The week of February 12, 2024: Withdrawals from the ESG/Net Zero cartel, office property, AI, the Russian economy, and much, much, more.
The week of February 12, 2024: Withdrawals from the ESG/Net Zero cartel, office property, AI, the Russian economy, and much, much, more.
The more people understand ESG, the more opposition that it attracts. There are signs that the same may be true of the goal of net zero greenhouse gas emissions by 2050. For as long as 2050 was a long way away, net zero sounded (to many) like a well-intentioned goal worth aiming for. But as 2050 draws closer, the net zero ratchet is turning more rapidly, and people are beginning to notice, as the ratchet squeezes them. The wave of protests by European farmers against the negative effect of climate policy and other environmental regulations on their livelihoods is likely to be a preview of wider resistance to come.
And now we have the news that, in a way, merges concerns about net zero and ESG. Two large money managers, JP Morgan Asset Management and State Street Global Advisors are withdrawing from Climate Action 100+. BlackRock Inc., BlackRock’s parent company, is also pulling out of CA100+, but BlackRock International will join in its place. According to a Bloomberg report (February 15),BlackRock International is the part of BlackRock containing most of the funds focused on decarbonization. In total, this represents about $14 trillion being removed from CA100+.
Climate Action 100+?
Over to their website:
Over 700 investors, responsible for $68 trillion in assets under management, are engaging companies on improving climate change governance, cutting emissions and strengthening climate-related financial disclosures, in order to create long-term shareholder value.
The work of the initiative is coordinated by five investor networks: the Asia Investor Group on Climate Change (AIGCC), Ceres, Investor Group on Climate Change (IGCC), Institutional Investors Group on Climate Change (IIGCC) and Principles for Responsible Investment (PRI). It is supported by a global Steering Committee.
It was no surprise to see Ceres, a familiar presence in the ESG eco-system, on the list:
Ceres advances leadership among investors, companies and capital market influencers to drive solutions and take action on the world’s most pressing sustainability issues.
Equally, PRI might well have been expected to pop up too. Supported by the United Nations, an organization not normally associated with the defense of free markets or shareholder value, PRI claims that it is “the world’s leading proponent of responsible investment.” It works “to understand the investment implications of environmental, social and governance (ESG) factors” and “to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions.”
PRI also runs the PRI Academy. This has the “aim of equipping industry professionals with a common language of ESG, based on the latest thinking in responsible investment… As of 2023, the PRI Academy has trained over 20,000 individuals from 88 different countries.”
The institutionalization of ESG (and the revenues it generates) is one reason why the inroads it has made across the investment sector (beyond those who have actively chosen it) will be so difficult to reverse.
Bloomberg (February 15):
The departures are occurring during a period of heightened US political backlash against the environmental, social and governance investing strategy. Republican officials across the country have launched investigations into banks and asset managers, introduced anti-ESG laws and pulled funds from firms such as BlackRock, which championed sustainable investing.
House Judiciary Chairman Jim Jordan, an Ohio Republican, called the decisions by JPMorgan and State Street “big wins” and said “we hope more financial institutions follow suit in abandoning collusive ESG actions.”
“I wouldn’t be surprised if we see more defections, especially given that there’s now a cost, such as potential litigation, that wasn’t there when companies joined,” said Lance Dial, a Boston-based partner at law firm K&L Gates LLP.
I’m old enough to remember being told that the efforts to push back against ESG would have no effect.
The authors of the same Bloomberg report describe CA100+ as “the world’s largest investor group formed to fight climate change.” Visit its website, and net zero comes quickly into view. The “Business Case” (apparently) is:
To mitigate investment exposure to climate risk and secure ongoing sustainable returns for their beneficiaries, investors are ensuring the businesses they own cut emissions to help achieve the goals of the Paris Agreement and accelerate the transition to net-zero emissions by 2050 or sooner.
