Our society is not only divided along political lines – media, culture and even coffee shops are demarcated between red and blue.
So perhaps it’s inevitable that these cracks will come to the world of investing.
I’m talking about the growth of so-called ESG investing – which stands for Environmental, Social, and Governance – and the growing backlash against this trend. Battle lines are forming in the hitherto apolitical, club-like world of money management.
The roots of social investing stretch back decades, when activists called for pension funds to boycott investments in tobacco stocks and companies that operated in apartheid South Africa.
ESG was created in 2004 by Kofi Annan, Secretary-General of the United Nations, who called on major financial institutions to help find ways to integrate environmental, social and governance concerns into capital markets.
This call resulted in a global pact, Who Cares Wins, that included Goldman Sachs and Morgan Stanley as signatories.
About a decade later, a number of institutional investors and asset managers, including BlackRock, the world’s largest asset manager with nearly $10 trillion in assets under management, began building support for shareholder initiatives and offering investment products with a focus on ESG.
Members of the United Mine Workers of America (UMWA) and other union leaders protest the union’s strike at the Warrior Met coal mine outside BlackRock’s headquarters in New York City, U.S. July 28, 2021. Portal/Brendan McDermid
To some extent, BlackRock and his cohort did so in response to pressure from the political left.
Now the same investment managers, notably BlackRock, are being criticized by the political right.
As you can see below, there has been varied activity by conservative politicians opposing ESG investment initiatives:
The story goes on
The latter article relates to an eight-page letter the AGs wrote to BlackRock CEO Larry Fink on Aug. 4, in which they complained about his company’s ESG mandate and asked him to respond by yesterday.
“We have a policy of not commenting on our interactions with legislators and regulators,” a BlackRock spokesperson wrote to us via email.
The oil and gas industry and Red State politicians argue that the ESG movement is raising the cost of capital, making drilling and other corporate investments more expensive, and in the process costing Americans jobs.
When I asked a veteran domestic oil and gas CEO about this, he told me, “The cost of capital has certainly increased for the industry.”
“Bank capital is very tight, especially for smaller companies,” said this CEO. “Many banks that used to participate in syndicates are no longer lending to New Energy. Which commercial loans are available comes with stricter underwriting standards. Part of that is ESG, but another is that of investors – both banks and shareholders – very recent memories of deep losses in the industrial sector.”
ESG may be causing some investors to avoid oil and gas stocks, which depress stock prices and make it more expensive to raise capital from public markets.
But oil and gas stocks have been cheap on a P/E basis for years. Exxon, for example, is selling a hair’s breadth at more than 10 times next year’s earnings, nearly the same as it was 13 years ago.
In terms of jobs, according to industry consultancy IBIS World, employment in the US oil and gas industry rose to more than 324,000 this month, by far the highest level in a decade.
Meanwhile, the energy sector has been the best performer in the S&P 500 this year. By a mile.
By the close on Friday, the energy sector is up over 40% this year. The next best sector, utilities, is up 10%. The S&P 500 is down 11% in 2022.
As BlackRock, Vanguard, State Street, and the big Wall Street banks fell out of favor with red-state politicians, Vivek Ramaswamy, a former biotech CEO and author of Woke, Inc.: Inside Corporate America’s Social Justice Scam, saw , an opportunity to found Strive Asset Management, funded with $20 million by the likes of Peter Thiel, Bill Ackman and JD Vance.
Ramaswamy says the real problem [with ESG] is “the fiduciary breach at its core, using someone else’s money to advance social and political prospects through shareholder voting and advocacy that the capital owners actually disagree with.”
Strive – tiny compared to the behemoths of Wall Street – will “oblige companies not to focus on environmental issues, not to focus on social issues, not to focus on political or cultural issues, to focus solely on products, products and… services and thereby serve their shareholder period.”
Author Vivek Ramaswamy speaks at the Conservative Political Action Conference (CPAC) in Dallas, Texas, U.S. August 5, 2022. Portal/Brian Snyder
Bill McKibben, a Middlebury professor and longtime environmentalist, has a different perspective.
“This is the fossil fuel industry weaponizing their control of state governments,” he says. “That’s to be expected. It will be interesting to see if the blue state treasurers and such are up to the fight.”
Strive, which aims to have funds for institutions, recently launched an energy index ETF (DRLL) that “offers US energy companies a new ‘post-ESG’ shareholder mandate for retail investors.”
Yes, “Sin Stock” investment vehicles have been around for years, like the VICEX fund and more recently the BAD ETF (BAD), but they’ve never garnered much attention, let alone returns, and unlike DRLL, they haven’t been classified as Anti-ESG. That could change.
But to me, the world’s transition from carbon-based energy to other sources doesn’t lend itself to binary thinking. “We must ban all drilling!” or: “ESG is an invasion of my freedom that must be stopped!” are points of view that do not bring us any closer to a solution.
Facts: Climate change is real and we need to move away from fossil fuels. But we can’t do it overnight and may need some incentives to do so.
It is also possible to believe in climate change and invest in some drilling for now. And Jamie Dimon told his clients this month.
“Why can’t we get it through our thick skulls if you want to solve the climate [change]it’s not against the climate [change] for America to produce more oil and gas,” Dimon said.
Warren Buffett, a believer in climate change, has invested in oil stocks, most notably Occidental Petroleum, in which Berkshire appears poised to take a 50% position.
Is it venal or hypocritical on Buffett’s part to believe in science and buy oil and gas stocks? Maybe. It is probably also an unemotional middle ground.
Behavioral scientists will tell you that some children – and adults too – have trouble transitioning and act when things change in front of them. I think that also applies to the energy transition.
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This article was published in a Saturday Morning Brief on Saturday 20th August. Get the Morning Brief delivered directly to your inbox by 6:30 a.m. ET Monday through Friday. Subscribe to
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