Tangle - The ESG debate.

I’m Isaac Saul, and this is Tangle: an independent, nonpartisan, subscriber-supported politics newsletter that summarizes the best arguments from across the political spectrum on the news of the day — then “my take.”

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Today's read: 12 minutes.

Quick hits.

1. Starbucks founder and interim CEO Howard Schultz will testify before a Senate committee on the company's labor practices. (The testimony)
2. President Joe Biden is going to host South Korea's President Yoon Suk Yoel on April 26. (The visit)
3. Capitol Police criticized Fox News host Tucker Carlson for releasing footage from the January 6 riots, saying they didn't get a chance to properly review the clips before publication. (The reaction)
4. The Justice Department filed a lawsuit to block JetBlue's acquisition of Spirit Airlines. (The lawsuit)
5. Fed Chair Jerome Powell said the central bank is likely to have to increase interest rates higher than expected to continue to cool inflation. (The rates)

Reader feedback.

Yesterday, I shared some stories about the reasons people unsubscribe in my reader Q&A. Not more than 45 minutes after the newsletter went out, I got an email from a reader and I could only laugh. I also couldn't help but share:

"I’m not sure if you’ll get this text, but I am unsubscribing," they said. "Apparently, you are beholden to Donald Trump, the man who caused the January 6th riot. I have no understanding for anyone who supports someone who has split this country apart like no other. Where is your integrity, morals and values? They’re with Trump and that’s shameful… You’re praising his CPAC speech in the latest edition. There’s nothing to praise about Donald Trump."

Today's topic.

ESG (or environmental, social and corporate governance). Last week, a Republican bill to prevent pension fund managers from basing their investment decisions on things like climate change cleared Congress, setting up what is expected to be the first veto of Joe Biden's presidency.

The basics: All across America, citizens rely on pension fund managers and asset management firms to handle their savings. Since 2004, there has been a movement afoot for those managers to more strongly consider the environmental and social impacts of their investments. That movement got an injection of energy in 2021, when BlackRock CEO Larry Fink penned a letter to CEOs encouraging them to consider ESG. BlackRock is one of the "Big Three" asset managers (along with Vanguard and State Street) that manage some $20 trillion in assets.

During Trump’s presidency, the administration issued a rule clarifying the 1974 Employee Retirement Security Act (ERISA) that required those overseeing pension and 401k plans to always consider economic interests ahead of “non-pecuniary” goals — i.e., that investment must be based on positive returns.

Now what? Under Biden, the Labor Department issued a rule that allows retirement plans to consider climate factors and other ESG issues in their investment decisions. That rule went into effect in January. Republicans have largely argued that anyone making investment decisions for retirement funds should base them solely on whether they enhance savings, and are working to ban the practice of considering ESG. They have introduced a resolution that would nullify the Biden administration's Labor Department rule.

The House has voted 216-204 to pass the resolution. With votes from all 48 Republicans and Sens. Joe Manchin (D-WV) and Jon Tester (D-MT), the Senate was able to pass the bill 50-46. Democratic Sens. John Fetterman (PA), Dianne Feinstein (CA) and Jeff Merkley (OR), as well as Republican Sen. Mike Crapo (ID), did not vote. Republicans used a tool called the Congressional Review Act to bypass the customary 60-vote Senate threshold to challenge a rule from the Labor Department.

In effect, the Republican-passed resolution will prevent fund managers from basing their investment decisions on ESG factors primarily, but will not prevent funds from considering ESG factors altogether.

"This just simply says that the primary criterion has to be the financial return on investment," Republican Senator Mike Braun, who sponsored the bill, told Reuters.

In 2022, ESG funds lagged behind non-ESG funds for the first time in five years when fuel shares soared.

A Harvard analysis of the ESG rules notes that the rule Biden implemented is actually similar to a rule former President Donald Trump put in place in 2020, though both have been framed differently in the press. Part of the confusion is due to each having initially drafted stronger rules that were then relaxed and pulled toward the center after a public comment period. From the analysis:

Neither final rule singled out ESG investing for favored or disfavored treatment. The final Trump Rule did not use the term “ESG.” The regulatory text of the final Biden Rule refers once to ESG investing, but only to state that ESG factors “may” be “relevant to a risk and return analysis,” depending “on the individual facts and circumstances.” This statement is true for all investment factors, ESG or otherwise.

