Wyoming was an early critic of woke capitalism, as it’s sometimes called, but the problems that arise when mixing business and politics are coming to the forefront.
This year, many state attorneys general and treasurers are taking a closer look at social credit scores in investing, and the role it played in facilitating the FTX digital currency scandal is likely to raise concerns about the ESG movement.
Red Flags
The ESG movement rates funds on various markers of progressive-friendly policies related to protecting the environment, diversity in the workplace and community relations. Any association with fossil fuel industries quickly gets a fund rated down.
In 2018, Bank of the West adopted Environment, Social and Governance (ESG) policies and announced it would divest from fossil fuel investments. Wyoming’s then-Treasurer Mark Gordon threatened to stop doing business with the San Francisco-based bank. U.S. Sen. John Barrasso wrote a letter to the CEO of the company, the AP reported, saying that it would hurt Wyoming’s economy.
This past week, $1 billion in customer money went missing from FTX, a digital asset trading company that abruptly imploded into bankruptcy.
Recent revelations show there were a number of visible red flags in interviews given by the company’s 30-year-old CEO and founder Sam Bankman-Fried, but these were largely ignored by investors and a fawning press dazzled by FTX’s do-good image.
‘Perverted Beyond Recognition’
Bankman-Fried was a large donor to progressive causes. He is believed to have donated to the World Economic Forum and spoke at its annual conference last May. The WEF is a champion of the “Great Reset,” which is a post-pandemic economic recovery plan using ESG metrics. He was spoke at the Clinton Foundation’s Clinton Global Initiative in September.
Bankman-Fried has since resigned and could face prison time for allegedly defrauding his customers.
“I was on the cover of every magazine, and FTX was the darling of Silicon Valley. We got overconfident and careless,” he tweeted Wednesday.
In a rather candid interview with a Vox reporter, he stated frankly that his ESG-friendly image shielded him from criticism.
“ESG has been perverted beyond recognition,” he told Vox.
Pushing Back
Wyoming’s early criticism of ESG came from the movement’s anti-fossil fuel stance. Other energy states are now pushing back against the movement as the federal government has been pushing new rules to enforce ESG compliance.
In August, 19 states — Wyoming wasn’t among them — sent a letter to Blackrock CEO Larry Fink, who has been a vocal proponent of ESG, criticizing the firm’s use of ESG social criteria in managing state pension funds.
In September 2021, Texas banned municipalities from doing business with firms that refuse to do business with the fossil fuel and gun industries. Florida Gov. Ron DeSantis in August approved a resolution that bars Florida’s pension fund from considering ESG factors in making investment decisions.
Wyoming, Arizona, Idaho, Kentucky, North Dakota, Ohio, Oklahoma and West Virginia also have enacted similar ESG-limiting legislation with respect to public funds, and many other state legislatures are considering such bills.
Under Performing
It’s not just that the ESG agenda is politically objectionable. There are growing financial concerns about ESG as well. Studies are finding that ESG funds perform poorly in financial terms and don’t actually prove to accomplish the stated goals of the movement.
A 2019 study published in the Journal of Finance found the highest ESG-rated funds attracted more capital than the lowest-rated, but none of the highest rated outperformed any of the lowest rated.
Researchers at Columbia University found that companies in the ESG portfolios had worse compliance records for both labor and environmental rules.
Just as FTX was shielded from criticism, many companies are able to appear environmentally friendly, and their ESG ratings maintain their images.
“You have a lot of data and a lot of studies that have come out recently showing that ESG funds have underperformed the market,” Anson Frericks, co-founder and COO of Strive Asset Management, told Cowboy State Daily. “They’re charging higher fees and they’re underperforming,”
Rent Seeking
Compliance with ESG is costly as well. Despite the fact it drives up the cost of business and the funds perform poorly, many large companies are champions of the investment philosophy.
Alex Stevens, manager of policy and communications for the Institute for Energy Research, said ESG became a backdoor attempt at regulated oil and gas companies.
It achieves “things that politicians and environmental activists couldn’t achieve through a democratic political process,” Stevens told Cowboy State Daily.
Whereas lawmakers, especially those in energy states like Wyoming, might not go along with agendas that harm economies, Stevens said ESG is a new iteration of rent-seeking behavior, referring to an economic concept where companies gain added wealth through government-funded social programs rather than gains in productivity. They use ESG as a “corporate responsibility” disguise knowing that compliance drives up the cost of business, which can benefit large corporations that have teams of lawyers and compliance experts who can navigate complex rules.
“Startups and smaller companies are placed at a competitive disadvantage when more of these regulations are piled on,” Stevens explained. “Whenever I see businesses embracing regulation, it always raises a red flag.”
Green Smuggling
Frericks founded Strive with a vision of doing business without considering political agendas leaning one direction or another. The strategy, Frericks said, brings more value to Strive’s clients.
When it comes to public pension funds, Frericks said, incorporating ESG effectively appropriates voter support for causes they might not support. He calls it “green smuggling.”
In the same way ESG defunded fossalil fuel development and cut out policymakers from the discussion, incorporating ESG into public investments has allowed progressives to push policies in states like Wyoming, Texas, and Florida that wouldn’t have otherwise adopted the measures.
Frericks said it’s likely there’s going to be even more pushback as people seek value for their investments and more appropriate venues for politics.
“We need a better way forward, one that allows capitalism to be capitalism, and where complex political issues are decided at the ballot box,” Frericks said.
