Anti-ESG
You can debate if gravity exists, but the fact that you will not float away while making your argument says all that needs to be said.
I feel like I have seen this before, with climate science, with LEED, and even with acid rain, DDT, the hole in the ozone layer, and cigarettes. The same playbook of disinformation and propaganda is once again being reopened, but this time the target is ESG.
This is nothing new; 12 years ago, the book “Merchants of Doubt” outlined how certain institutions and industries have created marketing campaigns centered on disinformation to spread confusion. Once again, we see a campaign based on the strategy of confusing the public and creating a false equivalence around ESG.
Why is ESG being targeted, you might ask? For the same reason that it has gained the attention of investors - money. Using sound research and logic, investors realize that a business that focuses on business operations, including risk management and ESG, tend to experience better returns than those that do not. Not only do ESG companies experience higher returns, they also see stronger earnings and dividends. Is it any wonder why investors see the importance of ESG?
It stands to reason then that with evidence in hand that investments are more likely to experience favorable returns, more investors will want to invest. In the US, we have seen a surge of 456% in ESG asset investment since 2010, with investments forecasted to reach 41 Trillion in assets under management by year-end and trending to surpass 50 Trillion by 2025.
What these investments do is consider risk, and one of those risks is the risk posed by a transition from a fossil fuel-based energy economy to a renewable energy economy. It is kind of a silly position to take when you think about it - by the very definition of limited resources, fossil fuels are a limited resource. There is only a certain amount of carbon that has been buried in our planet, and when it runs out, it runs out. As the supply for that limited resource is consumed, there is less of it, and thus, its price will go up. Notice we are not even discussing the climate impacts or the pollution aspects - we are still literally talking about what happens when supply and demand factors impact the cost. Need an example, look at gasoline three months ago. I suspect, when we moved from horse and buggies to cars, there was likely a group of buggy whip manufacturers plotting how they could at least slow down the transition to cars.
When we consider the advantages of renewable energy versus fossil fuels, the availability of solar or wind cannot be ignored. While it is true the sun doesn’t shine all day or even every day, and the wind blows on some days but not on others, in both cases, we are not going to run out of sun or run out of wind. From a national security standpoint, the sun shines across the globe - you don’t need to invade another county to access it.
So those who make money based on supply and demand or by selling the assets needed to invade countries that have natural resources may not view this transition as a positive; after all, they need chaos which is reduced if we have a stable, worldwide energy source. Let’s face it; if you are sitting on millions or billions of dollars of oil leases that haven’t been drilled yet, you never recover that investment which won’t happen if we stop needing to drill for oil. You are essentially the buggy whip salesman trying to delay the Model-T for just a few more years.
Now to protect those energy companies, some politicians who pander to them for campaign funding have decided to “protect them.” Exhibit A, Texas State Comptroller Glenn Hegar’s announcement last week of 10 financial institutions and more than 300 funds his office deems to be “boycotting energy companies,” a.k.a. fossil fuels. Accordingly, state entities—including pension funds for teachers and government workers—will be required to divest from these financial institutions as the state moves to implement Senate Bill 13, which Governor Greg Abbott signed into law last year. Under the same bill, Texas has since September required any financial company entering into new contracts or renewing contracts with state entities to affirm they do not and will not “boycott energy companies.”
Also, in late August, Florida’s Ron DeSantis proposed banning Florida Pension Funds from investments that consider ESG. The Florida Board of Advisors adopted DeSantis’s position. DeSantis frames it slightly differently in that he claims to be banning social, political, and ideological interests from being considered in financial decisions. This ignores that considering non-financial data can often yield significant earnings.
Why is that? Because business is complex, and while challenging to draw conclusions from any one metric alone, when combined with other metrics, the evaluation of non-financial metrics can help determine both risk and opportunity. Business schools across the US, from Stanford to Harvard, have study after study demonstrated that non-financial intangibles could help forecast future financial performance.
These actions in Texas, Florida, and West Virginia (which passed a similar law to Texas) might lead one two believe there are actually two equivalent sides to the debate around the importance of ESG, one pro- and one anti-. But let’s take this movement into scale:
Three states have limited their ability to engage with financial institutions that acknowledge climate risk. The net effect is these states will no longer be able to work with more sophisticated funds and instead will relegate themselves to investing in smaller, less experienced, and less sophisticated banks that put ideology ahead of economics. The end result will be higher fees to those state institutions and potentially lower returns. That won’t last for long before the states start to back off of that idea. In the meantime, most of the world is taking a more holistic view of investments and considering ESG as one element to consider.
