You got another thing coming

Whether or not you focus on ESG, it will come for you

This past week, the Texas State Board of Education’s Permanent School Fund (PSF) pulled $8.5B of investments out of BlackRock because of a perceived notion about ESG based on a misinterpretation of ESG as boycotting energy. In 2021, this misinterpretation led Texas to outlaw doing business with firms that boycott energy companies through the Fair Access Act, and the PSF is now complying with that law.

Only BlackRock doesn’t boycott energy companies. Per a letter from BlackRock Vice Chairman Mark McCombe to Texas education board Chairman Aaron Kinsey:

BlackRock holds more than $320 billion in global energy investments, including approximately $120 billion in Texas-based, publicly traded energy companies. We are also significant investors in private energy infrastructure throughout Texas.

As I’ve repeatedly written, boycotting high-emitting industries is not what ESG is all about. From an ESG perspective, energy companies should be aware of their transition risk as the price of renewables decreases and policy (and hopefully, subsidies) shifts away from fossil fuels. Still, an investor who understands the risk would engage in the transition through stewardship and provide low-cost capital to finance the change over time.

I get it, though. Wrapping your head around some future, long-term scenario is challenging. People aren’t wired to think about risks past their short lifespans. Even the ESG risk of commercial real estate through 2025 is hard to imagine. Still, I’m not convinced that’s what’s at play here. This appears to be political posturing at a material risk for the state, the fossil fuel industry. Yet, Texas leads the US in renewables and could capitalize on the transition instead of fighting it.

Well, the lead-up to Easter provides some simple-to-understand ESG examples. As 77% of Texans are Christian (as am I) and will celebrate Easter this Sunday, I was feeling particularly inspired this week to write to demystify the acronym a bit.

Palms: Risk Managed

For Christians worldwide, the Sunday before Easter is Palm Sunday. Christians in some countries will receive palms as a holiday symbol, while others use sprigs and branches from other types of trees.

No, I’m not going to write about palm oil, although this article showcases the complexity between the environmental and social considerations.

According to Catholic.org (which I assume would not include Protestant churches), 18,000 churches used millions of palm leaves this year. These palms are typically burned for the following year’s ashes on Ash Wednesday.

A business that deals in natural resources, like the supplier of palm leaves, needs to ensure sustainability is at the top of their minds to ensure they have a renewable product. While this holiday might give environmentalists heartburn from harvesting and the carbon from its end-of-life, managing the asset responsibly ensures that the trees are healthy year after year and that the model itself is sustainable, reducing the chances that a stakeholder will prompt for a replacement product.

There are only a few suppliers of palm leaves to churches in the US. One of those is Southeast Palm and Foliage. They don’t have a fancy corporate page, 10K, or CSR report, so to Facebook, we go!

The care they take when harvesting the leaves ensures the trees survive long-term, making their business model sustainable. Some of the same palm trees produced leaves 50 years ago are still doing so today. They offer this post from 2016 as an explanation, but it is also an ESG lesson.

The post, like ESG, is not political or values-based; it’s just “common sense.” The post calls out material ESG considerations, including environmental care, a long-term perspective (governance), and even an understanding of pay concerning productivity and quality (social). There is a recognition that doing these activities is better than some simple marketing message. In other words, greenwashing to curry stakeholder favor is a bad idea.

ESG in 2016…from a supplier of palm leaves to churches…

Admittedly, Southeast Palm and Foliage don’t need to call out ESG or even understand that they are doing ESG. They know the ESG factors to consider when running a successful business and plan accordingly.

Chocolate: Risk Unmanaged

While palms have something to teach us about ESG from a religious perspective, a more secular Easter tradition is at risk.

Easter represents one of two times a year (the other being Halloween) when the price of candy gets discussed. In fact, Sunny Fleming at ESRI asked me to write about this last Halloween when she saw that candy prices were fluctuating due to climate change and extreme weather patterns.

Last October, extreme droughts around sugar in Asia and Central America and cocoa in West Africa pushed candy prices up by 7.5%. More extended periods of extreme weather can occur over the short term, but long-term localized issues can develop as the climate systemically changes. An ESG mindset requires both views so that risk is well understood.

While Halloween is associated with all kinds of candy, Easter is associated more with chocolate.

Unsurprisingly, by Easter this year, West Africa had gone from droughts to flooding, extreme heat, and issues with smuggling. Exacerbating the problem is that cocoa trees become susceptible to disease as they age. Finding new areas to plant trees in a climate ravaged by extremes can be nearly impossible. In an effort to turn their financial strains into profit, some farmers have turned to selling their land to illegal mining operations, which worsens the soil (The Conversation). And in Ghana, smuggling has eroded $600M of economic value.

While this year’s issues were particularly difficult due to the recurring El Niño weather pattern, these climate-related issues appear systemic. Here’s an article from 8 years ago about the shifting climate patterns in Ghana and the havoc it is wreaking on their agriculture industry, which about 70% of the population relies on.

The result is that cocoa prices shot up to $8000 per ton vs. $2500 per ton last year! This puts a strain on confectionaries around the world to contain costs.

If a candy company doesn’t consider the global climate ecosystem and the nature of these interconnected risks across its value chain, it will experience ongoing systemic shocks.

What happens when the Easter Bunny fails to deliver? If Texas politicians think they can outwit ESG issues by legislating against it, they likely have another thing coming.