Back in December, Vanguard, a fund-management giant with some $8 trillion under management, pulled out of the Net Zero Asset Managers [NZAM] initiative. This “initiative” — a word that in this context reeks of self-importance (self-importance, needless to say, with other people’s money) — was formed by a group of asset managers. Today its members have around $60 trillion under management. They are committed to achieving net-zero carbon emissions by 2050, a commitment that extends, in ways set out here, to their investment portfolios.
Simultaneously, Vanguard pulled out of the Glasgow Financial Alliance for Net Zero (Gfanz), an umbrella climate finance organization set up by Mark Carney, a former central banker and an authoritarian on the make. I wrote about all this here.
Naturally, Vanguard’s decision caused outrage from many of the usual suspects.
Bloomberg, December 12 (Michael Bloomberg, another authoritarian, is a co-chair of Gfanz):
Vanguard Group Inc. is under pressure to reassure stakeholders that it still cares about the climate, after becoming the target of fierce criticism from high-profile environmental advocates including Al Gore.
The former US vice president, who now chairs Generation Investment Management, called Vanguard’s decision to quit the world’s biggest climate-finance alliance “irresponsible and shortsighted.” Gore also suggested the asset manager, which oversees $7.1 trillion in client funds, was out of step with the Zeitgeist.
Look at how that is framed: Vanguard “is under pressure to reassure stakeholders that it still cares about the climate.” Cares about the climate. The chance that Gfanz will have any material effect on the climate is . . . remote. And then, of course, there is the presumption that “stakeholders” need reassuring. Why? Vanguard has a duty to those who own it (which is an interesting story: some details here), to its clients, and of course, to the law. And that’s it. If that means that Vanguard is “out of step” with what Gore considers to be the “Zeitgeist,” well, too bad. And so what? The Zeitgeist is not necessarily an indicator of what is right or rational. Perhaps Gore should try reading Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds (1841), an essential work for this or any time, to remind himself of that.
The next paragraph of the Bloomberg report may or may not be an indicator of the current Zeitgeist, but it is certainly a reminder of who would like to shape it. We learn that the criticism of Vanguard:
Was echoed by others, including New York City comptroller Brad Lander, while climate groups such as Reclaim Finance, a French nonprofit, said the defection was proof Vanguard “was never serious about implementing its net-zero commitment” in the first place. The Sunrise Project, another nonprofit, said it expects Vanguard to face anger from some clients.
Lander is just someone who plays (expensive) games with other people’s money. Likewise, Reclaim Finance and the Sunrise Project are both denizens of the financial ecosystem that has benefited from the climate emergency. The only reason to take them seriously is their capacity to trigger capital destruction.
On February 21, the Financial Times (FT) published an interview with Vanguard’s chief executive. He doesn’t appear to be too worried about being out of step with the Zeitgeist:
“We don’t believe that we should dictate company strategy,” he said, in his first public comments about the decision. “It would be hubris to presume that we know the right strategy for the thousands of companies that Vanguard invests with. We just want to make sure that risks are being appropriately disclosed and that every company is playing by the rules.”
But, like Bloomberg, the FT is a home of genteel climate fundamentalism, and so it is again worth taking note of the way this topic is framed:
Vanguard has found itself caught between the two sides of the climate change debate.
The decision to withdraw from the coalition has sparked fury among environmental activists already angered by the Pennsylvania-based asset manager’s refusal to rule out new investments in fossil fuels.
Campaigners say it should use its influence to press companies to accelerate the decarbonisation of their operations, while US Republican politicians accuse it of failing to support fossil fuel industries.
To the FT, this is about the “climate debate” between (presumably virtuous) “campaigners” and (self-evidently wicked) “US Republican politicians.” Perhaps it is unfair to mention that the politicians are elected, and the campaigners are not. But what am I saying? It’s not unfair at all.
