The week of March 21: when ‘socially responsible’ investing is irresponsible, inflation, the oil price, health care, and much, much more.
It would be unfair to say that the variant of “socially responsible” investment known as ESG has no connection with reality: It’s just that, for the most part, the reality is not as advertised.
As a device, however, for using other people’s capital to drive a political agenda, ESG has been working well — and, of course, it has proved a useful source of profit, prestige, and power for those on its inside track. What will ESG do to help the environment? Not very much, although, in a slightly different sense of the E-word, it is helping provide rather too favorable an environment for Vladimir Putin.
Howard Marks, writing in the Financial Times:
The desire to punish Moscow for its unconscionable behaviour is complicated enormously by Europe’s heavy dependence on Russia to meet its energy needs: it supplies roughly one-third of Europe’s oil, 45 per cent of its imported gas and nearly half its coal.
Thus, the sanctions on Russia include an exception for sales of energy commodities. In effect, we are determined to influence Russia through sanctions — just not the potentially most effective one, because it would require substantial sacrifice in Europe.
Europe appears to have allowed its dependence on energy imports to increase so greatly (especially those from Russia) because it wanted to be more ecologically responsible at home. Security does not seem to have received much consideration.
But choosing to rely on a hostile neighbour for essential goods is like building a bank vault and contracting the mob to supply it with guards. The downside of Europe’s reliance on Russian oil and gas has made its way into the consciousness of many people only recently. But the negative effects of the other subject I focused on — offshoring — have been on people’s minds for much longer . . .
The question of offshoring is one for another day, but there is no doubt that the world has received a sharp lesson on the importance of supply lines that goes far beyond energy, as we will be or are discovering with, for example, various metals, fertilizers, and food.
To repeat, more or less, a line I have used before: Many of those pushing the “E” (environmental, in case anyone still wondered) in ESG have focused on the possible problems that may confront the planet in the decades to come, without thinking too much about the state the world is in now, other than, perhaps, delusionally. This is the 21st century now! Great-power politics are a thing of the past, and so on and so on, examples of a worldview based on a liberal determinist view of history that is, like all determinist views of history, nonsense.
And now (once again) has been shown to be so.
And yet, Rupert Darwall in Real Clear Energy:
The day after President Biden announced that the United States would ban imports of Russian oil and gas, a group of eleven powerful European investment funds that includes Amundi, Europe’s largest asset manager, outlined plans to force Credit Suisse, Switzerland’s second largest bank, to cut its lending to oil and gas companies. The juxtaposition of these two events dramatizes the fundamental disunity of the West. At the same time as the Biden administration is sanctioning Russian oil and gas producers, Western investors are sanctioning Western ones. Under the banner of ESG (environmental, social and governance) investing, the West’s capital is being deployed to create an artificial shortage of oil and gas produced by its companies and reward non-Western oil and gas producers such as Russia and Iran with higher prices. In doing so, the West is undermining its own security interests.
Two recent instances of large banks announcing plans to pull out of fossil-fuel lending have been ING and HSBC. These are also examples from after the invasion of Ukraine. And, of course, the regulatory efforts to discourage investment in fossil fuels continue, with the latest example being the SEC’s new climate-related proposals, which Richard Morrison discussed in an article for Capital Matters on Thursday. Again, these proposals were unveiled after the Russian invasion of Ukraine, an event that the SEC’s central planners clearly believe to be of little significance compared with their plans to tinker with the climate.
It is true, to be sure, that the Biden administration is trying to talk up domestic oil and gas production, for now (when, that is, it is not asking the Saudis and, perhaps, other reliable friends of the West to increase their production) and it seems reasonable to expect that U.S. production of these fuels will rise. It also seems reasonable to think that this increase will largely be based on existing projects. New projects take time to pay off, and the broader message sent by the administration, not to speak of Washington’s growing regulatory onslaught, gives oil and gas companies little reason to expect that they will be given the time they need to be rewarded for their efforts.
That is if they even get the capital needed to fund these new projects. It would be wrong to blame the slowdown in U.S. oil-sector capital expenditure in the years prior to the pandemic on ESG. That decline was due to a sharply depressed oil price in 2014–15 and a somewhat grudging recovery thereafter, a period of weakness caused, in part, by “excess” supply (a tribute of sorts to the success of fracking) and, in part, by weaker-than-expected demand. Shareholders’ reluctance to plow money into new production is related to its low expected investment return rather than to any sudden concern for the planet. Under the circumstances, they wanted dividends, not drilling.