Notice, as usual, a now familiar piece of weasel-wording (“ongoing sustainable returns”). Exactly what that term means is never quite made clear, except that it generally comes with talk of “long-term investing,” a style of investment that, in the wrong hands (and there are plenty of those in the investment world), can mean never having to say “sorry.” The good times will come in the end, you see. In reality, there is no particular magic in long-term investing. Choosing whether to invest in a stock, at least for fundamental investors, is primarily a matter of looking at its price and asking whether it properly reflects the company’s prospects over whatever given period, long, short, or anything in-between, that the potential investor considers relevant. If it does not, this could represent a buying opportunity.
There’s also the matter of that 2050 target. The route to 2050 includes some interim benchmarks that are approaching soon. They seem set to be missed. Writing for Bloomberg a year ago, Javier Blas noted that:
BP’s Net Zero scenario sees oil demand 4 million barrels a day lower than it is now [February 2023]. That would mean removing the equivalent of Germany’s entire consumption in 2024 and repeating that feat again the following year.
Blas also pointed out that the forecasts he had seen showed oil demand rising in 2023 and 2024. Sure enough, oil demand did increase in 2023, and now even the net zero boosters at IEA (truly an organization that has lost its way) are forecasting that it will rise again in 2024.
Now go back to what Blas was writing in February 2023. After considering the likely overshoot in 2023 and 2024, he peered further ahead:
BP’s Net Zero readout suggests demand would need to plunge a further 9 million barrels a day from 2026 to 2030, falling to 85 million a day by the end of the decade. That equates to eliminating the consumption of France each year and, on the final year, striking out Italy as well.
Then the really difficult period starts…
If climate policymakers stick with the 2050 target, this means that more will have to be done to within a shorter period. This will increase the likelihood of severe political and economic dislocation, which is unlikely to be good for business or to deliver the desired result within the desired period. Adding insult to injury, it is not the best way of coping with a changing climate.
And then there was this from Bloomberg:
Analysts at BloombergNEF estimate that $4.8 trillion of annual investment and spending is required through the end of the decade for the world to keep pace with the environmental targets of the Paris Agreement. That outlay is a long way from the roughly $1.8 trillion that was allocated last year.
Indeed it is, and that shortfall raises, again, the question of whether targeting 2050 is anything more a fantasy and, as such, a dangerous misallocation of resources. At the same time, those trillions explain why climate policy makers are so keen to get hold of other people’s money. ESG is, of course, a good way of helping achieve that. Sorry, shareholders!
But over to CA100+:
Investors are increasingly recognising their exposure to climate risks and their fiduciary duty to respond. While investors can redirect their investment decisions to favour companies and projects that will accelerate the necessary clean technology translation, they also have a powerful opportunity to affect behaviour change, diversification and transformation among the most carbon-intensive companies through their equity and fixed-income holdings. This is possible through investment stewardship – including direct engagement with public companies to achieve corporate practice consistent with long-term value protection and creation.
Click on the link to “investment stewardship” to find, among other things, this:
Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.
So, once again, the objective is not the creation of value tout court, but delivering long-term value and“sustainable benefits for the economy, the environment and society,” goals that many disappoint those investors (or clients of those investors) who just want to see their money invested in a way that generates maximum risk-adjusted return for themselves. To repeat the point: it is their money.
Quite who defines those “sustainable benefits for the economy, the environment and society” is unclear. After all, these are not uncontroversial topics. In a democracy anyway.
“Investment stewardship” is, like “stakeholder,” a word that should make any investor interested in financial return head for the hills.
Scroll down a little more to find this (emphasis added):
Environmental, particularly climate change, and social factors, in addition to governance, have become material issues for investors to consider when making investment decisions and undertaking stewardship.
Another reminder that ESG is in the room.
Meanwhile, according to the Wall Street Journal, CA100+’s members are:
[S]upposed to “engage” 170 “focus companies” such as Boeing, Home Depot and American Airlines—that is, threaten to vote against non-compliant corporate directors and back shareholder resolutions that pressure management. Their campaign has had great success with 75% of targeted companies committing to “net zero.”
One trigger for the move by State Street (and the BlackRock switch) was that CA100+ had, as is the way of activist groups, increased its demands.