It is also not unfair to point out that the Republican politicians were not “accusing” Vanguard “of failing to support fossil fuel companies.” Rather, they were questioning whether its ESG commitments were compatible with the undertaking it is required to give before acquiring stakes of more than a certain size in public utility companies. I wrote a bit about this here, and there’s more background here. But going beyond that specific issue, the GOP politicians objecting to ESG being involved in the investment process for public funds are generally doing so because they believe that such money should be invested with a view to maximizing risk-adjusted return rather than to pursue a political agenda.
The FT:
Buckley, however, said that Vanguard was “not in the game of politics”.
“Politicians and regulators have a central role to play in setting the ground rules to achieve a just transition to a lower carbon economy,” he said, when asked about the increasing politicisation of ESG investing.
Leaving aside the pious and emetic gobbledygook about a “just transition to a lower carbon economy,” Buckley is half-right. If a political decision is to be taken about the way that money is invested, it should (other than in the case of certain funds where the underlying investors have specifically requested that non-pecuniary factors be considered as part of the investment process) be taken by democratically elected politicians, not asset managers or corporate boards. Whether Buckley is right to say that regulators should have a “central role” is not so clear. When they are acting within a strictly limited mandate handed to them by elected politicians, sure. When they are, like the SEC’s Gary Gensler, indulging in mission creep — or rather, leap — they should not.
The FT:
The Vanguard boss also warned investors not to expect superior returns from ploughing money into ESG funds and alternative assets — two of the fastest growing parts of the asset management industry — rather than the index-trackers championed by his firm.
“We cannot state that [environmental, social and governance] investing is better performance wise than broad index-based investing,” said Buckley. “Our research indicates that ESG investing does not have any advantage over broad-based investing.”
Oh.
The FT also notes (and this is a reference to the investment industry as a whole, not just Vanguard):
Assets managed by ESG funds have soared to $2.5tn from just $0.6tn at the start of 2018. But Russia’s invasion of Ukraine has led to significant gains for energy and defence stocks, heralding soul-searching for ESG focused investors in a tough environment for returns.
Perhaps the soul-searchers might also like to reflect on the wisdom of a supposedly ethical investment discipline that could constrain investment in companies manufacturing weapons that help Ukraine defend itself.
And then there’s this from the Wall Street Journal’s Joseph Sternberg:
Green energy is incompatible with energy security, which makes it incompatible with national or continental security.
I know, I know—disruption of the supply of energy imports from Russia is supposed to have highlighted the necessity of developing wind and solar (and now hydrogen) as a local alternative. Except that these energy sources are more costly and less stable than fossil-fuel or nuclear workhorses. They are worse for the environment once one considers the mess made while mining and refining the rare-earth minerals that go into renewable tech. And since China controls much of the global supply chain for those minerals, green energy merely replicates in Asia the form of energy dependence Europe now loudly bemoans regarding Russia.
A serious European leader would point out that energy security that holds advanced economies hostage to the weather and Beijing is no security at all.
Back to the FT:
Vanguard sells just 28 sustainable funds with global assets of $33.9bn. That is well behind its closest rival BlackRock, which has a far bigger range of 282 sustainable funds with assets of $270bn, according to data provider Morningstar.
The firm offers ESG index funds that exclude certain companies, which “allow investors to express their values and preferences” but this “has to be an individual investor’s choice”, said Buckley.
Quite.
Meanwhile, for those following the Zeitgeist, some news from Bloomberg (February 6):
Cash flows into US sustainable funds plummeted last year as the broader market took a beating and anti-ESG crusaders targeted money managers including BlackRock Inc. for “woke capitalism.”
ESG exchange-traded funds in the US aren’t faring any better in 2023.
ETFs in the US with environmental, social and governance goals had net outflows of $772 million in January, compared with $953 million of inflows for the first month in 2022, according to data compiled by Bloomberg. Some of the largest withdrawals last month came from funds managed by BlackRock, Invesco Ltd. and Vanguard Group.