The oil price has now soared, but thanks to ESG, and ideologically driven notions of corporate social responsibility, there’s a clear danger (reinforced by the political and regulatory climate and perceptions of how it will develop) that the cash will not be there to support the additional production that the West is likely to need for some years to come, particularly if much of Europe is to end its dependence on Putin, or avoid being plunged into crisis if Russia’s dictator turns off the taps.
Renewables alone will not be enough to fill the gap. It would take too long to build enough new capacity, and “enough” will never be enough until there’s an effective answer to the problem of intermittency: The sun doesn’t always shine, and the wind doesn’t always blow. Nuclear power could make a major contribution, but scaling it up or, in some cases, starting or restarting it from scratch will take years.
There are a few signs here and there that the implications of a crunch that was always in the cards are beginning to sink in, even among the West’s more recklessly green governments, such as Britain’s. The Tories are now planning to allow drilling for oil and gas in the North Sea to “the maximum extent.” The U.K., Prime Minister Boris Johnson has said, must “abandon [its] phobia of [its] own hydrocarbons,” words of advice that the Biden administration would do well to follow.
Whether it will, to any serious degree, remains unlikely. The president appears to be aware that there is a problem, although not (except politically) of its extent. It’s also far from clear that he is willing or able to rein in the climate zealots now running riot within his administration, his party, and his regulatory apparatus.
Within ESG world there have been a few tremors. In his newly issued letter to shareholders (in which he too has some interesting things to say about reshoring or nearshoring), BlackRock’s Larry Fink comes across as a touch conflicted about today’s higher energy prices.
On the one hand:
Higher energy prices will also meaningfully reduce the green premium for clean technologies and enable renewables, EVs and other clean technologies to be much more competitive economically.
But on the other:
Energy prices at this level are also imposing a terrible burden on those people who can least afford it. We will not have a fair and just energy transition if they remain at these levels.
This was also intriguing:
The speed and magnitude of company actions to amplify sanctions [on Russia] has been incredible. Iconic American consumer brands have suspended their operations of non-essential products. And financial services companies have taken similar steps to further isolate the Russian economy from the global financial system.
These actions taken by the private sector demonstrate the power of the capital markets: how the markets can provide capital to those who constructively work within the system and how quickly they can deny it to those who operate outside of it. Russia has been essentially cut off from global capital markets, demonstrating the commitment of major companies to operate consistent with core values.
However far-fetched the analogy might seem, if I were the CEO of a fossil-fuel company, all too well aware of climate warriors’ desire to see my shareholders’ business starved of capital, I’d file those words away.
In conclusion, I wouldn’t expect to see too much of a change in direction from BlackRock.
Then there was this recent report by Lisa Pham from Bloomberg:
The arrival of war in Europe has some investment clients questioning whether money they’ve put toward environmental, social and governance goals is being well spent, according to the co-head of ESG equity research at JPMorgan Chase & Co.
Some might say that it’s a bit late to be asking that question, but I couldn’t possibly comment.
Russia’s invasion of Ukraine is a “pivotal” event not just for geopolitics, but also for the multitrillion dollar ESG investing industry, said Jean-Xavier Hecker, JPMorgan’s co-head of ESG equity research in Paris. He says some ESG investors are starting to look at stocks that have done well because of the war, such as defense, and are wondering how much longer they’re willing to forgo those returns.
They see this as “a potential missed opportunity” that they “are starting to question,” Hecker said in an interview. That’s as more traditional ESG allocations have “been costing relative performance for several ESG funds,” he said.
With war now raging at the doorstep of the European Union, a debate is brewing over how the ESG industry should respond. Defense lobbyists have said regulators in the EU should start treating weapons as ESG-friendly because they can be tools for defending democracy. Critics have countered that that misses the obvious point that guns and bombs are ultimately responsible for millions of deaths.
Hecker said he can’t see defense stocks becoming serious contenders for ESG portfolios. “We think that the fundamental approach of why defense wasn’t in ESG funds hasn’t changed,” he said.
