It’s not easy to be anti-green
The anti-ESG movement seems to have gained traction, or at least more attention, in recent weeks. As the midterm elections approach, the Republican Party is mounting the pressure on what it has called “woke capitalism”. But if the rhetoric is real, the action would seem a bit more limited. Turns out being anti-ESG is harder than it looks. The Alexes look at what has (or in fact hasn’t) happened.
Alex Rosenberg: So, is the ESG backlash still relevant?
Alex Steger: Well, it is and is not. A lot of the things we talked about in May are happening and have actually accelerated. “Anti-ESG” asset manager Strive launched its first fund, the Strive US Energy ETF (with the funny ticker DRILL) and it collected Already $150 million in assets. And various Republican-controlled state treasuries have implemented their measures to take money away from companies they believe are anti-fossil fuel companies, in particular BlackRock, which has lost $1.25 billion in at least four states.
Rosenberg: Looks like the backlash is in full force.
Steger: It does. And I think it’s probably just picking up momentum from here as we get closer to the midpoints, there’s definitely some real effort behind it, but the moves mentioned above seem maybe- be more impactful than they are. Take, for example, the Treasury thing. Sounds like a big deal, but a) money is a drop in the bucket for an $8.5 billion manager, b) it’s basically cash rather than money significant pension fund that didn’t come into play, and c) a state ended up giving the money to Federated Hermes.
Rosenberg: They look fancy.
Steger: For the uninformed, which might include Arkansas State Treasurer Dennis Milligan, Federated Hermes is the result of a merger between US money market specialist Federated and European ESG specialist Hermes. A spokesperson for Milligan defended the move to Insider, saying the company “hasn’t been at the forefront of politics with these wallets.” But if we assume that “doing politics with portfolios” is the same as ESG investing, then Federated Hermes might differ. At the top of his site, in the biggest lettering on the entire site, it says: ‘Sustainability. We think so. Then there are some pictures of windmills with clouds and inside the clouds are the words ‘Sustainability’ ‘Responsibility’ and… uh… ‘ESG’. He then goes on to boast that “everything we do” is aimed at creating sustainable wealth.
Rosenberg: And don’t get me started on their handbags.
Steger: Uh… okay. In any event. There’s a certain irony here…because one of the easy criticisms of ESG funds in recent years has been when a particular fund, say a fund that claims to weed out big polluters, turns out to hold a blatant polluter. Now the anti-ESG crowd finds they are falling into the same trap.
Rosenberg: So in their attempts to weed out companies that weed out companies that harm the environment, they actually jumped on a company that takes credit for weeding out companies that harm the environment? Perfect.
Steger: Turns out this whole business exclusion thing is more complicated than it looks.
Rosenberg: So maybe the impact of the anti-ESG movement has been exaggerated. But I will say that it has been interesting to see the furious reactions from ESG activists, who somehow realize that their tactics have been co-opted by those with different beliefs. What’s great is that they are forced to recognize that there is no one obvious way to “make the world a better place”. It is an inherently political question. If this were not the case, every shareholder vote for a company to have a non-monetary impact would automatically be a pro-ESG vote.
Steger: Yes, and as we know, most pro-ESG resolutions do more talk than support. Mind you, new research from Morningstar found that anti-ESG votes get even less love.
Rosenberg: I don’t want to digress here, but didn’t you find this research a little weird? Morningstar said that “it has certainly become more complex to assess which proposals are pro-ESG and which are anti” since sometimes “the entire resolution seems reasonable, with the submitter only revealing the true motivations in person during the meeting”. They note as an example that a proposal asking General Motors to disclose the risk of child labor in its electric vehicle battery supply chain, which sounds quite ESG, has shockingly turned out to be a anti-ESG proposal when his lawyer claimed that electric vehicles are only growing in popularity. “Because of the Biden administration’s attacks on the oil and gas industry.” Similarly, asking Mondelez to split his roles as CEO and Chairman of the Board seemed “reasonable…on paper” – but Morningstar learned it was actually a cleverly disguised anti-ESG proposal. when his lawyer had the temerity to say that “people are fed up with the radical political agendas imposed on them by big business.
Of course, that’s when Morningstar sustainability guru Jon Hale calls “nonsense” the notion that “ESG is a plan to advance ‘leftist’ goals.” But you can’t define what is and isn’t ESG using politics as a barometer and then laugh when people say you do political assessments.
Steger: Good thing you weren’t wrong! Either way, research on anti-ESG votes (however defined) without love could make for unpleasant reading for Strive, which plans to run index funds but is making its voice heard during proxy season. Again, this is a tactic straight out of the ESG playbook, but not one with guaranteed success.
Rosenberg: One thing that makes this confusing is that there are two definitions of anti-ESG. One is a right-wing version of ESG (“making the world a better place by fighting climate change regulations”), and the other is based on the idea that the ESG project is inherently flawed, since Environmental and social goals just don’t combine well with investment decisions for a variety of reasons.
Steger: Interestingly, the ESG backlash appears to have shifted from the latter to the former. It is no longer a question of saying “don’t be that” – it is now a question of saying “be that rather”. And while “this” may be the opposite of the various progressive causes awkwardly captured by the ESG letters, it could end up having exactly the same impact, namely putting personal beliefs ahead of performance and thus hurting returns.
Rosenberg: Well, whenever you try to do something with your investment besides generating returns, you can’t expect to generate maximum returns, can you?
Steger: Who leaves us where? Anti-ESG being sort of the same as ESG. Both sides will hate this! Still, it will be fun to watch asset managers and PR as they try to walk that tightrope and please both sides of the divide. I know of at least one asset manager who has different pitch books for red and blue states.
Rosenberg: We are pro-ESG! We are anti-ESG! The important thing to remember is that you should not focus on our performance.