The ESG Advocate 009 - Anti-ESG goes to market
It's been over a month(!) since I covered the anti-ESG movement in any depth, but it still hasn't gone away. For example, as I prepped to listen to content on my runs this week, I searched Youtube for ESG videos.
"ESG"
Over 20 minutes
In the past week
Results:
❌Glenn Beck video #1
❌Glenn Beck video #2
❌Scott Adams video?!?
✅A webinar from The Conference Board
❌Anti-ESG, SMB perspective from Canada
Needless to say, I ran while listening to podcasts this week. The anti-ESG movement is everywhere, including the markets.
Let's get to it!
💪The Energy ETF that won't quit (unless it's ESG)
Thematic investing allows investors to invest according to their convictions. Want to invest in companies that excel at AI? Here are the top ETFs! Want to invest in Energy companies? Well, we have that, too!
Mostly, these types of funds offer a diversified approach to investing around a common theme. If you have an investment thesis (AI will grow), you can test it in an ETF.
A new energy ETF is getting a lot of attention lately and has quickly built $100 of Assets Under Management (AUM) within the first week of launch. I'm writing, of course, about Strive Capital's DRLL ETF. This energy fund, focused mostly on O&G, shares 9 out of the top 10 holdings with another fund you've likely never heard of, XLE.
Why is so much attention on an ETF so similar to an existing ETF? It's simple. DRLL is anti-ESG (or anti-woke, depending on your marketing preference).
DRLL's investment strategy is built on passive management, which largely uses the broader index to ensure returns and is the same strategy XLE employs. There are several key differences between DRLL and XLE, mostly in the positioning and objectives.
First, page 6 of DRLL's investment case, which declares "We Believe Our 2-3x Call is Conservative," also contains these two statements:
Potential energy outperformance of 650% possible vs tech.
We believe now is the time to be greedy, playing for a return of normal valuations for energy relative to tech.
Combine these two statements with the fact that this is a self-proclaimed anti-ESG fund and ESG represents risks, and you have an interesting cocktail. Yet, ETF marketing about returns is often hyperbole.
Second, DRLL has specific objectives aligned with the myth of never-ending growth, which I wrote about last week. Here's how Vivek Ramaswamy put it:
That means yes, drilling for more oil. Yes, fracking for more natural gas. Yes, doing whatever allows you to be most profitable and successful over the long run without regard to somebody else's political agenda. Nobody is delivering that voice to the energy sector today. And I will tell you, that's the shareholder mandate that Strive plans to deliver to U.S. energy companies
Since our entire global economy is based on growth, I think there are plenty of voices telling energy companies more short-term growth over sustainable returns (as we'll see in the next section).
Lastly, and maybe the biggest difference, DRLL plans to use its proxy voting power to vote against ESG initiatives that they believe run counter to growth while also introducing anti-ESG proposals. Maybe this is why their expense ratio is 4x that of XLE?
Here's what that might look like. Recently, 2 of the top 6 holdings in DRLL joined the Oil and Gas Methane Partnership (OGMP) 2.0 Initiative. Per the press release:
The initiative’s mission is to improve the industry’s transparency in methane emissions reporting and encourage progress in reducing those emissions.
With DRLL's investment strategy, they could introduce proposals to reverse efforts like this in the pursuit of growth. Yet, this runs counter to how Mark Brownstein, Senior Vice President for Energy at the non-profit Environmental Defense Fund, said about the initiative:
Solutions exist for companies to cut emissions quickly and cost-effectively. OGMP provides a comprehensive and transparent framework to see and compare their results.
So, if your goal is to own energy stocks (including solar, by the way) while actively telling management to ignore ESG risks, this is the ETF for you. You are the target stakeholder for this fund...on a fund that ignores stakeholders and pretty much everything else.
Our shareholder engagement is based exclusively on maximizing returns for our clients.
It is worth noting they incorrectly conflate ESG risks and opportunities with sustainability and impact investment strategies on the fund's factsheet.
ESG investing is defined as utilizing environmental, social, and governance (ESG) criteria as a set of standards for a company’s operations that socially conscious investors use to screen potential investments.
ESG isn't always about socially conscious investors. That is more impact investing. As always, ESG is about risk and opportunities. As Erika Karp, Chief Impact Officer at Pathstone, pointed out this week, ESG investing isn't necessarily even a thing, but an analysis of material issues.
The risk of not conducting integrated ESG analysis across securities, managers, sectors, regions, and the capital markets is tremendous.
Look, I'm all for thematic investing principles and believe that in a free market, anyone can vote their opinion through share ownership, even if I don't agree with their position. To me, the position that ESG issues should be discounted in the pursuit of growth makes little sense. Growth won't come if you discount your risks.
But we might not need to worry. Morningstar reports that the anti-ESG movement is not getting the voting traction it needs to make a difference. Time will tell whether or not DRLL will have its proposals approved, but perhaps the attention and subsequent inflows are the points.
NOTE: You should have guessed by now that this doesn't represent financial advice.