We have seen the launch of a few investment vehicles that are committed to not including ESG assets in their asset mix. A few hundred million was raised, but that pales compared to the over 41 Trillion in ESG assets. These non-ESG funds are essentially boutique funds, and time will tell how they perform, but they are very much niche, not mainstream.
The bottom line is climate risk is investment risk. There is no other side to that position, only ideological opposition seeking to use the issue as political fuel to fire up their base.
In the 1930s and 40s, Doctors recommended smoking cigarettes as a healthy way to reduce throat irritation. When lung cancer rates spiked in the 1950s, the scientific community concluded that the cause was cigarette and tobacco use. The Tobacco industry was looking at the loss of an entire industry; investment dollars would be lost. They needed a way to sow doubt and slow down dis-investment in their industry, and that is precisely what they did. For the next 50 years, the industry invested in discrediting any science which linked cancer with their product. Doubt essentially becomes their product.
This happened again in the 1940s and 50s with the pesticide DDT. The pesticide was so effective that it was sprayed liberally across entire towns towards the end of WW2 to counter lice infestations and mosquitos. Soon after, it was sold directly to the public, with similar success, until the late 1960s when we discovered the chemical was not only killing pests but also leading to several cancers. The early 1970s saw the chemical manufacturers take a similar playbook and attack the science. Sow doubt. While short-lived, for a time, the industry was able to hold off its product from being banned through the same marketing techniques as employed by tobacco.
Climate change came under similar scrutiny. As scientific theories proved to be accurate and a consensus was achieved amongst the scientific community that climate change was occurring and the cause was us, the fossil fuel industry attempted to sow doubt by pushing positions like “it is just part of a normal cycle” and “we are actually in a period of cooling, not warming.” In fact, in some cases, the same agencies that created the disinformation campaign for cigarettes are the same that climate skeptics used by the fossil fuel industry.
So what we see is not actually unusual or new, and it is not the birth of some rising anti-woke movement. It is merely the same old tired strategies that we have seen time and time again. Strategies that have not been proven successful in doing anything but delay the eventual outcome.
We can take some comfort that despite the spotlight the anti-ESG movement has gained, it has not garnered much support. In fact, of the nearly 50 anti-ESG proposals that were filed as shareholder proposals, less than 7% have passed. The best way to counter this “movement” is to point to the facts. ESG investing is built on sound financial principles, and any investor that ignores risk does so at their own peril.
Take the face value of what is being presented - the anti-ESG movement demands that we not consider companies that take a stance on improving diversity, equity, and inclusion. By default, you can conclude that the campaign would prefer that there be no diversity, that equity is eliminated, and that we should exclude people from decision-making, if not the entire organization itself.
By default, you are proposing an investment in a company that does not seek innovation because it only employs people who think like the company already thinks. We are cutting off the organization from new ideas or people that think differently than the organization does. When that happens, we are reducing opportunity.
When we see these actions, we should be vigilant and examine the true intentions of the people behind such demands. They can debate if gravity exists if they like, but at the end of the day, there is a fiduciary duty to look out for the investor’s interests. Doing so means evaluating any impact that could result in the investment not performing as well as it could. There is no room for ideology in this debate; it is sheer risk assessment and optimization of asset performance. We cannot simply ignore that risk because it doesn’t fit with someone’s political agenda.
You can help reduce the impact of the built environment by sharing this blog with your peers. Together we can impact the 39% of greenhouse gasses attributed to the built environment. It starts with awareness, and we succeed with teamwork.
Stay well!
Chris Laughman is the ThirtyNine Blog author, a blog dedicated to reducing the impact of the built environment. Opinions expressed in this blog are mine alone and may not represent those of my employer. When not blogging, Chris is helping the real estate industry reduce energy and water impact as the Vice President of Sustainability for Conservice, the Utility Experts. Whether Multifamily, Single Family, Student Housing, Commercial, or Military, we simplify utility billing and expense management by doing it for you. Our insight into your utility consumption provides an opportunity to identify risks. Leveraging innovation and experience, we ignite solutions with real impacts and track performance to ensure the trendline stays laser-focused on the goal. At Conservice, we have developed a true bill-to-boardroom solution to help truly make a difference. We have before us a tremendous opportunity. Standing shoulder to shoulder, we will get this done. Contact me at claughman@conservice.com for more information.
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