Still, the prospect of Biden's first veto and the Republican-passed bill has set off a debate about ESG investing. Today, we're going to take a look at some of the commentary around that debate.

What the right is saying.

• Many on the right criticize ESG and support Republicans' efforts to change the rule.
• Some argue that ESG-focused investments have been performing badly, and funds focusing on ESG could endanger retirees.
• Others say investors shouldn't be facing political and social pressure — they should just be focused on making their clients more money.

The Wall Street Journal editorial board said the resolution "protects worker savings from political investing."

"The Senate and House this week voted to overturn a Labor Department rule that lets retirement fund managers use worker savings for political causes," the board said. "As Mr. Manchin explained, the rule lets retirement plan fiduciaries consider environmental, social and corporate governance (ESG) factors and 'prioritizes politics over getting the best returns for millions of Americans’ retirement investments.' The Biden rule reversed a Trump-era clarification of the 1974 Employee Retirement Income Security Act (Erisa), which required retirement plan fiduciaries to consider solely 'pecuniary' factors that have a 'material effect' on investment risk or return. Erisa is intended to prevent retirement funds from using savings for their own purposes.

"The Biden rule protects fiduciaries from lawsuits for considering ESG factors that could be 'relevant' to investment performance such as a company’s greenhouse-gas emissions or workforce diversity," the board said. "This broad standard would essentially let managers invest retirement savings however they want. The rule would also augment the power of proxy advisory duopolists Glass Lewis and Institutional Shareholder Services (ISS) by directing fiduciaries to 'rely on efficient structures' such as 'proxy advisors/managers that act on behalf of large aggregates of investors.' ISS and Glass Lewis are voting force multipliers on ESG shareholder resolutions. The rule would drive more savings into ESG funds that typically charge higher fees by letting retirement sponsors offer them as default options in 401(k) plans. Workers can opt out of default plans but usually don’t. Why isn’t Mr. Biden lambasting ESG funds for charging 'junk fees'?

In National Review, Noah Rothman said Biden's "ESG extortion" was rightly rebuked by Congress.

"In its recent updates, [Apple iPhone] introduced a 'clean-energy charging' feature. When engaged, it slows your phone’s capacity to recharge its battery during your region’s peak hours of electricity use, prioritizing renewable sources over on-demand fossil-fuel-generated power. The practical effect of this feature is to slow the rate at which your phone recharges, which explains the spike in online inquiries from users who want nothing more than to turn the thing off... So-called ['ESG' investing] is the financial equivalent of the iPhone’s green charging feature. It sacrifices the pursuit of returns on investment to one degree or another, incorporating 'non-financial factors' into the development of a portfolio. The goal of this practice is to reward firms that prostrate themselves before faddish progressive causes, from DEI initiatives to climate activism.

"Among investors who privilege their sense of personal gratification over their bottom lines, ESG investing is just another financial product," Rothman said. "But transforming private finance into a vehicle for the pursuit of left-wing policy goals by non-political means isn’t for everyone, particularly investors of limited means. Retirement-fund managers, for example, are confronted with a conflict. They must now balance the social and political pressure to reward the firms progressives like and punish those they don’t against their fiduciary responsibility to seek maximum returns for their investors. Assets in 'sustainable investments' are down by nearly half from their 2020 peak — from $17 billion to roughly $8.4 billion today... Maybe ESG isn’t so 'sustainable' after all."

In Newsweek, former chairman of the Securities Exchange Commission (SEC) Paul Atkins said "activist investment" puts millions of retirees at risk.

"With inflation soaring and investment returns falling, millions of retirees could end up with a smaller-than-expected retirement nest egg because their hard-earned savings will have been sacrificed for political causes," Atkins wrote. "The final rule, which is set to take effect this month, will undermine the decision-making principle that guides asset managers, who have a fiduciary responsibility to maximize returns for workers and retirees enrolled in employee benefit plans... The demand for—and prices of—ESG-related investments have fallen in the wake of the COVID-19 pandemic and the Ukraine war as investors returned to allowing market fundamentals rather than idealism to guide asset allocation.