BlackRock had zero net flows into its sustainable products in the US last year, according to a person with knowledge of the matter. The company declined to comment.
National Review Institute: Ideas Summit
We will be holding an ideas summit in Washington DC on March 30-31.
Topic: The Sources of American Strength
Participants include:
Ryan T. Anderson, David L. Bahnsen, Louis Brown, Senator Tom Cotton, Allen C. Guelzo, Pano Kanelos, Megyn Kelly, Terry & Matt Kibbe, Bjørn Lomborg, Jessica Melugin, Douglas Murray, Vivek Ramaswamy, Ian Rowe, Carrie Severino, Elise Westhoff, Rich Lowry & National Review Writers.
More details here.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 107th episode, David is joined by Derek Kreifels, CEO of the State Financial Officers Foundation, the most prominent organization working to drive responsible fiscal management of state assets. The public owns the assets that states manage in state pension funds and the like, and the public deserves to have its interests represented — and not the interests of a radical, incoherent cult hell-bent on eroding financial health and fiduciary duty. Derek walks us through what is going on at the state level with public money, and how excellent progress is being made by reaching out directly to those financial officers who work for the public.
No Free Lunch
David has also launched a six-part digital video series, No Free Lunch, here on National Review Online. In it, we bring the debate over free markets back to “first things” — emphatically arguing that only by beginning our study of economics with the human person can we obtain a properly ordered vision for a market economy . . .
The series began with a discussion with Fr. Robert Sirico of the Acton Institute. Later guests include Larry Kudlow, Dennis Prager, Dr. Hunter Baker, Ryan Anderson, Pastor Doug Wilson and Senator Ted Cruz.
Yes, the six-part series now has seven parts.
Enjoy.
The Capital Matters week that was . . .
Currency Policy
A few weeks ago, Argentine minister of economy Sergio Massa told the Financial Times that his country and Brazil are starting preparations for a common currency. We know that this is an old idea, as it has been floated since at least the 1980s. But is it a good idea?
Industrial Policy
As the French say, “With ifs, one could put Paris in a bottle.” And so it is with industrial policy: if one ignores everything we know about politics, industrial policy could work. After all, it shouldn’t be that hard to direct funding to achieve a certain economic goal or to boost a particular industry . . .
Vero’s criticism of industry policy is sharp as usual. I would just like to note an observation that Tim Carney made at the Washington Examiner about another political problem that industrial policy faces.
Politicians are obsessed with “creating jobs.” Aside from the fact that politicians don’t actually create jobs, they have yet to realize that the U.S. economy right now is not in need of jobs . . .
Antitrust
The Federal Trade Commission’s (FTC) antitrust crusade has run into an obstacle: the judiciary. Indeed, the agency wants to expand its authority and broaden enforcement standards so it can win more cases against big businesses, but so far judges have kept its populist turn in check . . .
FTC commissioner Christine Wilson made the most of her resignation announcement in the pages of the Wall Street Journal. Her thoughtful dissents at the agency will be missed, but hopefully her self-described “noisy exit” will bring attention to a Federal Trade Commission that is mismanaged, is exceeding its statutory authority and, most importantly, threatens harm to large swaths of the U.S. economy . . .
Regulatory Policy
The Department of Transportation announced a suite of policy actions it intends to take in response to the February 3 train crash in East Palestine, Ohio. “We at USDOT are doing everything in our power to improve rail safety, and we insist that the rail industry do the same — while inviting Congress to work with us to raise the bar,” said Secretary of Transportation Pete Buttigieg.
Looking closer at the department’s proposals, safety does not seem to be the primary justification. Instead, they include demands that environmentalists and unions have made for years, and none of them would have prevented the East Palestine crash . . .
The Environmental Protection Agency ordered Norfolk Southern to pay all the costs of clean-up efforts in East Palestine, Ohio, after one of the company’s trains derailed there on February 3.
