The move toward ESG investing is not the free market at work
Government tilts the scale toward the alternative approach toward investing
Advocates of environmental, social, and governance investing — typically shortened to ESG — may say it is simply a reasonable response to market demands. Hughey Newsome, chief financial officer of Wayne County, recently wrote in Forbes, says, “Bureaucrats are not primarily demanding these mandates, but instead mainstream institutional investors are.” But an alternate view is that ESG is becoming a dominant force because competition in the investment-ratings business is limited by selective government accreditations and other barriers to entry.
Standard and Poor’s Financial Services, BlackRock, and Moody’s are private companies that operate in the free market, and they have increasingly taken ESG goals into account. Does this give an opening for someone who prefers more traditional investments to start competing businesses in the financial services industry?
Would that it were so easy.
Credit rating agencies such as S&P let investors know whether a business is a worthwhile investment by assigning it a credit rating. ESG is one of many rating metrics. Institutional investors, such as asset management firms or banks, use these credit ratings to determine how they will invest their shareholders’ money.
ESG has become a dominant metric for investments due in no small part to the shielding from competition its promoters enjoy.
The first layer insulating ESG-leaning firms from competitors is the federal government’s special accreditation of credit rating agencies, including the Big Three: Standard & Poor’s, Moody’s, and Fitch Ratings.
Set apart by the Securities and Exchange Commission as Nationally Recognized Statistical Ratings Organizations, these three, and six other selected enterprises, enjoy legally sanctioned dominance and a significant competitive advantage in their industry.
Only one NRSRO refrains from wholeheartedly pushing ESG: Kroll Bond Rating Agency. Kroll says that it prefer “fundamental, bottom-up credit-by-credit risk analysis, rather than through the collection of often irrelevant ESG data and/or the creation of ESG scores that are burdensome to analysts and issuers.”
Kroll, however, retains ESG as one of its metrics for consideration, and it handles less than 1% of total outstanding ratings of the accredited rating agencies.
These nine organizations are unlikely to give up their SEC-granted domininant position any time soon.
Asset management firms, too, are riding the ESG train. Just like credit rating agencies, they are difficult to unseat or to compete against.
Take, for instance, BlackRock. The world’s largest asset management corporation is a prominent advocate for ESG, and a government favorite when it comes to managing crises.
BlackRock CEO Larry Fink’s personal relationship with former Treasury Secretary Timothy Geithner helped to secure BlackRock a key stake in using tax dollars to purchase toxic assets from U.S. banks during the 2008 financial crisis.
More recently the firm was chosen to assist the Federal Reserve’s 2020 coronavirus bond sales. Multiple former BlackRock executives serve in President Joe Biden’s cabinet. Several former Obama administration regulators occupy influential seats at BlackRock.
Banks also play a key role.
JPMorgan Chase and Wells Fargo have both donated over $1 million to Biden throughout his political career. Bank of America received billions in aid from the Bush and Obama administrations.
Goldman Sachs alumni have filled federal offices for years, including Hank Paulson and Steve Mnuchin, secretaries of the Treasury Department under George W. Bush and Donald Trump, respectively. More recently, Goldman executives served in the Biden administration’s 2020 transition team. Morgan Stanley executives have filled seats in the Bush, Obama and Biden administrations.
Even if ESG were benign as a preference for the color purple, its institutional entrenchment would still be an issue. If investors want to invest in companies that don’t care about being purple, but credit rating agencies and institutional investors are prioritizing purple investments, there would be limited methods of recourse for the non-purple investor to take.
The non-purple investor would soon learn that federally approved credit rating organizations, as well as most major banks and asset managers, all favor being, selling, or trading purple. Pro-purple metrics would be ingrained among the nation’s most powerful, whether by special accreditation or softer, subtler influence. These barriers to entry would stifle non-purple investment and opportunities.
Every link in the investment chain is made up by behemoth corporations accredited by or working closely with the federal government, and all shielded from competition. Ratings agencies (the NRSROs) base their ratings on ESG metrics. Major institutional investors, whether asset management firms like BlackRock or commercial banks, overwhelmingly demand ESG-based investments.
How can ESG be a tool of the free market when so many barriers prevent opt-outs and competition?
Josh Antonini is an environmental policy intern with the Mackinac Center for Public Policy. Email him at joshuaantonini@mackinac.org.
Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.
EVs and solar panels have moral and environmental trade-offs, too
Slave labor and dirty environmental practices make green energy far from clean
Green energy and climate activists say they support social and environmental justice. But the products they advocate are not compatible with either social justice or environmental justice. In fact, green energy activists choose Mother Earth over the oppressed of the world every time they call for retiring fossil fuels and replacing them with renewable energy.
