2022: The year of the ESG pushback?
A clip from Citywire
By Alex Steger and Alex Rosenburg, May 19, 2022
2020 was the year of ESG. The delayed response to that trend appears to be upon us.
ESG is a scam.’ So tweeted Elon Musk in response to S&P Dow Jones Indices dropping Tesla from the S&P ESG index. Is he… right? Is this part of a wider pushback on ESG investing? And is Tesla an ESG name or not? Alex Rosenberg and Alex Steger grapple with those questions in the following conversation.
Alex Steger: I can start by answering the one easy question above: Yes, Musk’s comments are part of a wider pushback on ESG, which seems to have really gathered steam in recent weeks. Musk’s criticism of S&P was not the first time he has hit out at ESG investing this year, and comes a week or so after the launch of a so-called ‘anti-woke’ asset management firm, which claims that it will push holding companies not to take a stand on social and environmental issues. Plus, as we have covered before, states like Texas and West Virginia are trying to stop the flow of government money to fund managers who don’t like fossil fuels.
Alex Rosenberg: If 2020 (and to a lesser extent 2021) was the year of ESG, where you basically had to have those three letters in your name to attract assets as an active manager, and ESG-branded stocks went gangbusters, is 2022 the year of anti-ESG? And now the hard question: Is anti-ESG a current fad – or, conversely, was ESG the fad, and one that is reaching its end in the face of recent cynicism from the political right and leftft alike?
Steger: Yes, I agree, 2022 does feel like the year of anti-ESG. For a firm to launch with the specific purpose of being against this style of investing says something. The firm, Strive Asset Management, was announced with some fanfare and is backed by Peter Thiel and Bill Ackman. It has $20m in funding and is led by Vivek Ramaswamy, the author of a book called Woke, Inc. He has branded the big three passive players – BlackRock, Vanguard, and State Street – an ‘ideological cartel’ and will lobby any stocks he owns to not get involved in political and social issues. It is not clear what his criteria will be for selecting stocks in the first place and whether previous ESG pronouncements will be a factor in being included in the firm’s funds.
One fund that takes this idea a step further (i.e., not just wanting companies to stay out of ESG, but buying those that it deems to be against ESG) is the ESG Orphans ETF (ORFN), which is not an endowment for children left parentless by an explosion at a vegan cafe, but actually a passive fund (with a 0.75% fee!) full of tobacco, oil, and firearm names. The ETF launched this week and is another example of the growing backlash. It’s by no means coming at the pace or scale (can Strive really put a dent in BlackRock?) of the 2020 ESG bonanza, but it is happening.
Rosenberg: What’s funny about these products is that they seem so vague precisely because ESG itself is so vague. Anti-ESG doesn’t mean much because ESG doesn’t mean much. A good troll would be if Sustainalytics added ‘getting involved in discussions of ESG’ to its long list of ESG risks and Ramaswamy had to use Sustainalytics to scan for companies.
I do think what’s interesting is how these type of responses make theoretical and financial hay from the rise of ESG. Ramaswamy’s thesis in a nutshell is, ‘The largest-scale fiduciary breach of the 21st century is hiding in plain sight: the big three asset managers are using the money of everyday citizens to advance political agendas that they disagree with.’ It seems pretty clear that he has a point. (BlackRock might say that its ESG methodology also helps pick stocks that perform better, which doesn’t make much sense for reasons we’ve discussed at length in prior columns.) When ESG was a niche little thing that investors were choosing for their own pet reasons, then who cares. But when ESG is made a default option for many investors, it is distinctly awkward to realize just how politically motivated it is.
Now, ESG managers may not think of what they do as politically motivated. But when you’re asking questions like ‘is lack of diversity among executives worse than pollution?’, how can the answer reflect anything besides your own ethical and political perspective?
Steger: And that’s almost that exact question that has got Musk all fired up (although it doesn’t seem to take much). Musk took to Twitter yesterday in outrage (is there any other way to approach the platform?) after S&P Dow Jones Indices removed Tesla from its S&P 500 ESG index. The automaker was removed as its ESG score dropped partially due to claims about racial discrimation and working conditions, as S&P explained in a blog post. This triggered Musk to brand ESG ‘a scam.’