Social(K) BLOG
September 10, 2022

The Wrong Side of History

Don’t take the wrong side of an argument just because your opponent has taken the right side.” — Baltasar Gracián

Written by Stephanie Cohn Rupp, CEO of Veris Wealth Partners and originally appeared here

Environmental, Social, and Governance (ESG) investing is facing a new round of criticism from American conservative leaders. Senator Ted Cruz, to offer one example, has framed BlackRock’s ESG policies as “abusing the market.” More alarming to me, are the new state-level policy attacks on ESG led by elected officials from across the United States. To offer three recent examples:

  • Governor Ron DeSantis and trustees of Florida’s State Board of Administration passed a resolution barring state pension funds managers from considering ESG criteria.
  • Texas State Comptroller Glenn Hegar banned state and local entities from doing business with ten banks that the state accused of boycotting the oil and gas industry.
  • The State of West Virginia and its State Treasurer now refuse to do business with financial institutions that divest from fossil fuels.

As I see it, these actions demonstrate a lack of concern for the financial performance of the pension-holders they supposedly wish to protect — as well as a lack of regard for the views of a vast majority of the American people. A recent Pew study showed that 69% of American adults want the US to focus on developing the infrastructure for wind, solar, and other alternative energy sources instead of expanding the production of oil, coal, and natural gas.

I have spent the last twenty years of my career in global Impact and ESG investing, serving clients from across the political spectrum. From my perspective, these condemnations and policies designed to defend the fossil fuel industry show a deep misunderstanding of ESG investing and lack of knowledge about important megatrends that are shifting the views of Republicans and Democrats alike and shaping a future that will look very different from today.

These anti-ESG positions are, in my view, dangerously on the wrong side of history.

Error #1: ESG Critics’ Biggest Mistake: Ignoring Stranded Assets

I believe the greatest mistake of policymakers enacting bans on ESG investing is that they are ignoring the risk of “stranded assets.”

Lloyd’s defines stranded assets as those that “have suffered from unanticipated or premature write-downs, devaluation or conversion to liabilities” typically because of environmental changes caused by climate change.

By continuing to invest in fossil fuels, the pension systems of West Virginia, Texas, and Florida — and the pensioners who depend on them — will continue to be exposed to oil and gas and the risk of stranded assets.

Though fossil fuels continue to dominate the global energy system today, we are about to experience a sharp decline in their use because of new government regulations, sharp changes in consumer behavior, and the potential for legal action against emitters. Researchers have forecasted that 60% of oil and fossil methane gas, and 90% of coal will remain in the ground for the planet to not exceed a 1.5 °C carbon budget. These “assets” will remain stranded.

Stranded asset risk is not fully reflected today in the value of companies that extract fossil fuels. If this risk was priced in, as I think it will be in the future, this would result in a sudden drop in value that would affect investors and shareholders.

Whether you believe in climate change or not — as an investor, it is a dangerous bet to continue to invest in an industry which has a high probability of becoming obsolete. Returns to pensioners will most probably suffer as a result.

Error #2: Ignoring that Energy Companies are Making Net-Zero Commitments and Transition Plans

Dare I say it, even energy companies have Net-Zero commitments. Exxon-Mobil pledged net-zero carbon emissions from operations by 2050. Shell’s target is to become a net-zero emissions energy business by 2050. I am not aware of any Net Zero commitment from the State of Texas or West Virginia unfortunately. According to GlobalData’s Thematic Research, BP, Equinor, Repsol, and PKN Orlen are the companies best positioned to benefit from investments in renewable energy and they are leaders in diversification of energy sources. So I have to ask, why would these politicians stick their pensioners into investments into soon outdated energy, if even the energy companies are making these commitments and embarking on the energy transition… As the French would say, is this not acting “more Catholic than the Pope”?

Error #3: Misreading Republican Public Opinion

We would hope that these US State Treasurers, Comptrollers and Governors would be as enlightened on these matters as the Central Bank of Singapore, which is preparing for this energy transition and have made Net Zero commitments. But if one is politician, at least, it would be good to listen to the opinions of Americans and especially most Republicans. Why? Because both right and left-wing asset owners and voters want to combat climate change and are not as far apart as often is portrayed. According to a Pew Research, 77% of all Americans (Dems, Reps, and Independents combined) wish to prioritize renewables over fossil fuels. 66% of Republican Women wish to move away from fossil fuels, while 60% of Republican men agree (90% of Democrats agree). 88% of Republicans are supportive of policies to reduce climate change such as planting a trillion trees to absorb carbon emissions and 73% of Republicans are supportive of providing a tax credit to businesses to develop carbon capture and storage. Also, Research by McKinsey found that in the US more than two-thirds of wealth will be held by women by 2030… and Republican Women care more about Climate issues than Republican men. This massive wealth transfer to Women will yield an even greater tidal wave towards ESG Investing — and especially Climate. Republican politicians and State Treasurers may attack ESG investing as “woke”, but wealthy Republican women, will increasingly invest in the clean energy transition — it’s smart investing after all. I assume those wealthy Republican women will probably be less inclined to fund politicians and PACs which support “dirty energy”, putting the lives of their children, and future generations in peril.

Of course — partisan voters and investors will not agree on LGBTQ+ rights, on Roe, Gun Control, just to name a few. But partisan investors and voters do agree on a lot of things: chiefly on Climate, but also on combatting modern-day slavery, supporting economic development, investing in job retraining and creating good paying jobs for all.

“Don’t take the wrong side of an argument just because your opponent has taken the right side.” 17th Century Spanish Philosopher, Baltasar Gracián

Being on the wrong side of history — believing that the earth is flat or denying that the earth revolves around the sun — is tragic on many fronts: human, historical and scientific. Galileo was sentenced to death by the Roman inquisition for heresy and died under house arrest, after pleading guilty to get a lighter sentence.

But what is particularly frightening with these bans on ESG investing from Texas, Florida and West Virginia, to name a few, is not only about being on the wrong side of history. These myopic decisions pose real world risks — not only to the pensioners of these State Systems, but also harming humanity by supporting policies which further Global Warming and its catastrophic consequences.

This article originally appeared here

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