It’s Your Money, So Why Must it Reflect Their Values? Is there an ESG Bubble?

by Kevin D. Freeman on February 2, 2020

The hottest area of investing today is ESG, which stands for Environmental, Social, and Governance. To some, ESG means “sustainable investing.” Over $30 trillion worldwide has been dedicated to ESG. That’s truly amazing. This trend has developed very rapidly and is the talk of Wall Street. But what does it really mean? Consider these excerpts from

For all the talk about ESG, nobody knows what it means

January 30, 2020

Sustainable investing has become one of the buzziest trends sweeping Wall Street. There are now dozens of conferences organized around the topic. Consulting firms and private foundations are spreading the gospel. Trillions of dollars are piling in.

There’s just one problem: No one is entirely sure what it is exactly or how to define it….

The ESG movement totaled at least $30.7 trillion of funds held in sustainable or green investments in 2018, up 34% from 2016, according to a report by the Global Sustainable Investment Alliance. Morgan Stanley, in a report published last year, said there’s been a “tipping point in attitudes” among investment professionals toward putting long-term money in companies that embrace ESG’s mission. That means putting numbers around hard-to-measure but valuable things, from carbon emissions to boardroom diversity to how well employees are treated.

ESG metrics are self-reported, meaning that companies can choose — and often choose not — to report or include certain metrics. In the Russell 1000, only 300 companies reported greenhouse-gas emissions in public filings in 2017, according to data compiled by Bloomberg…

“There are many different shades of green,” said Ravina Advani, head of energy, natural resources and renewables at BNP Paribas. “Everybody has their own view on what it means to be green. It all boils down to what the use of proceeds is. Some companies are getting push back.”

The reality is that ESG is a buzzword with different meaning to different people and therein lies the problem. It is so wide open that people can have all sorts of agendas at work. Some investors want to “save the planet.” For others, it’s a hot new marketing gimmick to attract money. Still others want to push a certain political agenda and use your money to do it.

Stop a moment and consider that the best experts claim ESG was $30.1 trillion in 2018 and that assets were growing at an exponential rate. Current estimates suggest the total now tops $40 trillion. The goal is to use investment dollars to promote a certain outcome. With ESG, investment returns are not necessarily the main goal. And, while the specifics may be nebulous, it seems obvious that the generalities are centered around left-leaning political ideals. In fact, the #1 issue for ESG is now addressing climate change. From Pension and Investments Magazine:

Climate change moves to top of investors’ list of ESG issues

As institutional investors spend an increasing amount of time thinking about environmental, social and governance risks and strategies for dealing with them, the issue of climate change continues to push its way to the top of the list.

According to the U.S. SIF Foundation’s biennial Report on U.S. Sustainable, Responsible and Impact Investing Trends, released late last year, “climate change/carbon” was the top ESG criterion for money managers…”

There should be no doubt that the trillions of dollars in ESG are now being weaponized to fight climate change. That is clearly the top priority for money managers. But is it your top priority?

Larry Fink, the CEO of the world’s largest investment manager Blackrock (with $7 trillion in assets), recently said that his primary goal was NOT simply to produce the best return for investors. That would remain a goal but not the top goal going forward. Rather, Fink promised to address Climate Change as explained in this Forbes article:

BlackRock’s Larry Fink Shifts Fund’s Investment Strategy To Address Climate Change

Topline: BlackRock founder and chief executive Larry Fink said in his influential annual letter to CEOs that the fund will refocus investments on more sustainable options and less on those impacting climate change, like coal…

So what is Fink’s motive? An article in the January 17, 2020 edition of The Wall Street Journal (Larry Finks Latest Sermon) suggests he may be auditioning to be the next Treasury Secretary in the next Administration:

Mr. Fink gets attention because BlackRock is the world’s largest asset manager, with some $7.43 trillion in client assets. He is now threatening to vote against corporate directors and management if they don’t do what he says, and he is especially exercised about climate change. He is demanding that companies disclose climate risks, and wants to see their plans to operate under scenarios in which warming is limited to fewer than two degrees Celsius this century. Corporations in which BlackRock invests will also have to comply with the rules from a “Sustainability Accounting Standards Board” on issues such as labor practices and workforce diversity. “Disclosure should be a means to achieving a more sustainable and inclusive capitalism,” Mr. Fink writes…

BlackRock is a fiduciary and as such is legally obligated to act in its clients’ best interest. This is ostensibly why BlackRock has voted against more than 80% of the climate resolutions on proxy ballots by activist shareholders. But suddenly Mr. Fink is prioritizing the interests of liberal politicians and pressure groups. We can’t help but wonder if Mr. Fink, after a profitable life in business, is auditioning to be Treasury Secretary in, say, the Warren Presidency. His “stakeholder” notions sound similar to her plans to put American corporations further under the government’s thumb.

