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Breaking up is hard to do, especially around Valentine’s Day. But yesterday my colleague Brooke Masters and I broke the story that JPMorgan Asset Management had fallen out of love with the Climate Action 100+ and quit the group. Later in the day, State Street Global Advisors announced it was out too. Republicans loved it. Congressman Jim Jordan lauded these break-ups as a “big win”.
BlackRock, too, sort of broke up with Climate Action 100+, saying it would transfer its participation to its smaller international arm (the ultimate “let’s just be friends” move, right?)
Joking aside, there is a noticeable detente between big Wall Street firms and the Republican party over ESG investing so far this year. Earlier this month, BlackRock chief executive Larry Fink was in Texas to discuss energy security. BlackRock is the only US company blacklisted in Texas for allegedly shunning oil and gas companies with sustainable investing. The trip likely helped to clear the air with the state’s top Republicans, who have hammered BlackRock’s sustainable investing for more than a year.
Obviously, there is a presidential election in November and polls suggest it is pretty close between Joe Biden and Donald Trump. By dropping Climate Action 100+, perhaps the asset managers are trying to quell their political problems before things get really nasty if Trump wins the White House.
For today, I have a piece about criticism for financial market index providers and companies with alleged business ties to Myanmar. And our colleague Josephine Cumbo has an interview with the outgoing chief investment officer at Calstrs. Please read on. — Patrick Temple-West
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The Myanmar problem for ESG indices
Three of the biggest index providers for stocks and bonds investing, MSCI, FTSE Russell and S&P Dow Jones, have included dozens of companies linked to the Myanmar junta regime in their sustainability indices, according to a new report from Inclusive Development International.
The non-profit organisation has filed complaints to regulators in the US, UK and the Netherlands alleging the index providers are violating the OECD guidelines for responsible business conduct by promoting supposedly sustainable investments in dozens of companies linked to Myanmar’s military.
The three index providers score companies on environmental, social and governance issues. And these scores contribute to how big a weighting an index will give a certain company.
But index providers have not accurately included human rights track records, IDI said, leading funds to invest in businesses allegedly aiding the Myanmar regime.
After seizing power in a coup in 2021, Myanmar’s military has embarked on a brutal crackdown. In 2021, the military jailed Aung San Suu Kyi, the country’s former leader and Nobel Peace Prize laureate. The country’s Rohingya Muslim minority has been targeted in a violent military crackdown that has drawn accusations of genocide. The US and other governments have repeatedly condemned Myanmar’s military and sanctioned its leaders.
IDI’s report identified about 20 companies that aid the junta in some way. These include companies that make weapons or surveillance equipment, but also big technology companies.
The report listed Alphabet and Apple as being among those enabling the military regime. Alphabet and Apple have mobile phone “app” stores that allegedly promote businesses tied to the Myanmar government, the report said. These Silicon Valley giants are typically among the largest holdings in ESG equity funds.
The index providers “have not received the attention they deserve,” Natalie Bugalski, IDI’s co-founder, told me.
“They are fulfilling this fundamental role in directing capital to companies but relying far too much on companies’ self-reporting,” she said.
“They are not doing enough to research whether companies are contributing to human rights abuses and then using their enormous leverage to prevent and address those human rights impacts,” she said. “They really need to be stepping up their game in doing their human rights due diligence and using that enormous leverage that they have.”
The scrutiny of ESG index providers comes just days after the EU proposed rules to regulate these companies. ESG index providers would need to comply with the European Securities and Markets Authority (Esma) for index transparency, especially about how these indices are constructed. These rules would need to be adopted by the bloc’s council and parliament.
Index providers have got in trouble before for including certain companies in ESG indices. In 2019, one of Vanguard’s ESG funds sold out of a private prison company, a gun manufacturer and more than two dozen other companies that it said were “erroneously” included in an ESG index designed by FTSE Russell.
A spokeswoman for S&P said in a statement: “Inclusive Development International’s report is misleading and inaccurate.”
“S&P Dow Jones Indices does not structure, sell, market, or issue any investment products based upon its indices which follow rules-based, published methodologies and are anchored on a robust index governance process,” she said.
MSCI said in a statement that its indexes “follow transparent and rules-based methodologies.” FTSE Russell, Apple and Alphabet did not respond to requests for comment. (Patrick Temple-West)
US pension giant says engagement, not divestment, achieves climate impact
The investment chief of Calstrs, one of the world’s largest pension funds, has said the tactic of dumping companies not acting on climate change is a “failure” and does not alter corporate behaviour.
Christopher Ailman, CIO of the $327bn Calstrs retirement fund, the second-largest public pension plan in the US, insists that engagement — or trying to influence companies to change their practices by remaining invested — is a better way to achieve outcomes for the environment.
His intervention adds to the growing divergence among the world’s largest institutional investors over how to use their shareholder muscle to influence change in companies they invest in.
“I feel very strongly about this issue,” Ailman told me in an interview.
“Divestment is an investment decision. As a solution to a social problem it is an absolute 100 per cent failure.
“Ignoring something does not change a thing. You can ignore as many things as you want and it is going to change it for you but it is not going to change it for society.”
Ailman’s comments come as Europe’s third-largest pension fund has sold €2.8bn of its holdings in oil groups including Shell, BP and TotalEnergies because they were not doing enough to produce credible plans for the clean energy transition.
That decision by the Netherlands’ PFZW is the latest sign of investor worries over oil groups’ transition strategies. The Church of England made a similar move last year.
When it comes to climate solutions, Ailman added that shifting your portfolio and reducing your carbon “is a smart move.” But he stressed that Calstrs had brought about change through engagement.
“I think our engagement has taken people that were absolutely on one side of the issue and actually brought them back to the centre and now we are pushing them to the recognition that the future has to change,” he said.
“We are talking about companies that were looking backwards . . . As a shareholder we are not going away,” he said. “We are the voice in their ear that is constantly saying: you need to adapt, you need to change, the future is going to be different.”
Even as he talked down the wider benefits of divestment, Ailman still warned that Calstrs may ultimately ditch its stakes in the worst climate laggards, which he expects to suffer financially if they don’t up their game. “If you are a laggard you are definitely going to lose value and price,” he said. “At some time we are going to have to decide to give up on those companies.” (Josephine Cumbo)
Smart read
Private equity giants should pay attention to calls for them to do more to share the wealth they generate, warns Gillian Tett.