Well, if that fundamental approach consists of the investment manager having his or her head in the sand, that makes sense. Unless the underlying investor is a pacifist, the key question, where the answer can be reliably ascertained, is not the fact that these companies make weapons (assuming that they are not weapons that fall into a prohibited category), but to whom they sell them. Of course, there is a danger that weaponry sold to a reputable buyer, the U.S., say, might still end up in disreputable hands, such as the Taliban’s after the scuttle from Afghanistan, but there is a limit to the extent to which that can be anticipated or policed. (Would it be wrong to supply weapons to Ukraine, merely because of the risk they might be captured by the Russians?) If an armaments company’s principal customers are democracies buying weapons for their defense and that of their allies, it is hard to argue that its business is not providing a social good, a part of ESG’s “S.” It’s easy enough for ESG investors to stipulate that a weapons company selling to the world’s more unsavory regimes would fail that test.
In January, with Russian troops already gathering at the Ukrainian border, Artis Pabriks, Latvia’s defense minister, spoke to the Financial Times, and this issue came up.
[Pabriks] explained how he had seen an email a few months earlier from an unidentified Swedish bank — Swedbank and SEB dominate Latvia’s financial sector — refusing to give a loan to a Latvian defence company due to “ethical standards”. That follows a pattern of banks and investors, not just in Sweden but across Europe, refusing to back defence companies as it goes against their environmental, social and governance policies.
Pabriks was apoplectic. “I got so angry. How can we develop our country? Is national defence not ethical?
Fast-forward to early March, and a different report from Bloomberg:
SEB AB, one of Sweden’s biggest banks, said this week it’s reversing a ban on investing in weapons as it adjusts its sustainability policy to match Europe’s new geopolitical reality . . .
SEB said its change in policy, based on a view that “investments in the defense industry are of key importance to uphold and defend democracy, freedom, stability and human rights,” only affects certain funds. It also noted that some investors have made clear they won’t touch such assets, and underlined its intention to avoid all weapons that violate international conventions.
Peggy Hollinger, writing in the FT a few days later:
It is tragic that it took a war to drive home the importance of Europe’s defence industry. Surely an important component of the bloc’s ability to provide safety and security to its citizens should qualify for some recognition in the social element of ESG.
And by the same logic, investing in (or lending to) fossil-fuel companies, should, at least in certain cases, notch up a good “S” score. Energy security is going to be key to holding the West together in the next few years, and, as discussed above, that’s going to involve fossil fuels. That doesn’t mean that portfolio managers must invest in oil and gas, nor does it mean that they should eschew renewables, but it does mean that a blanket ban on Western fossil-fuel companies should be off the agenda for any ESG fund.
Somehow, I don’t think that that would be a view shared by Bloomberg’s Pham:
At the same time, there are growing fears that Russia’s war on Ukraine is derailing the fight against global warming. That’s amid renewed warnings from scientists that not enough is being done to prevent an environmental disaster. According to market researcher Morningstar Inc., Europe’s efforts to wean itself off Russian gas may well result in more investment in coal.
Priorities, priorities . . .
JPMorgan’s Hecker said the underlying urgency of transitioning to renewable energy hasn’t gone away, with or without a war. Estimates for how much is needed to transition toward a low-carbon economy over the next three decades range from $100 trillion to $150 trillion, and industry experts agree that private capital will need to cover most of that.
“If we think about delivering the Paris Agreement, we will need massively more renewables being installed,” Hecker said. “When you consider those numbers in the long term, I don’t think that the actual growth potential of renewables is fairly reflected.”
When an asset manager argues that the price of some eventuality is not “fairly” reflected, that normally tells you something.
By the end of last year, a lot of ESG funds were still heavy on technology stocks, light on energy stocks and virtually free of defense stocks. So far this year, the best-performing European ESG equity funds were packed with commodities, while those that performed worst were heavy on tech. Overall, European ESG-focused equity funds tracked by Bloomberg lost 9.2% on average in the period, underperforming the MSCI World Index.
That’s not how it was meant to be.
Advisors wary of sustainable investing may want to consider the performance of environmental, social and governance focused funds during these volatile times.
According to a new report from Morningstar, many funds investing in companies with relatively high ratings for ESG factors “prove to be more buoyant” than comparable non-ESG funds during market declines.
“Sustainable investments have continued to perform well throughout 2020, reinforcing the value of sustainable investing and further dispelling the myth that investors who include sustainability considerations in their portfolios face a financial trade-off,” says Audrey Choi, Chief Sustainability Officer at Morgan Stanley and CEO of the Institute for Sustainable Investing.