"In December, it was reported that ESG funds suffered their first major outflows in a decade, suffering a 29 percent decline last year—more than 30 percent worse than non-ESG funds," he said. "Nearly 80 percent of ESG products failed to keep pace with market index funds in 2022. The Labor Department announcement may be good news for struggling ESG funds, but it could prove disastrous for the beneficiaries of retirement plans. ‘Doing well by doing good’ seems a hollow promise. Federal bailouts and taxpayer-funded guarantees cannot go on forever, which makes investment returns all the more vital to the long-term health of retirement funds... The Biden administration has ample evidence that politicized investment strategies are not in the financial best interests of retirees. States have amassed more than $1.25 trillion in unfunded pension debt thanks partly to politicized investment strategies that have hamstrung fund managers attempting to make up for the shortfall."

What the left is saying.

• Many on the left support ESG and the Biden rule, arguing that it amounts to good asset management.
• Some say Republicans should support ESG and the freedom for investors to consider all factors.
• Others criticize ESG as "corporate greenwashing" and call for even more regulation than what Biden is proposing.

The Financial Times editorial board called it "good risk management."

"The rule only permits, but does not compel, managers to take ESG into account — and the president is defending sound investment principles," the board said. "In some states, anti-ESG laws have been motivated by claims that asset managers are discriminating against powerful local industries, from oil and gas to coal or firearm makers. The ESG industry remains flawed. It lacks clearly defined standards of measurement and performance, opening the door to 'greenwashing' and other cynical practices. Compelling money managers to be bound by its dictates would be misguided. The White House rule contains no compulsion, however. It merely allows fiduciaries to take ESG considerations into account as part of a prudent strategy... And asset managers increasingly realise that earning the best returns, and avoiding losses, means considering all risks and externalities related to any investment.

"Company values can be affected by more than just financial performance. A Biden veto will ensure company pension plans can take ESG into account. Republican-run states will still have the right to bar public pension funds from doing so. But they should be wary of how they exercise that power," the board added. "An Indiana fiscal watchdog last month estimated that, by restricting fund managers’ options, a proposed state law limiting their use of sustainable investment factors could reduce returns of the public pension system by $6.7bn over a decade. Blocking some investment considerations not only amounts to interference in the market of a kind Republicans have long claimed to oppose. It could also result in the opposite of what is intended."

In The Wall Street Journal, Democratic Senate Majority Leader Chuck Schumer (NY) said Republicans should be "all for" ESG.

"Investing in a free-market economy involves choice. There are 8,000 securities listed on U.S. stock exchanges alone. Investors take many different factors into account when evaluating their investment decisions. Three such factors—environmental, social and governance, also known as ESG—have recently gotten a lot of attention from some more conservative Republicans, including Florida Gov. Ron DeSantis," Schumer said. "ESG opponents are trying to turn it into a dirty acronym, deploying attacks they have long used for elements of a so-called woke agenda. They call ESG wokeness. They call it a cult. They call it an incursion into free markets. We’ve heard it all before. I say ESG is just common sense.

"Republicans conveniently ignore something very important: America’s most successful asset managers and financial institutions have used ESG factors to minimize risk and maximize their clients’ returns," he wrote. "In fact, according to McKinsey, more than 90% of S&P 500 companies publish ESG reports today. This isn’t about ideological preference. Investors and asset managers increasingly recognize that maximizing returns requires looking at the full range of risks to any investment—including the financial risks presented by increasingly volatile natural disasters, aging populations and other threats that the public doesn’t normally associate with financial modeling. Nothing in the Labor Department rule imposes a mandate. It simply states that if fiduciaries wish to consider ESG factors—and if their methods are shown to be prudent—they are free to do so. Nothing more, nothing less."

In Newsweek, Robert Reich said "Republicans are right about ESG" but for "the wrong reason."

"They call ESG investing 'woke capitalism' and portray it as an illustration of Democrats and liberals trying to impose their views on the rest of society," Reich said. "You may be surprised to hear me say this, but Republicans are right about ESG, though they're right for the wrong reason. The problem with ESG isn't that it's 'woke capitalism.' It's that corporate money has corrupted politics so much that our democracy can't effectively deal with many environmental and social concerns. CEOs and pension fund managers who tout their records on ESG are engaged in greenwashing, designed to burnish their brands and attract investors (including retirees) who want to believe they're doing good while doing well.