Anytime someone like Sen. Debbie Stabenow touts the benefits of an electric vehicle, or U.S. Energy Secretary Jennifer Granholm tells people who struggle with $5-per-gallon gasoline to spend $65,000 on an electric vehicle, there are moral and environmental trade-offs to consider.
Gov. Gretchen Whitmer has pushed for Michigan to be carbon neutral by 2030. What she doesn’t admit is that electric vehicles and renewable energy sources cause just as much damage to the environment as gas guzzlers and fossil fuels.
Mining lithium, a major component of EVs batteries, is just as destructive to the environment as fossil fuels, according to an investigation by Euronews.com.
“Lithium can be described as the non-renewable mineral that makes renewable energy possible,” it said. Say that to yourself a few times slowly, and ponder it.
Based on how Foreurope.org describes the process of mining lithium, it sounds quite like environmental contamination. Mining requires the use of toxic chemicals. The process causes water pollution and depletion, and such mining often occurs in an arid, water-scarce region. Mining for lithium also causes air emissions that can cause physical ailments and disease. Mining also disrupts the ecosystems and food production of those in nearby communities.
These are people who cannot just run to the local restaurant or fast food establishment if their food and water source is contaminated.
Americans who talk about environmental justice for Black and minority communities in the U.S. are strangely silent about their own contribution to environmental injustice in other, often poorer countries.
The Environmental Protection Agency defines environmental justice as “the fair treatment and meaningful involvement of all people regardless of race, color, national origin, or income, with respect to the development, implementation, and enforcement of environmental laws, regulations, and policies.”
Unless the people you affect live in Africa, apparently. Some 70% of the cobalt produced for electric vehicles comes from the Democratic Republic of Congo. And China owns 80% of the cobalt there. The metal is used for solar panels.
Mining for the materials used in renewable energy sources sometimes involves individuals too young to legally work in the United States. “The glamourous shop displays and marketing of state of the art technologies are a stark contrast to the children carrying bags of rocks, and miners in narrow manmade tunnels risking permanent lung damage,” reports Amnesty International.
According to the report, some young children say they spend up to 24 hours a day in the mines, hauling heavy loads. Often they work without basic protective gear, such as gloves or masks. In 2014, approximately 40,000 children in one region in the DRC worked in mines, and they were paid one to two dollars per day.
China is another leading supplier of materials used in renewable energy. The Xinjiang Uyghur Autonomous Region of China produces 45% of the world’s polysilicon, a key component used in solar panels. Chinese officials force Uyghurs, a Muslim minority ethnic group, to produce polysilicon. The U.S. State Department has declared that Uyghurs are subject to genocide and various crimes against humanity. This happens even as they produce the renewable energy resources prized by American climate activists.
Countries in the west are selling their future to China by shutting down reliable fossil fuels for unreliable and expensive renewable energy such as solar panels and industrial wind facilities.
High energy costs, to the environmentalist, are a worthy sacrifice for the sake of Mother Earth. Renewable energy is expensive. A forced transition to it, though, would lead to less reliable and more expensive energy, landing hardest on people who can afford it the least.
It costs utility companies a lot to switch to renewable energy. Most people in Michigan are subject to a regional monopoly provider, so they have no choice in who they use for energy. One of those monopolies, Consumers Energy, has requested two price hikes to fund its green energy transition.
There’s one thing worse than expensive energy — not having energy. If shortfalls affect renewable energy sources, those who can afford generators can buy one to stay powered up. Low-income people would be stuck without power.
Consumers Energy has admitted that its renewable energy sources may fail to meet the needs of its customers. In winter 2019, Gov. Gretchen Whitmer told Michigan residents to turn down their thermostat to 65 degrees to avoid large power outages. The grid was overtaxed.
California significantly increased its reliance on renewable energy, which has resulted in rolling blackouts. Utilities there purchase high-cost energy from out-of-state.
Texas is on the same path and suffered an energy catastrophe in February 2021, with widespread and long-term power outages. Up to 700 people died, whether from the cold itself or carbon monoxide poisoning, as they tried to use other means to stay warm. Many more Texans experienced home emergencies, such as flooding in their home, caused by pipes freezing and bursting.
You can be a green energy warrior, or you can support social and environmental justice. You can’t do both.
Jamie A. Hope is assistant managing editor of Michigan Capitol Confidential. Email her at hope@mackinac.org.
Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.
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