End of Week Notes
Today’s climate legislation is likely only the beginning
Investment implications and more pushback on ESG critics
On the day that Democrats in Congress are leveraging their thin majorities to pass the most significant climate legislation ever, let’s take a moment to savor it. Because beyond the specifics of this bill, its passage signals the point of no return for the federal government’s commitment to addressing the climate crisis. It may not be all we wish for, either today’s legislation or what may come in the future, but you can bet there will be more to come.
The anti-climate lobby has narrowed to extremist Republicans, by which I mean 100% of the current Republicans in Congress (unless a few GOP House members cast a surprise vote in favor), the Wall Street Journal, and out-of-touch right-wing trade groups. They are fueled by the fossil-fuel industry, which continues its refusal to support any climate action whatsoever.
No matter. Republicans not only won’t have the power to roll back this legislation anytime soon, they won’t have the inclination. They may try to slow the pace of federal climate funding and regulation or try to continue to prop up fossil fuels (which, by the way, the current legislation also does), but they will soon see that the bulk of America’s clean energy transition is taking place in Red States and Red districts.
Here are the details on that:
So much for the idea that sustainable investing has somehow been a distraction, keeping policy action from happening. It is an absurd argument from the politically naive. If anything, policymakers seeing the growing climate concerns of investors, bankers, and companies helped them overcome entrenched fossil fuel interests to pass this bill.
As readers are probably well aware, Republicans are fighting a rear-guard action at the state level, trying to intimidate banks and asset managers that are addressing climate change by threatening to pull state business from them. That’s likely to be costly to the states, as shown in this recent academic paper, because larger financial firms can provide services at lower cost than smaller entities. It’s also totally unworkable, since nearly all banks and asset managers have incorporated into their businesses their concerns about climate risks and their interest in climate-transition opportunities.
New York City Comptroller Brad Lander, who helps oversee about $240 billion in pension funds, told Bloomberg that “efforts by conservative US states to thwart the financial industry’s plans to address climate change are just a cover to defend the interests of oil companies.”
“Being a comptroller, being a fiduciary of pension obligations for hundreds of thousands of people, you keep an eye on the long term, you pay attention to the science. You make the wisest, long-term and responsible decisions you can.”
But Republican state officials increasingly are telling fiduciaries to ignore everything they know about climate change.
In campaign mode, Republicans are making even more extreme statements. According to Bloomberg, Arizona GOP Senate candidate Blake Masters recently called ESG “an existential threat to the U.S. economy.”
These comments are not only extremist, they’re reflective of the creeping authoritarianism on the Right. Republican politicians want to limit the freedom of investors and companies to address environmental, workforce, and transparency issues that aim to improve profitability, help workers, create more sustainable products, and protect the environment.
Whatever happened to the idea of giving investors the freedom to decide for themselves what factors to consider? Whatever happened to the idea of giving companies the freedom to address issues they consider material to their business?
ESG becoming MORE not less important to companies — McKinsey
In another piece that cuts through all the noise, McKinsey discusses why “ESG is becoming more not less important to companies.”
The whole point of what companies are trying to do — and trying to measure with ESG information — “is to ensure that their business endures, with societal support, in a sustainable, environmentally viable way.”
“What critics fail to consider is social license — the perception by stakeholders that business/industry is acting in ways that are fair, appropriate, and deserving of trust. The precondition of sustaining long-term value is to manage and address, massive paradigm-shifting eternalities.”
Worth a read if for no other reason than to see how ESG — sustainability — has become as much a thing for companies as it has with investors.
Climate Bill spurring flows into clean energy funds
Back to the Inflation Reduction Act for a moment. In my Morningstar column this week, I note that investors began flooding back into renewable energy funds upon learning of the climate agreement on July 27. In the two weeks prior, investors pulled $223 million out of these funds; since then they’ve poured $434 million into these funds.
Given the greater interest in climate-conscious investing that is sure to build from here, asset allocators and wealth managers will need to help investors figure out the appropriate allocations to specialized funds focused on climate solutions, such as renewables and clean tech. I provide some pointers on it, but this needs more attention.
EVs are winners in the Inflation Reduction Act
Morningstar equity analyst Seth Goldstein says the Act is likely to spur opportunity in lithium, semiconductors, specialty chemicals, and automotive components companies.
“In some of these upstream suppliers, we see real big opportunities regardless of recession. That leaves the EV sector in a much stronger place than perhaps most of the rest of the global market.”
What we learned at Tesla’s shareholder meeting
Strong support for changes to environmental, social, and governance practices means Tesla’s board has some key decisions to make, says my colleague Lindsey Stewart.
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