"But investors don't want to do good at the expense of doing well," he said. "They'd do more good donating that money to nonprofits seeking to protect the environment and advance various social causes. Corporations and institutional investors won't deviate from maximizing short-term profits and shareholder returns unless required to do so by law. And even then, they'll do so only when the penalty for violating the law multiplied by the probability of getting caught is higher than the profits from continuing with the illegality."

My take.

Reminder: "My take" is a section where I give myself space to share my own personal opinion. If you have feedback, criticism, or compliments, don't unsubscribe. You can reply to this email and write in. If you're a subscriber, you can also leave a comment.

I rarely say this on issues we are covering, but this is one of the noisiest nothingburger stories I can remember dominating the pundit class in a long time.

Everything I've read about the volley of rules and the rhetoric around them makes me think the culture war is just devouring some rather benign action from the Labor Department. In essence, the rule Trump implemented required documentary evidence that any ESG choices had to be economically indistinguishable from non-ESG alternatives. Biden's rule eliminated the added documentation, and added things like the "economic effects of climate change" as a potentially relevant way to analyze the investment.

Both of these rules still require fiduciaries to act in the best interests of the people whose funds they are managing. Neither of the rules prohibited or mandated ESG investment. The new resolution passed by Republicans strikes down Biden's version of the rule but, like the Trump-era rules, does not explicitly prohibit or mandate anything — it just shifts the emphasis. As Bloomberg's editorial board put it, the entire fight is "less than meets the eye."

So what's the big deal? It all feels like one giant head fake. Republicans are on the warpath on anything they can call "woke", which apparently now includes thinking about how, say, climate change might impact future investments. Maybe I'm a naive woke lib, but I'd prefer if the people managing my money prudently considered risks, like the future of fossil fuels and the potential political blowback against investing in them. That just seems rational. I want my finances to grow, and I think it’s reasonable that considering ESG may actually aid in that goal, as it did for the years leading up to 2022.

Meanwhile, liberals’ attachment to all things ESG also seems silly. The truth is, as Robert Reich rightly noted, ESG has mostly been used to greenwash corporations' bad behavior. Hans Tarparia wrote in a 2022 op-ed that "Wall Street’s current system for E.S.G. investing is designed almost entirely to maximize shareholder returns, falsely leading many investors to believe their portfolios are doing good for the world." In theory, ESG feels good — the idea that you are making money and investing in companies that consider their moral or ethical impact on the world. In reality, the whole thing is basically a sham.

So, what we really have here is an idealistic goal like ESG that is supposed to usher in more ethical corporate behavior but really isn't doing that. Unfortunately, these ESG funds have performed badly in the last two years. Now, Biden and Trump have volleyed two rules that are more alike than they are different, and Republicans, in a vacuous virtue signal for their side in the culture war,  have made a frenzied push to kill the Biden rule that favors an ESG movement which is a vacuous virtue signal for his side in the culture war. It’s probably going to usher in the first veto of Biden's presidency, and leave the very-similar-to-what-Trump-did-rule in place.

So, after all this debating, very little will change — and very little would have if none of the back and forth had happened.

Blindspot report.

Once a week, we present the Blindspot Report from our partners at Ground News, an app that tells you the bias of news coverage and what stories people on each side are missing.

One story the left missed was a proposal in Oregon to give homeless and low-income people $1,000 per month.

One story the right missed was a proposal in Kansas that disability rights advocates say will encourage employers to keep paying disabled workers less than minimum wage.

Your questions, answered.

Q: In your answer to the reader question, you say that you're pretty much convinced that prison isn't the best way to punish criminals. Out of curiosity, what is the best way to punish criminals? We could clearly do a number of things to prevent people becoming criminals, but some crime will remain, how do we punish/deter those individuals?

— Jake from Los Angeles, California

Tangle: I had a lot of readers write in with some version of this question: "You said you don't think putting people in prison is good, so what should we do?" I don't have one good answer, and replying to this question necessitates a full newsletter (which is something I'll put on my list to do). Briefly, though, I can tell you a few things I’ve observed.

