The ESG Advocate 012 - Governments are all over the place
After last week's deconstruction of Enron's CSR report, we now return to regularly scheduled programming with the ESG and sustainability news from the past week (maybe the past two weeks).
This issue is largely focused on government. We'll look at the markets' unofficial and official pushback to conservative states, check in on how China is adapting to ESG, and look at a great example of ESG leadership out of California.
Plus, two podcast choices and a newly minted word that many know well.
Let's get to it!
The markets give red states a reality check
This week I had the pleasure of opening up NAEM's Impact 22 session with a presentation on ESG and Materiality. This was my second ESG presentation to NAEM, or The National Association for Environmental, Health, Safety, and Sustainability (EHS&S) Management, and the second time I used this slide to explain the difference between ESG and sustainability.
There's a simple reason I keep using this slide. While ESG and sustainability are complex, there are also complexities between them. Often, I see one flow into the other as there is only so long you can ignore sustainability until it becomes an ESG risk.
As companies look at this early on, these two things appear very close together and MIGHT look like virtue singaling. In a recent Forbes article, Columbia University's Tomas Chamorro-Premuzic explained it like this:
ESG is following something of a similar pattern to diversity, which in the beginning was largely virtue signaling to make it look like organizations really cared.
From this early conflation and immature perspective, conservative states continued their attack on ESG by incorrectly assigning value-signaling to a risk management vehicle. As a reminder, these states control massive public funds and believe virtues are being imposed at the expense of value. While culture and sustainability manifest through values and purpose, addressing them doesn't mean you are abandoning a fiduciary responsibility, quite the opposite.
If governments ignore the impact of climate change, their citizens will pay the price through the loss of public services and life, property damage, and high capital costs. We've seen this play out in Jackson (water), Kentucky (unprepared for flooding since 2015), and Texas (either heat or the cold).
The last two weeks have seen responses from the markets calling out the anti-ESG conservative view (aka. Infowars Investing). The first is a brilliant fictional response from BlackRock by Nell Minow.
...our decisions, whether buying, selling, holding, voting proxies, or engagement initiatives, are based entirely on the underlying indicators of future value. To do otherwise at your direction would be to subsidize un-economic enterprises. That is politics, not finance. It is certainly not capitalism...
Of course, she's right. To ignore ESG means to ignore risk, which creates the potential to go against future value.
Shortly after Minow's letter came BlackRock's official response where they did not mince words:
...we are disturbed by the emerging trend of political initiatives that sacrifice pension plans’ access to high-quality investments – and thereby jeopardize pensioners’ financial returns.
The real BlackRock letter is organized around a few topics, but the section titled "Fiduciary Duty and ESG" contains the crux of the matter.
As prudent risk managers and stewards of our clients’ assets, it is imperative that we seek to understand and assess how these risks and opportunities will impact the companies in which we invest on our clients’ behalf.
And there it is...risks and opportunities, the core of ESG.
While BlackRock responded directly, Morningstar was tracking down the voting records of public funds. They uncovered that public funds voted "90% of the time in favor of ESG shareholder resolutions."
It seems pretty clear what the fiduciaries of public funds think about ESG in their voting record:
Indeed, in 2021, the Florida Retirement System voted 99% of the time for ESG resolutions. The Teacher Retirement System voted 97% of the time for ESG resolutions, and the Employees Retirement System of Texas voted in favor 85% of the time.
We'll have a chance to see this play out as more control is coming to investors. The SEC mandated universal proxy cards to give investors more control over voting on individual directors rather than a slate. Whether or not activist investors can seat ESG-favored directors remains to be seen. More control for investors would allow these states to vote their opinion (and apparently change it).
Not only are public funds voting in favor of ESG resolutions so far, but red states are capitalizing on the green economy by growing manufacturing, ensuring resilient supply chains with localized availability, and creating jobs.
Just because a state does not have targets to reduce greenhouse gas emissions itself does not mean it has no aspirations to sell its products to others that do.
Many of these states don't believe that government should play a role in capturing the opportunity.
But should Georgia, and other red states, do more to nudge the market in a cleaner direction? Wilson, the Georgia economic development commissioner, doesn’t think so. He’s counting on businesses and consumers to lead the state’s transition to electric vehicles and renewable energy, not the government.
This is a huge juxtaposition that relies on corporates creating sustainable jobs without the markets or government. Could this momentum continue without those levers? I doubt it.
China defines ESG for China
Despite my slide's awesomeness (above), the markets and corporates haven't agreed on a single definition for ESG. This has left countries like China open to interpreting ESG how they see fit.
First, let's go back to the BlackRock letter for a quote on this topic.
We further state that clients’ portfolios will “reflect the regulatory and legislative choices governments make to balance the need for reliable and affordable energy, and orderly decarbonization."
Obviously, governments play a role in setting environmental policies, influencing companies and citizens. China is no exception. We can see its goals and status over on the NetZero Tracker. Their net-zero goals are set out to 2060, while many western countries have theirs set to 2050. This is not surprising since China and India were the two countries that softened the language around coal at COP26 to 'phase down' from 'phase out.'
Despite the change in wording, the Chinese Communist Party is pursuing specific environmental and social justice initiatives with "Beijing’s growing push for carbon neutrality and 'common prosperity.'"
Like in other markets, one might look at China and anticipate greenwashing when, in reality, it looks like some companies might be leading with the Social (ie. common prosperity).