🤔Politics out of investing, unless it helps
On one hand, DRLL states that politics are left out of the investment thesis yet are unmistakably aligned to a conservative perspective. This is so blatantly apparent that it led Ryon Harms, CEO of Manifest Social, to call the anti-ESG investing movement "the Age of Infowars Investors."
Divestment in fossil fuels is a growing concern of state legislatures. This became painfully evident as 19 conservative state attorneys signed a letter to BlackRock on August 4th.
Many of our states have adopted legislation prohibiting energy company boycotts, and others will likely join them.
The word 'risk' appears only once in the letter as a final jab to BlackRock Ironically, it is the risk the investment firm faces, not the risk states that don't even try to transition will face.
The time has come for BlackRock to come clean on whether it actually values our states’ most valuable stakeholders, our current and future retirees, or risk losses even more significant than those caused by BlackRock’s quixotic climate agenda.
The tragedy is that many of these southern states are great locations for solar and wind but need transmission line infrastructure to export energy to other states. Figuring out how states could capture the next wave of energy innovation through a responsible transition would be a more productive use of political capital instead of a coordinated attack, but that's not where we are today.
We're left with a doubling down on endless fossil fuel growth, which means no consideration of sustainability issues, risk-related or otherwise.
🤷♂️The anti-ESG position ignores risk
As Mindy Lubber, CEO of Ceres, calls out, the big problem is that the anti-ESG movement is built on a lie. ESG represents issues around risk and opportunities. Yet, if we don't reverse the effects of climate change, these risks will worsen for companies. This is where sustainability efforts intersect with ESG.
I love the storytelling that kicks off this article:
Imagine you are an investor, and a business comes to you with an opportunity. A beverage company, perhaps, whose facilities are running out of water. A clothing company whose cotton is all dying. A ski resort that is seeing less snow each year. A logistics company that is struggling with melting runways and buckled infrastructure, snarling already-strained supply chains across the economy. And imagine these companies aren’t doing anything to address these issues.
Examples like these are why I'm having so many conversations with companies about these issues. People want to solve these challenges because they see the threat to their businesses and communities. Still, conservatives, long the friends of big business, have turned against the free market. They believe that these issues are politically or value-driven.
Denise Hearn, Senior Fellow at the American Economic Liberties Project, put it this way:
By elevating corporations above the law, Friedman, and his conservative allies ultimately ushered in the very outcome they sought to avoid — a corporation elevated to such high political stature that it undermined the countervailing mechanisms of the state and the public altogether.
Look, the people I talk to daily are passionate about solving these challenges. They are driven partly by their values but also want to ensure their business and customers continue to prosper. Companies are in the middle of investors pressuring them to address risk and employees who are passionate about solving these challenges.
Discounting ESG and sustainability altogether by conflating them with some kind of 'punishment-based' divestment rhetoric could add to ESG risks by:
Ignoring issues related to climate risk and social justice
Reputational damage through ignorance or inaction
Talent and customer turnover
Missing opportunities tied to transitions
Strive Capital's own footer acknowledges ESG risk without calling it what it is.
A company’s profitability may also be affected by pricing pressure, government regulation, environmental factors, and unpredictable changes in consumer demand.
Those last three things are all ESG! 🤦♂️
📢Do pro-ESG efforts have a marketing problem?
So, where do we go from here? Do we scrap ESG entirely or try to fix it?
I think putting ESG or sustainability back in the bottle is unlikely. Many companies and investors are at the early stages of uncovering ESG risks and opportunities while understanding their systemic impact. Governments are also taking action coming out of COP26. I believe we will likely see the slow burn of ESG over the next few years, which means we will likely sit in green-washing concerns mixed with real ESG/sustainability efforts alongside these continued attacks for a while.
The conflation of ESG and sustainability doesn't help, though. Leslie Samuelrich, President of Green Century Capital Management. makes a reasonable call to action here:
It’s time for the industry to explain what ESG means and what it doesn’t mean, to maintain its credibility.
The SEC is attempting to address this for investors, at least, with their ESG Fund Names/Disclosures draft proposal. Whether or not EU's CSRD, the ISSB, or the SEC's other climate draft proposal will address this for corporates and the public remains to be seen.
For the pro-ESG movement, the voices don't seem to be as loud. Robert Eccles, Professor at Said Business School, points out in the same read above that ESG is boring because it is focused on material issues. He's correct in his interpretation, but there's a fine line between addressing ESG risks and opportunities and dealing with broader systemic issues. That line is blurred as time passes, and the strange inertia of never-ending growth contributes to the anti-ESG noise.
I'm not sure ESG is boring. I'm working on all kinds of interesting material projects with companies and some great sustainability ones as well!
To return to the sentiment on ESG, I'd call out a recent Business Pants podcast episode about the anti-ESG movement. It's worth a listen to follow Matt Moscardi down the rabbit hole of uncovering who is behind one particular group. His frustration about the lack of pro-ESG voices out there is palpable.
And so, my final advice is to get out there and make some noise (and drive change)!
Tweet of the Week
LinkedIn Post of the Week
A conversation about ESG with a state treasurer — www.linkedin.com
In this funny post, Jérôme Tagger imagined a conversation between a conservative state treasurer and an investment manager.
It was too good not to share.