The concept of ESG was first proposed by the United Nations Global Compact in 2004. Up to now, more than 60 countries and regions around the world have issued relevant requirements for ESG information disclosure.
The size of ESG funds
There are about US$3 trillion in ESG, sustainable, or low-carbon funds around the world. According to data disclosed by Morningstar, from 2019 to the third quarter of 2022, the asset size of global ESG funds increased from US$0.90 trillion to US$2.24 trillion, an increase of 149%.
How the regulations to all listed companies?
I mentioned in Chapter 3 of the book “The Rules of 10 Baggers“: The SEC has mandated that listed companies must disclose the use of green energy by companies in March 2022. This is why in recent years (before the SEC has this regulation), almost all well-known companies listed on the US stock market have taken the initiative to disclose the use of green energy in their companies, and have also set goals such as carbon neutrality. Even the China Securities Regulatory Commission requires all listed companies to disclose environmental information by the end of 2020.
I also mentioned in Chapter 6 of the book “The Rules of 10 Baggers“: the world’s largest sovereign fund, Norway’s sovereign fund, in addition to its official documents stating that it has ESG (Environmental, social and corporate governance: Environmental, social and corporate governance) In addition to the task, in 2019, petrochemical energy companies such as oil and coal will be greatly reduced, and large sums of money will be invested in green energy infrastructure to support many renewable energy projects and companies. In 2020, Norway’s sovereign fund blacklisted 12 companies based on ethical and climate justice concerns.
Regarding the Norwegian sovereign fund, I suggest you refer to the description of my other two blog articles:
- “How great Norway Sovereign Wealth Fund (GPF) is“
- “What investors can learn from GPF (Norway Sovereign Wealth Fund )“
What about regulations for ESG funds?
In March 2021, the EU introduced new regulations for the Sustainable Financial Disclosure Regulation (SFDR). Explicitly require asset managers to disclose the content, methodology and presentation of their “green” KPIs. It is required that non-financial institutions must disclose the proportion of annual revenue, capital expenditures, and operating expenses of sustainable business activities, must meet one or more of the following six sustainable activities, or labor rights must meet the minimum protection requirements, etc.:
- Climate change mitigation
- Climate change adaptation
- Protect oceans and water resources
- Transforming to a circular economy
- Pollution Prevention and Control
- Protect and restore biodiversity and ecosystems
The SEC is preparing to curb the scope of ESG investment products and set standards for ESG-related funds; requiring all relevant funds to explain how the funds are sold, invested, and how the funds will vote at public company shareholder meetings, etc. In June 2022, The Wall Street Journal reported that the U.S. Securities and Exchange Commission was investigating Goldman Sachs’ ESG fund’s operations for non-compliance.
The Financial Times reported that in the draft regulations developed by the SEC, naming rules will be established, requiring funds to invest more than 80% of the funds in the companies indicated by the funds, and hold no more than 20% in cash and public debt.
In January of this year, in order to avoid this kind of situation of trickery, the Taiwan Financial Regulatory Commission stipulated that in order to avoid ESG funds “with the name of ESG, but not the reality of ESG”, ESG funds must submit for approval. If the name of the fund is related to the theme of “ESG”, the application for approval should be submitted within six months. And the holding of ESG-related targets must be at least 60% of the fund’s net asset value, preferably 70%. Otherwise, a warning should be added after the name of the fund. It can be seen how serious the violation is!
What are the ESG standards?
But I want to remind everyone that the SEC is only setting guidelines and not listing the details of enforcement. Moreover, the biggest problem with ESG scores launched by many units on the market is the lack of standards. As long as there are no standards, there will be disadvantage and bias arise. Investors must be careful about this. Next time you see any similar ESG rankings, just refererence only, don’t take it seriously. In other words, it is now up to the companies to express themselves and to use their own conscience.
Tesla (ticker: TSLA) is the world’s largest electric vehicle manufacturer, and has made outstanding contributions to green energy and reducing air pollution, but it is surprising that Tesla does not score very well in many of the current well-known ESG rankings. However, many of the big traditional automakers have better ratings than Tesla.
In May 2022, Tesla Got Kicked Out of the S&P 500 ESG Index. Elon Musk Sounds Upset nad fight back on Twitter. Elon Musk Calls ESG “An Outrageous Scam” after Tesla was removed from the index.
Anti-ESG is taking shape
In recent years, Wall Street giants have warned in their latest filings that the outside world has no consensus on ESG requirements. Obviously, there are “differing views” and “differing requirements” on ESG, which may hurt profit performance.
Some Republican administration officials have launched investigations into the voting rights of BlackRock and State Street shareholder proposals. State lawmakers are considering, or have passed, laws that would require government pension funds to withdraw money from asset managers that consider climate change and racial equity issues.
The wave of anti-ESG in the United States has intensified. BlackRock CEO Fink said that fiscal officials in Republican states have withdrawn about US$4 billion in funds in 2022 due to ESG concerns. BlackRock and State Street’s ESG investing policies were under fire at a Texas state legislature’s hearing in December 2022. The State Street filing said the scrutiny of ESG actions has created political and reputational risks, and state investigators have requested submissions.
In March 2023, the U.S. Senate passed a measure to block a new rule from the Biden administration that allows retirement plans to take ESG and other factors into consideration when making investment decisions. U.S. President Biden used his veto power for the first time.
Anti-ESG trends will start to emerge in 2022. It is understood that throughout 2022, states across the United States have proposed more than 40 anti-ESG bills. As of the beginning of April this year, the number of anti-ESG bills in states across the United States (mainly Republican states) has skyrocketed to a hundred, seven of which have become state laws to restrict public pensions under the state government and state companies. Investment and operation in the field of ESG.
