hairs; 20-plus Republican state attorneys general also challenged ISS and Glass Lewis as both advisory firms expanded their traditional governance work to including “S” and “E” issues through a more comprehensive ESG lens. (These firms advise and provide services to public sector pension plans.)

Some Red state leaders are cutting ties with BlackRock and other firms and moving to prohibit the Wall Street organizations from management of state monies (such as their public employee pension systems).

BlackRock CEO Larry Fink fired back at the annual Davos gathering to say that his firm, while losing about $4 billion in the public sector pullback of funds to be managed, has seen the flow of new money into BlackRock to manage dwarfing that – new funds to be managed by BlackRock topped $200 billion in year 2022, he told the Davos crowd.

In his annual letter to corporate CEOs, Larry Fink wrote in 2022 that “stakeholder capitalism is not about politics, it is not ‘woke’, it is capitalism….” Helping clients transition their investments toward a lower-carbon economy is helping BlackRock (with $9 trillion-plus AUM) to attract new assets to manage, CEO Fink explained.

The underlying concern of the Red state officials is really about protecting fossil fuels interests  – like their home states” oil, natural gas, and coal assets. Texas and Louisiana economics are heavily dependent on production of fossil fuels and that no doubt leads to  the political opposition to ESG and minimizing recognition of the dangers posed by the climate crisis.

While BlackRock and other asset managers may not yet eliminating fossil fuels from the assets managed, or in products offered to investors, there is trimming going on (at other major asset management firms and in a number of state investment funds).  There is also pressure being applied to traditional oil & gas firms to innovate and invest in renewable energy production. 

Consider:  in 2022, renewable sources accounted for 22 percent of energy production while coal accounted for 20%. 

Responding to the misguided opposition to ESG in nine states, Democrats in the House of Representatives formed a sustainable investment caucus to advocate for ESG policies and actions.

Said caucus chair Sean Casten of Illinois to The Hill editors: “Given the significant growth of AUM in funds that prioritize ESG factors, Congress has a duty to craft policies that provide investor protection and transparency ofd information to market participants.”

In an opposition move, House Republicans at month’s end moved to block the Biden Administration action on “allowing” pension plan administrator’s to consider ESG factors in their management of fiduciary funds.  The Republicans passed a resolution that would reverse the U.S. Labor Department rule that allows such consideration.  

This is a see-saw event; depending on which party is in the White House, under ERISA rules, fund managers have been allowed to consider ESG/and prevented from using ESG considerations in fund management.  

The House Republicans claim that using ESG would results in higher fees for “less-diversified” investments in “lower-performing” fund portfolios. (Read:  less fossil fuel investments in sustainable funds.)  

The Securities & Exchange Commission has a rule under consideration to mandate disclosure of GHG emissions by publicly-traded companies. It is expected that the Final Rule could be issued sometime in Q1 2023.

This move no doubt will set off a firestorm in Red state territory, and among the congressional delegations from those states. For public companies operating in those states that have, with sizeable operations in the European Union, new ESG disclosure rules are also being put in place in the EU.  

This year we will see significant conflict in the culture wars over climate change measures at the national, state and even city levels. 

The Federal government leads now in addressing the climate crisis, and Red state congressional leaders could challenge to the SEC’s legislative authority (to enact corporate ESG disclosure rules) when the Final Rule is issued (bringing legislative and judicial action).

The G&A team selected the Top Stories (below) on these conflicts.  We’ll keep you updated throughout 2023 on the culture war battles focused on climate change.

We are at an important inflection point in the effort to seriously address the climate crisis, and in ultra-partisan power circles now, the question posed is: which side are you on?

Top Story/Stories

• This group is sharpening the GOP attack on ‘woke’ Wall Street (The Washington Post) https://www.washingtonpost.com/climate-environment/2023/01/30/climate-change-sustainable-investing/
• House Democrats launch sustainable investing caucus (The Hill)  https://thehill.com/policy/equilibrium-sustainability/3830314-house-democrats-launch-sustainable-investing-caucus/
• Disclosure Rules On Track for Issuance by June (Thomson Reuters) https://tax.thomsonreuters.com/news/new-climate-and-sustainability-disclosure-rules-on-track-for-issuance-by-june/
• Politicians Want to Keep Money Out of E.S.G. Funds. Could It Backfire? (The New York Times – subscription required)  https://www.nytimes.com/2023/01/30/your-money/red-states-esg-funds-blackrock.html
• What’s Behind The ESG Investment Backlash (Forbes)  https://www.forbes.com/sites/christinero/2023/01/29/whats-behind-the-esg-investment-backlash/?sh=5929816c3158
• Davos 2023: BlackRock U.S. inflows dwarf $4 bln lost in ESG backlash -CEO (Reuters)  https://www.reuters.com/business/finance/davos-2023-blackrock-us-inflows-dwarf-4-bln-lost-esg-backlash-ceo-2023-01-17/

Climate Change Resolutions / and Investors’ Voting — “Hurricane” Coming in 2017 Shareholder Voting?

