Fighting Back Against ESG

One of the most pernicious trends of our day is the employment of “environmental, social and governance” (ESG) criteria in investing. Former Vice President Mike Pence writes at Real Clear Markets:

On Wall Street, major investment firms are rating companies based on their adherence to left-wing environmental, social and governance (ESG) values. Like the social credit scores issued by the Chinese Communist Party, a low ESG score can be devastating, making it virtually impossible for a company to raise capital.

If that last statement sounds extreme, consider this from Goldman Sachs, as related and commented on by my colleague Isaac Orr:

A recent article by Goldman Sachs explains how so-called green banking practices are pushing up the price of oil.

The article states:

Even as oil prices climb higher, the flow of money into new oil and gas projects has stalled as investors increasingly avoid industries that produce fossil fuels and heavy carbon emissions. …

Your research shows that the link between higher energy prices and capital expenditures has broken down. What severed that connection?

Michele Della Vigna: “The capital markets engagement on climate change has reached very high levels. We can measure it in many ways, like climate change shareholder resolutions where the approval rate went from 10% to 40% during the past 10 years. And this drives a complete divergence in the cost of capital of high-carbon versus low-carbon energy projects. We estimate there’s been a divergence of 15 percentage points in the cost of capital. This is just to give you an indication of how extreme the impact is of the capital markets focus on climate change.

Because of this shift, the industry finds itself severely capital constrained on traditional hydrocarbon investment in different ways. For smaller exploration and production companies it’s about getting financing. For larger integrated oil and gas companies it’s about decarbonizing. But either way, none of these companies can scale oil and gas projects the way they used to. And if you think that most companies effectively are forced to embrace a carbon budget, a carbon budget ultimately leads to less oil and gas development, leads to higher hurdle rates, or cost of capital for these projects, and automatically means that whatever the cash flow available may be, capital expenditures are restrained.
***
Higher oil prices are absolutely consistent with a push for decarbonization that comes from the capital markets.”

So higher prices for gas and oil are a choice by the Biden administration and liberals in the investment community who are trying to force a transition to unworkable wind and solar energy.

Here is another example: Vista Outdoor is a profitable, growing company in which I am an investor. Vista Outdoor is currently selling at a price/earnings ratio of only 3.26, while the average P/E of the S&P 500 is currently 15.97, and the average P/E in the outdoor recreation industry is 17.8. What gives?

Vista Outdoor has two divisions: one sells outdoor recreation products–camping, golf, fishing, bicycling and the like. The other division is America’s largest seller of ammunition. Because of its ammunition sales, which are booming and highly profitable, the company has been shunned by liberal investors. As a result, Vista has announced that it is dividing the company in two:

Vista Outdoor Inc. (NYSE: VSTO), an Anoka-based company that sells both ammunition and consumer brands like Bell bicycle helmets and CamelBak water bottles, plans to separate into two publicly traded companies.

Following the split, the company’s outdoor products business — the consumer line that also includes brands like Giro, Camp Chef, Bushnell, Bushnell Golf, Foresight Sports — will be led by current Vista CEO Christopher Metz but will be based in Bozeman, Montana.
***
Shooting sports — how Vista refers to its ammunition business, though it also sells to law enforcement and military customers — is roughly twice the size of its consumer-oriented outdoor products unit, accounting for $1.5 billion of Vista’s total 2021 revenue of $2.22 billion.

Both segments saw growth of more than 20% from the previous year, as both gun sales and outdoor activities saw a surge of interest during the pandemic.

This should be a great deal for shareholders, as the outdoor sports business will now trade at a P/E ratio typical of the industry. Left-wing investors will still shun the ammunition company, but it will be a cash cow for investors.

That is one way of fighting ESG. Back to Mike Pence:

Fortunately, many states have had enough and are beginning to fight back against the Woke Wolves of Wall Street. West Virginia recently announced that Goldman Sachs, JP Morgan, Wells Fargo, Morgan Stanley and BlackRock will be banned from doing business with the state as a result of the companies’ pernicious ESG policies that punish the coal industry. All five companies had previously announced that they were drastically cutting investments in new coal projects.

Other states are also rising to the occasion. Already, the New York Times reports that Louisiana and Arkansas have joined West Virginia in pulling more than $700 million out of BlackRock. State treasurers in Utah and Indiana are demanding an end to the insidious practice of ESG. And state attorneys general, led by Mark Brnovich of Arizona and Doug Peterson of Nebraska, are pursuing Wall Street firms for possible antitrust violations and the illegal restraint of trade or commerce, a perfect description of the tactics inherent to ESG.

If ESG investors have been communicating with one another and agreeing to boycott certain companies, it would be a clear violation of Section 1 of the Sherman Act. I’d like to see criminal liability here; prison terms under the Sherman Act can be up to 10 years.

States with large employee pension funds invested in the stock market would be well advised to rein in massive investment firms that are pushing a radical ESG agenda. State and local governments should entrust their money to managers that don’t work against their citizens’ best interests. States should also pass model legislation developed by the American Legislative Exchange Council requiring government pension fund managers to vote the state’s shares, rather than delegating that authority to Woke Wolf of Wall Street firms.

Every state in the union should follow West Virginia’s example and give Wall Street a simple choice: either serve the interests of our citizens, or take your business elsewhere.

One more thing: by prioritizing politics over financial return, ESG investors like BlackRock inevitably underperform for their clients. There must be a huge market for investment funds that simply want to maximize return for investors and shareholders. One such is Strive Asset Management, founded by Vivek Ramaswamy, the author of Woke, Inc.. Strive launched a U.S. energy ETF (“DRLL”) that attracted $250 million in a matter of days. Strive has several more ETFs in the works. From the linked Bloomberg article:

As outlined in Tuesday’s filings, Strive will “generally vote against board members and proposals that advance social or political agendas unrelated to providing excellent products and services to customers” — which in DRLL’s case, means encouraging oil companies to drill more. That pits the issuer against the likes of BlackRock Inc., which has launched a wave of environmental, social and governance-focused funds in recent years.

There are signs that the ESG fad has already crested:

The Ohio-based Strive is planning its expansion as flows into ESG ETFs falter. Dogged by poor performance as energy stocks soar, just $4.5 billion has been funneled into the category so far in 2022, data compiled by Bloomberg Intelligence show. Compare that to two straight years of more than $30 billion of inflows.

But let’s not take any chances. ESG is one of the worst ideas of recent times. It needs to be crushed.