As energy prices continue to soar with no reprieve in sight, the continued fallout from Environmental, Social and Governance (ESG) principles isn’t stopping anytime soon.
While the American public is slowly seeing these values for what they indeed are — empty platitudes and virtue signaling — the Biden administration continues to double down on ESG across government agencies.
However, there is an opening for states, cherished laboratories of democracy, to help rein in the abuses stemming from these confusing, unenforceable and, in some instances, unauthorized principles. Three states can serve as examples here.
Most prominently, fossil-fuel-rich West Virginia is aggressively against financial institutions targeting coal, oil and gas companies. The Mountain State accounts for 13 percent of total U.S. coal production, while the oil and gas industry employs 82,000 people (or 9.2 percent of the workforce) and generates $11.2 billion in the state’s gross domestic product.
In January, lawmakers passed a bill to discharge the state treasurer “to publish a list of financial institutions engaged in boycotts of energy companies.” The result of this is its Restricted Financial Institution List. Listed financial institutions include BlackRock Inc., Goldman Sachs, JPMorgan Chase, Morgan Stanley, U.S. Bancorp and Wells Fargo. If companies prove they aren’t engaging in energy company boycotts anymore, the state treasurer will promptly remove them from the list.
Like West Virginia, oil- and gas-rich Texas has similarly hit investment firms for targeting these critically important industries. The oil and gas industry plays an integral role there — representing 35 percent of the state’s economy. The Lone Star State warned if they engage in discriminatory practices against lawful energy companies — including the denial of loans — they would be ineligible to participate in their state pension fund. And the state delivered on the promise.
Betting against Texas was more costly than ESG investments themselves, so much that in February of this year, BlackRock — the world’s largest asset manager — decided it wouldn’t boycott fossil fuel companies and, instead, recommitted to backing related investments again.
“We will continue to invest in and support fossil fuel companies, including Texas fossil fuel companies,” the February 2022 memo read.
The Texas case study shows these companies ultimately care about their business model and not satisfying the whims of a few activist shareholders.
Similarly, Idaho is leading the charge to fight S&P Global’s usage of ESG metrics, including its recent “ESG Credit Indicator Report Card: U.S. States And Territories,” to determine state credit ratings. As State Treasurer Julia Ellsworth rightfully argues, the new ratings undermine creditworthiness on partisan grounds.
A letter from the Idaho delegation called out S&P Global for its biased credit rating system because it falsely represented its ratings as objective, writing, “In 2015, S&P admitted to falsely representing that its ratings were objective, independent and uninfluenced by S&P’s business relationship with the investment banks that issued securities covered by S&P.”
The rating agency paid a hefty settlement amounting to $1.375 billion, including millions to the Gem State for defrauding investors in Residential Mortgage-Backed Securities and Collateralized Debt Obligations.
West Virginia, Texas and Idaho aren’t the only states fighting ESG. More Republican-led states are joining the battle because it’s proving to be a winning issue for protecting pensioners, retirees and the broader economy from so-called “sustainable” investing that isn’t as lucrative as advertised.
Harvard Business Review notes, “To begin with, ESG funds certainly perform poorly in financial terms. … Although the highest rated funds in terms of sustainability certainly attracted more capital than the lowest rated funds, none of the high sustainability funds outperformed any of the lowest rated funds.”
It’s not only American states that are reconsidering ESG principles and the associated policies. Even Germany realizes the shortcomings of divesting from fossil fuels after Russia’s invasion of Ukraine. It urged the Group of 7 nations to reconsider commitments to stop overseas fossil fuel projects by 2022. A draft text of the reversal reportedly concedes that “publicly supported investment in the gas sector is necessary as a temporary response to the current energy crisis.”
Even BlackRock’s CEO Larry Fink cautioned against businesses like his becoming “the climate police.”
Thus far, 15 state treasurers have urged the administration to stop bending the free market to undermine lawful energy companies. And more are expected to join in the fight.
ESG proponents will be on the losing side of history as U.S. states and the private sector recognize our continued dependence on affordable, safe, clean fossil fuels is more attractive than not.