The publication Economy and Markets was even more blunt. They called this action “Blackrock’s Dereliction of Duty.” Here are their points:

The largest money management firm in the world and almost 200 CEOs of leading companies just told us that they will use our investment dollars to affect social changes however they see fit.

That’s not their job.

If they want to use their personal funds to pursue social issues, great. But company resources are meant to be dedicated to running the business in a way that benefits the owners of capital. The only shared goal that management can identify is maximizing shareholder value, then individuals can use their gains to pursue whatever social goals appeal to them individually.

Increasing shareholder value doesn’t mean breaking the law or doing anything shady. That would break the main tenets of capitalism, which are the free exchange of labor for income and the free exchange of wealth (income) for goods and services. Anyone cheating on either side of employment or consumption is denying the other party of their free exchange.

This isn’t a free lunch.

I have to think that Fink and the managers at Blackrock do their best every day to increase the returns to investors. By changing their investment decisions based on something other than returns, they must be choosing less attractive investments or else they’d already be in them. Put another way, if the companies that Blackrock is targeting for divestment were already out of favor, then Blackrock wouldn’t own them in the first place.

The same goes for the CEOs. They must be changing their management decisions to include concerns beyond the prudent management of capital for the highest growth of the business. Every dollar they move from that effort is an investor’s dollar used for something other than the original purpose.

There’s very little pushback against these moves. Few are willing to stand up and be seen as acting against climate change initiatives or stronger communities. But that’s not the issue. The question is, who gets to decide? Should each of us be able to put our capital where we think it is best served for growth, protecting the environment, and improving our communities, or do we hand the last two responsibilities to unelected CEOs who are using our money?

If recent trends are any indication, the decision has already been made. We’re giving up returns in our individual stock investments and mutual funds so that investment managers and CEOs can pursue what they think is best.

Does this seem right to you? Big money managers take their client’s money and use it to push a political agenda with possibly personal motives? Historically, the motive for managers has been to maximize returns. But now, ESG has given managers a sort of “slush fund” to pursue what they prioritize with your money. Because the definition is so ill-defined, this leaves open the door to massive potential malfeasance.

Recent surveys have shown that climate change, for example, is nowhere near the top priority for voters. And the subject is deeply divisive between Republicans and Democrats. According to a recent Pew Research survey, 67% of Democrats believe that climate should be a top priority but only 21% of Republicans. What this means is that over $40 trillion has essentially been weaponized to favor Democrats either directly or indirectly. But the truth is that it’s not their money! This is the worst type of elitism and it will have profound consequences.

Is there an ESG Bubble?

One consequence already underway is that our markets have been skewed by all the money moving to ESG. JP Morgan’s equity chief wrote recently that ESG may be a “bubble in the making.” His argument is that investors aren’t paying enough attention to corporate fundamentals and that trades will get crowded as everyone piles into the same investments. He has a point and we are seeing that bear out now. Two performance darlings of the market are Tesla and Beyond Meat. Both are classic ESG stories, one as an electric car maker and the other a producer of plant-based proteins. Neither is the market leader in sales in their industry. In fact, each has a relatively small market share and limited profits compared to traditional competitors. Yet both have experienced a massive influx of investment dollars into their stocks and have huge market caps compared to their peers with higher sales and profits. Is this a bubble? JP Morgan seems to think so and offers strategies to avoid problems if the bubble bursts.