What Chinese asset managers define as “ESG” closely hews to Beijing’s political priorities, including a 2060 net-zero goal along with energy security, rural employment and poverty alleviation.
This is a stark reminder of just how complex the shift is, which is another challenge of ESG. One could easily make an argument for any of these things to be ESG. Still, the pressure of the government's policies combined with retail investor interest is fueling inflows into sustainable and ESG-like funds.
As the Bloomberg article points out, it isn't very clear what these funds are doing, which is a common problem around the world that regulations like SFDR and the SEC's latest fund draft proposal attempt to address.
Aligning the markets and policy would seem to be a massive engine for growth. This is something the anti-ESG movement in the US could learn from, considering the Bipartisan Infrastructure Law and Inflation Reduction Act were just passed. Still, let's get back to China.
For regulatory nerds out there, China has adopted some of the IFRS standards for accounting and is looking to enact sustainability disclosures in line with what the ISSB is proposing. ISSB falls under IFRS.
If you are looking for evidence of the work in China, some of it can be found in the education sector. The Cheung Kong Graduate School of Business (CKGSB) published a report on its global ESG and sustainability work, from research to projects.
For example, one of those projects enabled the commercialization of Gougu tea in the Suichuan county of Ji’an. The project supported about 150 families (S) and is a good example of rural revitalization China promotes.
It's still too early to see the outcome of the investment movement or corporate and educational efforts, but it seems like positive momentum right now.
SIDE NOTE: As an English major working at the intersection of business, technology, and ESG/sustainability, I appreciate CKGSB's inclusion of the humanities because I believe this, too!
...the humanities can help mitigate humanity’s collective myopia, and foster a long-term vision and a broader view of business for the greater good.
The power stays on in California with low-tech
From China, we next go to California. There is no shortage of news coming out of California lately, but an emerging intersection of ESG and technology popped up last week. A heat dome parked itself over much of the western US, straining the energy grid in California. An ESG crisis quickly emerged:
🔌Heat wave strained the grid (E)
🥵People could lose critical power (S)
📱What should the government do? (G)
Twitter lost power in a data center in Sacramento due to the extreme heat and strain on the grid on September 5th.
By the next day, a quick action via a low-tech communication solution (texting) had a swift impact. The Governor’s Office of Emergency Services sent a text message to reduce power usage.
Within a few minutes, the strain on the grid was reduced, and blackouts were avoided.
The blackout threat remains due to the extreme heat. Still, this is a powerful story of how technology and our ubiquitous connectivity avoided an ESG catastrophe.
The story is also more complex than climate change, as we're seeing across red and blue states alike as Axios point out in the short read below. Infrastructure needs to be a focus through this new lens of climate risk.
The world's energy infrastructure is failing in ways that were foreseen — www.axios.com
Governments around the world have consistently made astonishingly short-sighted decisions.
Threats like this are weighing on the public's mind, which might be why climate change laws are gaining popularity. The California example shows that people are willing to take near-immediate action when informed by their government. Still, a response like this is reactive and would fall into the adaptation category (ie. not solving anything long-term).
While governments can help with swift action reactively, providing tools for citizens to understand their local risk is a proactive way to surface the issue. Several US government organizations created a new tool to help citizens understand their local climate threats.
The Climate Mapping For Resilience and Adaptation (CRMA) tool shows citizens historical, current, and predictive models of where they live, including climate hazards like:
🥵Extreme Heat
🏜️Drought
🔥Wildfires
🌊Flooding
🏖️Coastal Inundation
It's fairly comprehensive. For example, I discovered that in Pennslyvania we've had an increase in cold days since 1990, which is not great.
Even with reactive solutions and proactive policies and tools, governments and citizens can't address climate change issues alone. This is why, back to the beginning, the markets and corporates must also address the issue. I'll leave you with this final read from Institutional Investor about corporates and diversified investors, which states this before setting some actions:
There are many reasons that governments around the world are unable to adequately address the externalization of the cost of carbon by businesses that find such activity profitable.
While we might prefer government-led solutions, myriad existential economic threats — including growing inequality, declining social cohesion, tax evasion, and soil loss — are not waiting on more effective regulation.
Pick your Podcast
Depending on what resonated with you this week, I have two podcast selections to complement this read. First, if the anti-ESG movement has you going, check out the obscene yet accurate rant from Matt Moscardi, co-founder of Free Float Media. It felt like a rallying cry to what he calls the anti-anti-ESG movement.
WOKE WEDNESDAY: In which Matt stop apologizing for woke investing, and reclaims ESG from the anti-woke - Business Pants | Podcast on Spotify — open.spotify.com
In which Matt stops apologizing for woke investing and reclaims ESG from the anti-woke.
But...if you're more optimistic and want to understand how groups work with governments and corporates to make a difference, check out Victoria Mills, Managing Director of the Environmental Defense Fund's EDF+Biz group, talking about their inspiring work.
How Environmental Defense Fund Engages Companies on Climate Policy - Climate Rising | Podcast on Spotify — open.spotify.com
Victoria Mills discusses how some companies are starting to advocate for more stringent climate policies as they see climate change affecting their operations, supply chains, and communities.
Tweet of the Week
Well, it's official. Greenwashing is a word! 👏👏👏
I look forward to the day when this is not a word. In the meantime, companies need to be wary of their claims. Consumers and governments are watching.