That was then.
The reasons why that was always a dubious proposition, at least over the longer term, have been self-evident for a while, but the events of the last month are a warning that ESG’s intellectual flaws and its significant destructive capacity could stretch far beyond the pain it can mean for shareholders.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 59th episode Sam Rines of Corbu Intelligence rejoins the Capital Record for a really plain-English breakdown of what is going on with oil and gas, Russia and Ukraine, and where the risk and opportunities lie in the future.
The Return of the Regional Seminars
National Review Institute is back on the road with its biennial Regional Seminars. This year’s series, titled “Creating Opportunity,” will feature panel discussions and one-on-one conversations that make the moral and practical case for free enterprise.
Notable speakers include William B. Allen, David L. Bahnsen, Jack Brewer, Dale R. Brott, John Buser, Veronique De Rugy, Kevin Hassett, Pano Kanelos, Rich Lowry, Karol Markowicz, Andrew C. McCarthy, Andrew Puzder, Amity Shlaes, Kevin D. Williamson, and, less notable, me.
We hope you will join us. You can learn more and purchase tickets here.
The Capital Matters week that was . . .
It is now clear that our current tax system is collapsing, and $80 billion in more revenue will not fix the problem. The system is now far too vast in both scope and complexity, and is only getting worse as Congress stirs the pot with ongoing law changes. Tax reform must focus principally on simplicity, efficiency, and neutrality. This will greatly lighten the compliance load for the vast majority of citizens who are overburdened with tax-law compliance. Failure to do so only drives up the already staggering compliance costs and provides incentive for some people to simply not comply with the law.
Earlier this month, a trial-court judge in Phoenix drove a stake through Arizona’s largest tax increase: Proposition 208. The decision brought an end — at least for now — to the latest progressive effort to raid the paychecks of the state’s entrepreneurs and other successful working people . . .
Over the weekend, Canadian Pacific Railway (CP) began to shut down its operations because of a labor dispute. Headquartered in Calgary, CP is one of the largest freight railroads in North America, with over 12,000 miles of track.
Around 3,000 engineers, conductors, and yard workers stopped working on Sunday, according to FreightWaves. They’re represented by the Teamsters Canada Rail Conference (TCRC), and the union said the main points of disagreement were wages, benefits, working conditions, and pensions — in other words, just about everything . . .
Yesterday, I wrote about the work stoppage at Canadian Pacific (CP) and how it could affect the U.S. About 3,000 CP employees represented by the Teamsters Canada Rail Conference (TCRC) stopped working on Sunday and rail operations were shut down through Monday.
This morning, CP and the TCRC reached an agreement to move to binding arbitration. That means both sides will argue their case before an independent third-party arbitrator, and the arbitrator’s decision will be final. While that process plays out, work resumes today at noon Mountain Time (CP is headquartered in Calgary). According to the Wall Street Journal, the details of the agreement are not public . . .
Scott Lincicome documents the many weaknesses in the case for subsidizing domestic chip production. And yet companies keep asking for, and counting on, such subsidies. It’s no wonder then that the public supports government regulation of these companies’ affairs. You can’t have it both ways: Play the free-market card when you don’t like the government constraints and beg for handouts every opportunity you get.
On Monday, Federal Reserve chairman Jerome Powell admitted the Fed’s inflation forecasting has not been great: “The rise in inflation has been much greater and more persistent than forecasters generally expected.” This admission gets at the heart of the Fed’s challenges: over-relying on macroeconomic forecasts in its monetary-policy decisions . . .
Some foods have no place on a plate — anchovies, capers, and lentils, to pick out but three. Don’t @ me.
Maybe it’s just me, but I don’t think that Larry Summers is entirely confident that the Fed has got this whole inflation thing under control . . .
In a series of television programs in the late 1970s and early 1980s, the late Nobel-winning economist Milton Friedman explained for the masses a mystery of their — and now, our — time: What causes inflation?
Then as now, people confused inflation’s cause with its effects. Friedman famously said that inflation was “always and everywhere” a monetary phenomenon, which is to say: The Federal Reserve’s printing of too much money causes it, and only the Federal Reserve’s decision to slow down the printing of new money can stop it. Yet as inflation once again rears its ugly head today, the public is once again mistaking its effects — higher wages, price spikes, excess demand for goods and services, etc. — for causes . . .
There are times when the U.N. makes the League of Nations look good.
