ESG for Thee, but Not for Me By Rupert Darwall
Activist investors are pressuring asset managers to vote green, even if it harms the poor.
B lackRock, the world’s largest asset manager, is holding its annual general meeting this week. To help give itself a smooth ride, BlackRock’s leadership has struck a Faustian bargain with the environmental, social, and governance (ESG) activists on its share register. But a smoother ride for BlackRock may mean a rougher ride for many of the companies in which it invests. In coronavirus-speak, in order to acquire immunity for itself, BlackRock opted to become an ESG super-spreader.
At the end of February, a pair of activist investors, Boston Trust Walden and Mercy Investment Services, announced that their “dialogue” with BlackRock had led to agreement, with BlackRock confirming that it would vote against boards with “unacceptable” positions on climate change. As a result, the two activist investors declared that they had withdrawn their shareholder resolution directed at BlackRock on climate change for this year.
Subsequently BlackRock appeared to have recognized the growing gravity of the current economic catastrophe and had second thoughts, at least for now. According to Reuters, last month BlackRock said it would ease up and allow companies to give a lower priority to environmental-sustainability reporting. “We recognize that in the near-term companies may need to reallocate resources to address immediate priorities in these uncertain times,” BlackRock said in a new stewardship document.
Walden is candid about viewing corporate governance and proxy voting as a mechanism to achieve political and legislative gains. Its 2019 ESG Impact Report states:
As companies set science-based targets, they signal to lawmakers that addressing climate risk makes good business sense, enabling legislators and regulators to develop sound public policy solutions that, in turn, provide companies effective frameworks to support climate-related goals.
Walden’s tactics conform to what the conservative-leaning SEC commissioner Paul Atkins in 2007 labeled “the tyranny of the minority,” which allows investors to leverage their “nominal economic interest to hijack the agenda of all investors.”
Walden’s collaborator is Mercy Investment Services, the financial arm of the Sisters of Mercy. Transparency is meant to be a key ESG tenet, yet Mercy’s 2019 “Accountability” Report is mum on the single most important number for an asset manager — the dollar amount of its assets under management. Instead, its officers couch its investment mission in the teachings of Catherine McAuley, the Irish founder of the Sisters. “Our work is to be about the service to the poor, the sick, the uneducated, with special concern for women,” says Mercy’s Patricia Wolf.
Yet examination of the Intergovernmental Panel on Climate Change’s (IPCC) 1.5°C special report reveals that its target of “net zero” carbon emissions risks being a double-edged sword to the world’s poor. The deployment of large-scale land-use policies designed to reduce the amount of land available for agriculture could “compete with food production and hence raise food security concerns,” the IPCC states with high confidence. The IPCC also warns that stringent climate policy could significantly slow down the transition to clean cooking fuels. According to the World Health Organization, close to 4 million people a year die prematurely from illness attributable to household air pollution from inefficient cooking practices.
As a result of the activists’ pressure, BlackRock is punishing corporations that do not accede to its demands to implement the recommendations of Mike Bloomberg’s Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB). BlackRock acknowledges that these frameworks are “currently voluntary.” They have no legal or regulatory standing but are dolled up in a way designed to give them more gravitas than they deserve. In line with the Walden momentum strategy of ‘encouraging’ companies to set “science-based targets” to push legislators to act, BlackRock also foresees acceptance of these climate frameworks gaining momentum and hardening into compulsion:
We consider the incorporation of the TCFD recommendations into policy guidelines by policy makers in several markets, including the European Union and the United Kingdom, to be an indication of growing support for mandatory reporting on climate risk.
The TCFD notion of climate risk is predicated on the expected transition to a low-carbon economy. “It is in the best interests of companies and markets that the transition is orderly,” BlackRock’s guidance on climate risk states. This assumption underpins Mike Bloomberg’s Bloomberg New Energy Finance unit:
Our clients include corporate strategy and business development professionals, finance professionals (traders, analysts, portfolio managers), as well as policy makers and regulators. We work with the largest corporations across utilities and generation, oil & gas, equipment manufacturers, banking and finance, and government.
If there’s no transition, there’s no data and no new consulting assignments.
The SASB is also a momentum play. In the words of its 2016 climate-risk technical bulletin, the Paris climate agreement (from which the United States has given formal notice of its withdrawal) is driving the need for transitions in carbon-intensive industries and amplifying regulatory pressure. The SASB document is also decked out in “official” garb and bears the signatures of the 74th and 70th Treasury secretaries, Hank Paulson and Robert Rubin. But the reality remains the same. Climate-risk reporting is not about genuine risk assessment but about prosecuting a political agenda. In the words of the two former Treasury secretaries, “the capital markets can affect the course of climate change for the better.”
It is also something that is in the interests of at least some on Wall Street, not normally seen as a hotspot of altruism. From ESG consultancies to “green” funds to IPOs for alternative-energy companies, climate change can be a good business opportunity.
Somewhat analogously, many Wall Street financiers such as Mr. Paulson have been strong advocates of closer trade and finance ties with China, which may be a profitable business for some but are increasingly seen as harmful to the interests of the United States and millions of ordinary Americans. Decoupling China from U.S. markets “would not be in America’s interest,” Paulson said in a November interview with the New York Times. “It would eventually threaten U.S. leadership in finance, as well as New York City’s role as the world’s financial center.” A month earlier, he had been emphasizing America’s joint interests with China, “such as fighting climate change.”
In a democracy, issues such as climate change and America’s relationship with China are decided at the ballot box. There is an election on November 3, the day before America’s exit from the Paris agreement takes effect. That is the proper way to decide the nation’s climate policy, not the annual meetings of the companies on which America depends for a swift recovery from the worst economic crisis in 90 years.
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