“The operator, Norfolk Southern, will not only be compelled to identify and clean contaminated soil and water, but also must reimburse the E.P.A. for the costs of cleaning private homes and businesses, according to the agency,” reports the New York Times. “If the E.P.A. deems that Norfolk Southern has failed to complete any of the tasks it has been ordered to do, the agency will conduct the cleanup itself and charge the company triple the cost, it said.”
Norfolk Southern had already been paying clean-up costs and said in a statement it would continue to do so . . .
When it rains, it pours, and small businesses can’t afford the resulting flood. That’s the reality of the Biden administration’s latest “Waters of the United States” (WOTUS) rule, which the Environmental Protection Agency rolled out just before the start of the new year. This mandate is a brazen example of federal overreach, issued despite several reasons to delay, and surely no one will suffer more than America’s smallest ranchers, farmers, and home builder . . .
Whether it’s YouTube video recommendations, Facebook friend suggestions, Tinder swipe queues, Reddit upvote weightings, or tweets displayed in a Twitter feed, the modern internet relies on algorithms to determine who sees what. Relying on myriad signals, these algorithms respond to our preferences, showing us more of what we, or those like us, enjoy.
But if plaintiffs’ arguments are accepted, and platforms are made liable for algorithmic recommendations, another concern will be injected into this mix. Risk-averse platform lawyers and the most litigious members of our society will suddenly have a say in previously personalized algorithms.
ESG
Last month, a disagreement emerged on the right about conservatives’ ability to combat ESG. Writing for National Review, former Blackrock executive Terrence Keeley wrote that “Conservatives mustn’t give up the fight” against ESG. Meanwhile, in Compact Magazine Julius Krein argued that “the Right Can’t Beat ESG.” Both can’t be right . . .
Tax
Earlier this year, Wisconsin’s senate majority leader, Devin LeMahieu (R), introduced a flat-tax proposal to reduce the top personal state income-tax rate to 3.25 percent from 7.65 percent, marking one of the boldest tax plans ever put forth by state leadership. Assembly speaker Robin Vos (R), for his part, has gone on record acknowledging the reality that we must compete with states such as Florida for jobs and people. And senate president Chris Kapenga (R) has outlined a vision of fully eliminating the income tax, a concept supported by the Institute for Reforming Government (IRG), the state’s chamber of commerce, and industry groups across the state . . .
In March 2022, the Biden White House issued a statement claiming that “even before the pandemic, the Trump tax cuts had added $2 trillion to deficits over a decade. The deficit increased every year of the previous administration.” Just last month, Senator Elizabeth Warren went further, writing that these tax cuts should be repealed to “close that door before the next $1 trillion slips away.”
The assertion that Trump’s tax policy increased federal deficits is not supported by any substantive analysis . . .
Health Care
Behind its never-ending feel-good marketing campaigns, AARP, formerly known as the American Association of Retired Persons, is a multi-billion-dollar organization that spends millions lobbying Congress and state legislatures — making the organization an influence-peddling powerhouse. Though the group boasts 38 million senior citizens as its members, it’s not clear how many of its positions benefit America’s retirees. But AARP certainly serves as a useful lobbying arm for the health-insurance industry, particularly health conglomerate UnitedHealth . . .
Sweden & Social Security
The Swedish Social Democratic Party ruled the country from 1932 through 1976. That included the 23-year premiership of Tage Erlander, who created much of the Swedish welfare state. Those were the big-government glory days that leftists romanticize. (You can read more about the history of the Swedish economy in this Capital Matters piece from last year.)
In reality, a long period of uninterrupted far-left rule did in Sweden what it normally does anywhere. The economy stagnated, state-run monopolies fell apart, and the people became upset. By the 1990s, the far-left Social Democrats had lost their seemingly permanent grip on power. The party itself moderated, and centrist and right-wing parties were able to form a few governments.
It was in that context that Sweden reformed its social-security program . . .
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