This was one of these times . . .
The Securities and Exchange Commission (SEC) voted 3–1 this week to propose new rules by which public companies would be required to disclose additional information related to their greenhouse-gas emissions and the climate risks they may face. This is a major move for the agency, which had previously tried to avoid taking sides in politically contentious public-policy debates. The SEC’s proposal would be difficult, on any reasonable interpretation, to square with the exercise of its normal authority over financial markets, and is yet another troubling example of regulatory mission creep. It is also a disappointing and alarming development for those who care about property rights and a competitive, growing economy . . .
The White House has drawn sharp criticism for its discussions with Venezuelan leaders. Under Biden, Washington has shown little support for the U.S.-recognized opposition led by Juan Guaidó. The U.S. does not recognize the authoritarian Maduro regime and has remained largely quiet on Maduro’s rogue behavior. Indeed, it has largely overlooked illegal, U.S.-sanctioned oil trade between Iran and Venezuela and has sat back while Russia and the Maduro regime have grown closer. In August, for instance, the Biden administration passed up the opportunity to negotiate on the side of the opposition while Russia represented Maduro . . .
In 2018, prescription-drug prices fell for the first time in 46 years. They dropped even more in 2019 and 2020. Much of this break from the prior upward trend in prices was the result of additional competition unleashed by President Trump’s deregulatory agenda, which President Biden seeks to reverse.
How does Biden seek to do this? The federal government increases drug prices in two ways: by preventing manufacturers from entering the market and by requiring extant manufacturers to cease production . . .
I’ve written a bit before about how weaponizing both the dollar and, effectively, the international financial system against Russia, risks, over time, undercutting a vital U.S. strategic advantage . . .
Vladimir Putin is having HR problems. His defense minister disappeared, apparently with a “heart condition.” Anatoly Chubais, Putin’s “climate envoy,” has resigned and left the country for Turkey. As a former chief of staff under Boris Yeltsin, it was Chubais who recommended Putin for his first Kremlin position in 1997. Putin then replaced Yeltsin in 2000.
Then there is the case of Elvira Nabiullina, governor of Russia’s Central Bank. She tried to resign after Putin’s invasion of Ukraine and as Russia’s economy cratered. But she was told by him that her departure would be viewed as a betrayal. Putin had her sworn into office for a new five-year term last week . . .
The FRED data go back to 2001, and December 2021 was the lowest the ratio has ever been, at 55 unemployed workers per 100 job openings.
The pandemic recession was over in May 2020. From then to January 2022 (the most recent month with data available) is 20 months. In March 2011, 20 months after the Great Recession was over, there were 421 unemployed workers per 100 job openings. In August 2003, 20 months after the mild 2001 recession was over, there were 279 unemployed workers per 100 job openings. We have never seen employment recover so quickly after a recession . . .
Corporate ‘Social Responsibility’
The event’s website offers a revealing glimpse into the ecosystem that “sustainability” has created — an ecosystem that contains true believers, to be sure, but is also one in which opportunists can take advantage of the pathway it offers to power, profit, and prestige — or at least a job . . .
Intel CEO Pat Gelsinger doubled down yesterday on his company’s apology for singling out forced-labor practices in the Xinjiang region, where the Chinese Communist Party is carrying out crimes against humanity and genocide against Uyghurs and other minorities.
Gelsinger was testifying in front of a Senate committee to voice his support for a bill that would provide semiconductor manufacturers with over $50 billion in subsidies to shore up U.S. supply chains amid the geopolitical competition with China.
He and other Intel executives have expressed interest in working to ensure U.S. supply-chain security, and the company announced a $20 billion investment earlier this year in an effort to build two new chip factories in Ohio. However, his latest comments are sure to call attention to his efforts to justify Intel’s continued business in China — and the unsavory moral compromises necessary to maintain it . . .
The Oil Price
With gasoline topping $5 per gallon in some parts of the country, and the price of oil topping $110 per barrel, President Biden and his team have bluntly stated that the high prices are Putin’s fault. Biden went so far as to say, “It’s going up, we can’t do much now. Russia is responsible.”
This stance seems a bit odd, as there are any number of things that could, in principle, be done, such as opening up leases for oil and gas exploration, accelerating the permit process for new wells, allowing pipeline construction, and so on. Which brings up the question, is it possible that Biden is doing nothing about high oil prices because he secretly likes them?
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