First, every year about 600,000 people are released from state and federal prisons. Another nine million are let out of local jails. Within three years, two out of three former prisoners are rearrested and more than 50% are incarcerated again. To describe this as anything other than a massive failure would require being truly delusional about what we are doing. So, everything I'm saying starts from the perspective that the system we have now is fundamentally broken. Roughly two million people are in jails in our country as I write this — statistically, most will now be trapped in the penal system for the rest of their lives.

Second, When I lived in New York City, I wrote about a program called The Doe Fund. If you live in a northeastern city you may be familiar with them — they are often the men and women cleaning streets or doing work on public property wearing blue uniforms. The Doe Fund is based on the fundamental premise that "work works." They give the homeless and formerly incarcerated people jobs and housing fresh out of jail or off the street. Their program drastically reduces recidivism rates among its participants.

Third, we have many alternative methods of imprisonment aside from human-sized cages. The most common is house arrest. Another form is probation. Both allow the government to monitor people with criminal records, create some insulation between the public and violent offenders, and use strong deterrents to prevent future crime. But house arrest is much less profitable to the prison industry than imprisonment, and (not coincidentally) is much less common. When house arrest is used as a substitute for probation, there are real problems. But used as a substitute for jail, there are huge upsides. Namely, not locking a person in a cage, not separating them from their family or community, and not trapping them in a violent motel full of other criminals who inevitably become their community (and sometimes criminal mentors).

This isn’t to say prisons are always bad. Obviously, prisons can keep those of us on the outside safer from violent reoffenders. They can help someone get sober by cutting them off from substances they abuse. And the good ones provide treatment, education, and job opportunities.

This is to say, though, that I think there are more imaginative alternatives out there that get better results than what we are doing now. I'll have to write in more detail about this soon.

Want to have a question answered in the newsletter? You can reply to this email (it goes straight to my inbox) or fill out this form.

Under the radar.

Last year's attack on the Nord Stream 2 gas pipeline has now been linked to a "pro-Ukrainian" group. A few weeks ago, we mentioned a theory floated by journalist Seymour Hersch (and the criticism of the theory) that the U.S. was behind the attacks. Now, the New York Times and Die Zeit, a German national newspaper, are both reporting that a yacht owned by two Ukrainian citizens is being investigated for sabotage. German prosecutors confirmed they are searching a vessel suspected of bringing explosives to the area where the blasts happened. There is no direct evidence or suggestion the Ukrainian or U.S. government had any knowledge of the attack. The New York Times has the story.

Numbers.

• Five. The number of consecutive years ESG funds out-performed non-ESG funds before 2022.
• $13.2 billion. The amount of funds investors withdrew from ESG stock, bond and mixed-asset funds between January and November of 2022.
• 2011. The last time there was a net outflow of those funds before 2022.
• 29%. The net drop in ESG funds between January and November of 2022.
• 21%. The net drop in non-ESG funds between January and November of 2022.
• 69%. The percentage of U.S. adults who said environmental issues were "very" or "somewhat" important when it comes to investments.

The extras.

• One year ago today we covered the Florida "parental rights" or "Don't Say Gay" bill.
• The most clicked link in yesterday's newsletter: The story about four Americans being kidnapped in Mexico.
• The future: 48.1% of Tangle readers think Donald Trump will win the Republican nomination for president, 43.9% said Ron DeSantis, 1.53% said Nikki Haley, and 5.7% said someone else.
• Nothing to do with politics: A former Mexican beauty queen and her partner are going to jail in Spain after stealing 45 bottles of wine worth a total of $1.7 million in 2021.
• Take the poll: Do you want your portfolio managers to consider ESG? Let us know.

Have a nice day.

Amateur astronomers are being recognized for playing a role in affirming that NASA's Double Asteroid Redirection Test (DART) mission was a success. In September, NASA successfully ran a spacecraft into the Dimorphos asteroid and re-directed its trajectory. They were testing an asteroid defense system to protect earth. Some 30 people across four different continents observed the mission using their own Unistellar smart telescopes from home, and NASA scientists used those observations to help determine if the mission was a success. Now, those amateur astronomers are being recognized in a paper published in Nature as co-authors on the DART mission. The Independent has the story.

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