Bloomberg:
After an initial period that focused on improving governance, curbing emissions and strengthening climate-related financial disclosures, CA100+ recently entered a second phase in which signatories are expected to take a more active approach by requesting that companies “move from words to action.” State Street Global Advisors, which manages $4.1 trillion, said in a statement that it considers the latest requirements from CA100+ to be inconsistent with “our independent approach to proxy voting and portfolio company engagement.” JPMorgan Asset Management, which oversees $3.1 trillion, didn’t mention the new strategy of CA100+, saying it left the group because it has made significant investments in developing its own climate risk engagement framework. BlackRock said committing to CA100+’s second phase would raise legal considerations, especially in the US.
The Financial Times had more on BlackRock:
BlackRock said in a note that it was dropping its corporate membership because it believes the phase 2 strategy, which takes effect in June, conflicted with US laws requiring money managers to act solely in clients’ long-term economic interest.
JP Morgan Asset Management may have been concerned by some of the antitrust issues (something possibly also detectable in State Street’s comments) floating around groupings such as these.
The Financial Times:
JPMorgan’s most recent climate change engagement report states that it “does not work in concert with other investors on investment matters and makes its own independent decisions concerning investee companies”.
Back to Bloomberg:
For many investment firms, climate change has left them in a bind. On the one hand, most acknowledge that they view global warming as a material financial risk to their operations and portfolios. But with ESG becoming a political punching bag in the US, they’re taking an ever more cautious view on what actions they will take on climate, especially if that’s in a group with other investors.
The Republican backlash has led the finance industry to talk less publicly about climate change and other ESG-related issues, a phenomenon which has been dubbed “greenhushing.” But the reality is the decisions to leave CA100+ will likely have little impact on the industry’s financing of green projects and other efforts to address climate change.
Bloomberg has become the Pravda (or a Pravda: there are other candidates) of climate apocalypticism, hence the last two paragraphs, where the editorializing is most evident. We are told that “most” investment firms “acknowledge that they view global warming as a material financial risk to their operations and portfolios.” Whether they believe what they “acknowledge” is a different question. And note the reference to ESG becoming a “political punching bag in the US.” What that description reflects is that those promoting ESG, a profoundly political project (and one designed to bypass the democratic political process), have encountered pushback from, among others, politicians — and they are not enjoying the experience. Politicians interested in politics, what a horror. ESG has not become a political punching bag, but a topic of political debate, a healthy development in a democracy — except to those trying to advance a political agenda (funded by other people’s money) on, essentially, the quiet.
The reference to “greenhushing” is, I suspect, accurate enough. And it’s also all too possible that defections such as those by State Street will “likely have little impact on the industry’s financing of green projects and other efforts to address climate change.” There’s nothing wrong with that if those efforts are solely designed to boost shareholder and investor return (without qualifications such as “long-term”), but that seems unlikely. Maneuvers by large financial institutions to use a camouflaged version of ESG and its kin are a reminder that it is too soon for those worried by the threats posed by ESG to think that victory may be in sight.
Another reminder of that comes towards the end of the Bloomberg article when Michael Sheren, a former senior adviser at the Bank of England, is cited. He warns that “the political winds aren’t rewarding climate-active firms. today…Withdrawing from CA100+ ‘sends the wrong, short-sighted signal and gives cover for others to do the same.’”
“Climate-active firms.”
Firms should be shareholder-active. If they see threats or opportunities arising out of a changing climate, they should act, but in the interests of shareholders, where shareholders (or those investing in funds that are shareholders) are, unless they specify otherwise, presumed to be motivated by financial return — and not just for the “long term.”
Sheren is now a fellow at the Cambridge Institute for Sustainability Leadership.
And what’s that?
We are an impact-led institute within the University of Cambridge that activates leadership globally to transform economies for people, nature and climate. Through our global network and hubs in Cambridge, Cape Town and Brussels, we work with leaders and innovators across business, finance and government to accelerate action for a sustainable future….
Our multi-stakeholder approach engages influential individuals alongside businesses, governments, financial institutions and civil society representatives, focusing on their shared potential to rewire economic, social and environmental systems.
And, yes, this is just another example of how deeply entrenched stakeholderism and corporatism have become at an institutional level.
The real question for shareholders and clients is not why JPMorgan and State Street have left CA100+, but why they were ever in it in the first place. The answer, in all likelihood, was fees, corporatist power games, and groupthink.