Don’t forget that ESG can snag even the best investors. One example can be seen in recent reports that Warren Buffet was caught in a solar company that many now call a Ponzi scheme. From the Sacramento Bee (January 30, 2020):

How a California solar company conned a legendary investor, NASCAR and others in Ponzi scheme

The victims of a nearly $1 billion solar-energy Ponzi scheme in Benicia sound like a who’s-who of American business: Warren Buffett’s conglomerate. Paint manufacturer Sherwin-Williams Co. Insurance giant Progressive Corp.

Some of the nation’s most sophisticated investors got conned by DC Solar Solutions Inc., the bankrupt, crooked company that made mobile generators powered by solar panels. Court records and financial statements reveal roughly a dozen companies fell for DC Solar’s promises of profits and tax benefits, from a $43 billion Pasadena bank to a Philadelphia company with experience investing in solar farms.

DC Solar’s rise and fall is a tale of greed perpetrated by a little-known former auto mechanic, his wife and a small group of employees in Benicia, a working-class town on Suisun Bay, against some of corporate America’s deepest pockets. For consumers and investors, the scheme shows how even the savviest investors can be ensnared by the promise of an easy windfall.

There is no doubt that the primary allure of that company was the idea that it was “green.” This stands as a stark warning of the risks of an ESG bubble.

NOTE: This blog DOES NOT provide investment advice. That’s not our purpose. We can’t tell you if there’s a bubble or not or what you should do about it. But we can make the point that your investments ought to reflect your values, and not those of your investment manager. We can also point out the massive hypocrisy at play. For example, the same investment managers who want to promote ESG in America may also be heavy investors in China. But how do Chinese investments stack up in relation to ESG?

The Hypocrisy of It All

In reality, China is terrible in all three areas. This is China, one of the worst polluters on the planet. Their carbon emissions are off the chart compared to ours. And, they score no better on the Social criteria. This is a nation that has imprisoned a large portion of their Muslim population. They persecute Christians. They do organ harvesting for money. Their one-child policy killed millions of females. They monitor their people and provide social credit scores to control behavior. Finally, they provide no real governance for foreign shareholders. Corporations serve the government, not the shareholders. Chinese environmental malpractice hurts everyone. Shouldn’t “woke” investors oppose Chinese shares on all counts, E, S, and G? And we have not even begun to mention the international security threats that China poses. If divestment from things that could harm the planet is so important, why not divest China? Unfortunately, the opposite appears to be underway.

At the same time that Larry Fink is planning to go “all in” for ESG, he is also seeking a much bigger presence for Blackrock in China according to an October 2, 2019 story in The Wall Street Journal. Fink knows full well that when you are in China, you play by their rules or you don’t play at all. There is no way that Blackrock will demand ESG priorities from Beijing.

Blackrock and Fink are not the only hypocrites in regard to ESG. There is a huge push to divest from Fossil Fuels, as shown in the chart. Something like $12 trillion has already been pulled from fossil-fuel related investments.

But, at least some students at Oxford were more than happy to demand that the school divest from fossil fuel shares even though they were unwilling to stop using natural gas for heat. From The Blaze:

Students: We demand the school sell its stock in fossil fuels. Professor: I can’t do that, but I’ll turn off the gas heating for you

January 31, 2020–A professor at St. John’s College, Oxford University, just taught student protesters an invaluable lesson in personal sacrifice.

According to the school newspaper, Oxford students have been occupying St. John’s College since Wednesday in protest of the school’s investments in fossil fuels. Dozens of students have reportedly set up camp in the front quad with signs and banners, vowing to remain until their demands are met.

Amid the protesting, professor Andrew Parker, also a manager of the school’s financial affairs, received a letter from two students requesting a meeting to discuss their demands — including the school’s divestment from fossil fuels. His speedy response was almost certainly not what they were expecting…

According to the Times, one of the students wrote back that he would pass on the request, but criticized Parker for not taking the matter seriously.

“You are right that I am being provocative, but I am provoking some clear thinking, I hope,” Parker responded. “It is all too easy to request others to do things that carry no personal cost to yourself. The question is whether you and others are prepared to make personal sacrifices to achieve the goals of environmental improvement (which I support as a goal).”

And this is the real problem. Hypocrites are all too willing to weaponize your money to support their supposed values but are unwilling to make sacrifices on their own.

That’s why this is Economic Warfare. And your values are being targeted by your money.


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