“Stormy Weather Ahead Warning”:  Climate Change Resolutions / and Investors’ Voting — “Hurricane” Coming in 2017 Shareholder Proxy Voting Season?

Guest Commentary – by Seth DuppstadtProxy Insight Limited

The United Nations‘ consensus reached in the “Paris Agreement” (COP 21), the goal to limit global temperature rise to within 2 degrees Celsius could turn shareholder support for climate change resolutions from a squall into a powerful hurricane at U.S. energy and utility companies this proxy season. says our team at Proxy Insight.

Example cited:  The BlackRock Investment Stewardship Team’s new guidance on climate risk engagement made the possibility of a Category 5 storm conceivable — if companies aren’t responsive.

During the 2016 corporate proxy season, a particularly successful subset of shareholder-sponsored climate change resolutions — known as 2 Degree Scenario (“2DS”) proposals —  averaged 37.73 percent shareholder support:

ISSUER MEETING DATE % FOR
Devon Energy Corporation 8-Jun-16 36.06
Southern Company (The) 25-May-16 34.46
Exxon Mobil Corporation 25-May-16 38.14
Chevron Corporation 25-May-16 40.76
FirstEnergy Corporation 17-May-16 31.9
Anadarko Petroleum Corporation 10-May-16 42
Occidental Petroleum Corporation 29-Apr-16 48.99
Noble Energy Inc. 26-Apr-16 25.1
AES Corporation (The) 21-Apr-16 42.21

 

This was a notably high level of support for a first-round shareholder proposal — especially for climate change related. *

Example:  The proposal at Occidental Petroleum almost gained a majority with 48.99% of votes cast in support (not including abstentions).

Proxy Insight data show Institutional Shareholder Services (ISS) recommended For votes for all nine 2DS resolutions, while proxy advisor Glass Lewis opposed one.

The shareholder resolutions ask companies to stress test their portfolios and report on financial risks that could occur in a low-carbon economy.

Up to 17 2DS resolutions are expected to move to vote at U.S. companies in 2017 proxy voting, according to Ceres.  (Ten will be filed at companies not having these resolutions before).  The next scheduled company voting on 2DS will be at AES Corp on April 20th. A preliminary proxy indicates Duke Energy shareholders will be voting on May 4.

*excluding non-US “Strategic Resilience for 2035” proposals (2015/16)

 TOP-10 INVESTORS (AUM) MOST FREQUENTLY SUPPORTING “2DS” CLIMATE CHANGE RESOLUTIONS

Investor For Against Abstain DNV Split
Deutsche Asset & Wealth Management 100.00% 0.00% 0.00% 0.00% 0.00%
Legal & General Investment Management 100.00% 0.00% 0.00% 0.00% 0.00%
Legg Mason Partners Fund Advisor, LLC. 100.00% 0.00% 0.00% 0.00% 0.00%
AXA Investment Managers 100.00% 0.00% 0.00% 0.00% 0.00%
APG (Stichting PF ABP) 100.00% 0.00% 0.00% 0.00% 0.00%
Schroders 100.00% 0.00% 0.00% 0.00% 0.00%
M&G Investment Management 100.00% 0.00% 0.00% 0.00% 0.00%
Aviva Investors 100.00% 0.00% 0.00% 0.00% 0.00%
Canada Pension Plan Investment Board (CPPIB) 100.00% 0.00% 0.00% 0.00% 0.00%
California Public Employees’ Retirement System (CalPERS) 100.00% 0.00% 0.00% 0.00% 0.00%

Information is available at:  https://www.linkedin.com/pulse/climate-change-voting-calm-before-storm-seth-duppstadt

Proxy Insight is the leading provider of global shareholder voting analytics.

Visit www.proxyinsight.com for more information, where you can also sign up for a trial or contact Seth Duppstadt, SVP Proxy Insight Limited at: seth.duppstadt@proxyinsight.com  Telephone:  646-513-4141