Meanwhile, as the FT reports, other members of CA100+ include Goldman Sachs, Invesco, and Pimco. To their credit, Vanguard and Fidelity, two other leading asset managers, never signed up.
And speaking of Vanguard, toward the end of 2022, it withdrew from another large financial sector climate grouping, the Net Zero Asset Managers [NZAM] initiative. NZAM’s members have committed to support the drive to net zero by 2050. Among its Founding Network Partners are, amazingly, Ceres and PRI. Vanguard withdrew, it explained:
[S]o that we can provide the clarity our investors desire about the role of index funds and about how we think about material risks, including climate-related risks — and to make clear that Vanguard speaks independently on matters of importance to our investors.
A handful of other firms have left NZAM.
Vanguard also withdrew from Glasgow Financial Alliance for Net Zero (Gfanz).
In February 2023, Vanguard’s CEO talked about the company’s moves in an interview with the Financial Times, which I discussed in a Capital Letter back then. Among his comments were the following:
“We don’t believe that we should dictate company strategy,” he said, in his first public comments about the decision. “It would be hubris to presume that we know the right strategy for the thousands of companies that Vanguard invests with. We just want to make sure that risks are being appropriately disclosed and that every company is playing by the rules.”
He also added this:
“We cannot state that [environmental, social and governance] investing is better performance wise than broad index-based investing…Our research indicates that ESG investing does not have any advantage over broad-based investing.”
Awkward.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 157th episode, David is joined this week by best-selling author Zeke Faux of Bloomberg, who has written the authoritative book on the real “product” behind the crypto world. (Hint: There isn’t one). David walks through Zeke’s research and the discoveries that led to his best-selling masterpiece, Numbers Go Up: Inside Crypto’s Wild Rise and Staggering Fall. They discuss the similarities to past manias and delve into the role of celebrities in “validating” certain shady operations. David concludes with some final thoughts of his own. This may be the most comprehensive indictment of the bitcoin and crypto moment packed into 45 minutes you will find.
The Capital Matters week that was . . .
Trade Policy
Donald Trump’s apparent imperviousness to scandal and early primary victories all but guarantee him the Republican nomination. Given President Biden’s extreme unpopularity, it’s entirely possible that Trump will be sworn in come January. We should work to understand the political and economic ramifications as soon as possible. One question looms large: What will happen to workers if a “tariff man” returns to the White House?…
Free-trade agreements (FTAs) benefit America’s economy and strengthen diplomatic alliances when they are done right. Yet, every single FTA the U.S. currently has in the works has stalled. What can be done to fix this problem?…
Office Property
The difficulties facing the office property market have (again) been brought into focus, this time by worries over a New York bank, New York Community Bancorp, because of its exposure to the commercial real-estate sector (which, of course, includes office buildings) …
It’s worth remembering that office-property woes are not just an American phenomenon.
Bloomberg has an update on the situation in Germany…
A report in Bloomberg by Isis Almeida and Miranda Davis highlights another sign of the weakness in the office-property market in the U.S., the disappearance (or near disappearance) of cranes from many city centers. They report that in 2017, Rahm Emanuel, Chicago’s then-mayor, could point to 60 construction cranes on the skyline. Now it’s nine. Last year there was just one groundbreaking, this year the total may end up at zero…
Entitlements
Both parties have agreed to ignore the U.S. debt problem by promising not to reform its primary cause: entitlements. Republicans for many years were the only party willing to say that entitlements as currently structured are fiscally unsustainable and require reforms. One of Donald Trump’s political innovations was to join Democrats in promising not to reform entitlements…
Environmental Policy
Cynthia Lummis & Kent Lassman:
Last month in Davos, the World Economic Forum (WEF) held its 54th annual meeting where world leaders suggested countries should make significant concessions to address climate change. Ideas included having wealthier nations pay for so-called climate action in poorer nations and the phasing out of fossil fuels globally. It is not countries that sacrifice, however, but rather real people who lose opportunities for sanitation, food security, transportation, and reliable electricity needed for clean water, home heating, and many industries.