Standard & Poor’s will remove ESG scores
Investors who use Standard & Poor’s (ticker: SPGI) credit ratings have raised confusion about ESG scores, and S&P will update them on August 4, 2023. S&P Global will no longer publish environmental, social and governance (ESG) scores alongside credit ratings, adjusting for investor feedback. People familiar with the matter said that investors did not generally understand S&P’s inclusion of ESG metrics in their rating reports.
How does the capital market view ESG?
Wall Street speaks one way and thinks another
RBC Capital Market Analysis has issued a survey report. In the fall of 2019, the top five companies in the S&P 500 index that are most commonly invested by global active management perpetual funds are Microsoft (ticker: MSFT), Alphabet (ticker: GOOGL) ), Visa (ticker: V), Apple (ticker: AAPL) and Cisco (ticker: CSCO), Amazon (ticker: AMZN), Meta (ticker: META) are also on the list. There are relatively few companies they invested that actually are ESG-focused.
In 2022, Citi (ticker: C) plans to invest its ESG funds in defense companies that manufacture weapons to fight Russia.
Bill Gates is a recognized expert on climate change, and he does invest in innovations such as Breakthrough Energy, nuclear fusion, biofuels, etc., and is committed to achieving the world’s 2050 goal of net zero carbon emissions. make a great contribution. But Gates himself has also shorted Tesla’s stock, a move that also sparked dissatisfaction with Musk’s tweets.
According to data from VettaFi, BlackRock (ticker: BLK), the world’s largest passive fund company, advertises ETF ESGU and SUSA in ESG’s ETFs, while Baker Hughes (ticker: BKR), Chevron (ticker: CVX) ), Exxon Mobil (ticker: XON), Halliburton (ticker: HAL), and Valero Energy (ticker: VLO) and other large energy companies. The shareholding ratio is 4.8% and 3.8%, respectively, which is the same as Energy stocks are equally weighted in the S&P. That is to say, the ETFs they advertise ESG are no different from the ETFs in the market. They; Wall Street says one thing, does another, and making money is more important.
The above are just some of the most famous examples, why is that so? Fund performance is what Wall Street values, but why? Because their clients are so demanding, the investors themselves are to blame.
Ignore the market hype
A few years ago, there were a bunch of ETFs launched under the name of ESG, just like a bunch of ETFs launched under the name of artificial intelligence seven or eight years ago, and electric vehicle ETFs in the past two or three years. The common feature of these ETFs is that they are full of data: how is artificial intelligence defined? Even Texas Instruments (ticker: TXN), a major manufacturer of automotive chips, is not a constituent stock, but is it convincing that China Steel is included electric vehicle ETF? (see “How does Texas Instruments make money? Amazing long term capital reward and company net profit margin!“) Now that the SEC has the law, which listed company dares not comply with ESG laws?
Most of these ETFs that catch the media trend are just to lure retail investors who are at a loss and chase hot industries, which is a typical tulip frenzy. Clear-minded investors should refuse to such investment targets chasing hot topics and or jus a hype.
Some typical cases
On November 22, 2022, Goldman Sachs (ticker: GS ) paid $4 million to settle an investigation involving ESG funds to settle a U.S. regulatory investigation into how it managed environmental, social and governance-based (ESG) funds–the criteria for selecting stocks in mutual funds and other products for ESG. The SEC said that when Goldman Sachs promoted ESG funds and similar investment strategies, it did not always follow a unified framework stipulated in its compliance plan; meaning that Goldman Sachs violated the SEC’s compliance rules.
BlackRock, the world’s largest passive index asset company, passive funds such as index trackers and ETFs, these funds account for 64% of BlackRock’s more than $10 trillion in assets under management. In December 2022, the stock price fell by 22% within a year (this is a collapse for the company), BlackRock activist shareholders called on CEO Fink to step down, pointing out that the company’s ESG goals are too hypocritical.
Activist shareholder Bluebell says “there is a gap between what BlackRock consistently says on ESG and what they actually do”. “We’re seeing BlackRock endorsing some bad practices from an ESG standpoint that’s not actually consistent with what they’re saying.” BlackRock is still the major shareholder of companies such as Glencore (ticker: GLNCY), Exxaro (ticker: EXXAF), Peabody (ticker: BTU) and Whitehaven (ticker: WHITF). “When coal was around $76 a ton, BlackRock was talking about getting out.” “Now that coal is $380 a ton, they’re buck-passing again. I think BlackRock’s coal strategy has nothing to do with coal prices. There is a high correlation between them.”
Vanguard, the world’s second largest passive index asset management company, also announced in December 2022 that it will withdraw from the Net Zero Asset Managers Initiative (Net Zero Asset Managers Initiative), the world’s largest climate investment alliance. Biggest betrayal so far.
Vanguard said it made the decision to maintain the freedom not to limit its investment choices.
I personally advise investors, especially if you are a retail investor, not to follow the frenzy. Don’t chase the ESG trend, honestly invest in your ETF tracking the maket index, and active investors should study the fundamentals of your individual stocks. Don’t pay attention to hyping ESG-related ETFs or claiming that a certain stock is an ESG concept stock, these will not help you.
I am the author of the original text, the abridged version of this article was originally published in Smart monthly magazine.
- “Should investors chase the ESG?“
- “Carbon capture current developments, prospects, and related companies“
- “How does Texas Instruments make money? Amazing long term capital reward and company net profit margin!“
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