China
Anyone who thinks that China will not be a drag on the world economy has not been paying attention to signs that China’s housing- and credit-market bubble has burst. Nor have they been paying attention to indications that deflation now threatens China’s economy or to signs that political risks are rising and investors have lost confidence in Chinese government’s ability to handle its daunting economic challenges. The Federal Reserve ignores at its peril the deflationary consequences of these developments for the U.S and world economic outlook…
Undersea Mining
Norway announced last month that it will allow deep-sea mining exploration on its continental shelf. As the race for critical minerals ramps up, Norwegian officials said, the rest of the world can no longer afford to fall behind Russia and China.
“Today, we are almost dependent on Russia and China and we have to diversify the global supply-chain production of minerals around the world,” Norwegian energy minister Terje Aasland told CNBC…
Fiscal
The Congressional Budget Office’s director, Phillip Swagel, is testifying in front of the House Budget Committee on Wednesday this week. Here are a few questions I would like to ask him if I could…
Tax
To protect their businesses from facing competition, the European Union and the Organization for Economic Co-operation and Development (OECD) have concocted an international tax cartel to weaken America’s most successful international businesses. The new tax rules discourage international investment by imposing tens of billions of dollars in compliance and economic costs…
Electric Vehicles
Part of the new right’s schtick is to insist that we market fundamentalists — that is, those of us with a principled commitment to free markets — give too much attention to consumers while discounting the interests of workers and producers. Workers and producers, they believe, should be the center of policy attention, hence the call for subsidies, industrial policy, protectionism, and such.
I have always found the claim that producers are more important than consumers weird…
Artificial Intelligence
In 1994, internet pioneer Netscape introduced the first version of its “Navigator,” which made the internet accessible to even novice users. What followed was an explosion of new computer applications, and the concomitant diffusion of computing into virtually every corner of our lives. It all seems so obvious now, but one of the most interesting patterns in the financial data of the time was that markets repeatedly were surprised by the gains from computing…
Pino’s New Podcast
Dominic Pino’s new podcast with the American Institute for Economic Research, Econception, released its first episode. I talk about why the national debt is a problem, building on analysis from a 1989 paper by Herbert Stein (of Stein’s law). The national debt is a problem, and the national debt is big, but it is not a problem because it is big. It is a problem because it represents a misallocation of the national income. And that problem is much more serious than most people understand…
Russia’s Economy
Tucker Carlson makes two classic American-tourist mistakes in his recent video from a Russian grocery store. He sees things in a foreign country that he hasn’t seen in the U.S. and concludes that those things are therefore unique. And he mistakes the purchasing power of an American tourist with the purchasing power of a Russian…
Inflation
On Sunday, I wrote about how Joe Biden’s pre–Super Bowl complaint about shrinkflation made no sense. Ryan Bourne of the Cato Institute has added another angle on his Substack: Shrinkflation probably helps Biden…
Despite the Fed’s actions, many on the left, including Paul Krugman and Joseph Stiglitz, are trumpeting lower inflation as evidence that inflation was transitory all along. However, no one making these claims predicts that the price level will fall, which is what the term “transitory inflation” would imply…
Immigration
We keep hearing that the U.S. economy, especially the job market, is strong. At first glance this seems right — after all, the unemployment rate has been below 4 percent for more than two years. However, when we look closer at the data, things aren’t so clear-cut.
My colleagues Steven Camarota and Karen Zeigler did their own analysis of the Bureau of Labor Statistics’ “household survey” and found that, compared with the fourth quarter of 2019, right before Covid hit, the number of immigrants employed (legally and illegally) is up 2.9 million through the fourth quarter of 2023, while 183,000 fewer native-born Americans are working. Employment for both groups has obviously rebounded since the shutdown-driven lows of 2020, but it hasn’t fully recovered for the U.S.-born, while the number of immigrant workers has exploded…
Labor
Starbucks has a market cap of $105 billion and had net revenues of $36 billion in 2023. Blocking a progressive activist group from unionizing its employees is probably worth the money.
Lest you doubt the political intent of the SOC, part of its proposed solution in its letter to investors is appointing the following people to Starbucks’ board of directors…
To sign up for The Capital Letter, please follow this link.