A biweekly roundup of Sage’s top ESG news picks
By Andrew Poreda, Vice President, Senior Research Analyst
What it means: Solar power was expected to play a large part in the Biden Administration’s clean energy transition, but a myriad of challenges has placed the once-positive outlook for new solar projects as tenuous at best. So, the Biden Administration made two key moves this week that were widely anticipated by experts. The first initiative waives tariffs on solar panels imported from Southeastern Asian countries and includes eliminating the possibility of retroactive tariffs. Many critics felt that China was using these countries to continue anti-competitive dumping measures after tariffs were placed on Chinese panels. The U.S. Commerce Department subsequently launched an investigation into these practices and considered applying retroactive tariffs on goods that had already been exported, which would have put an estimated 80% of projects in jeopardy. This reprieve should allow projects to continue as planned and keep thousands of jobs. The flood of cheap panels will obviously be a blow to the nascent U.S. solar panel manufacturing industry, so the Biden Administration invoked the Defense Production Act, which allows the government direct manufacturing production for national defense purposes. The Defense Production Act has been used numerous times in the past few years, whether it be dealing with lithium shortages for electric vehicles or mask shortages during the pandemic.
Sage’s View: In the push to clean up our grid and electrify our economy, solar power will play a vital role. The level of importance that role may be is up for debate, as solar’s intermittent nature requires careful consideration as to how to best complement it (e.g., can we ever get enough energy storage to ensure grid reliability?). Places like California still need to sort out issues like the updated Net Metering 3.0 proposal. But even if we are sold on solar’s future, the bigger concern is how do we produce the number of panels required to power our future electrified economy? While we are extremely short of the capacity needed, the other problem is that the entire world relies on one country to meet our solar demands: China. Everyone can agree that energy is a national security issue, and the Defense Production Act may be a courtesy signal to the American public that we care about the need for U.S.-supplied energy. But without details it seems like more of a distraction from the problem. It took China years to get to this position of dominance, and by waiving the tariffs, we set ourselves back another two years of actually producing a concrete vision for the U.S. solar industry (which really should be renamed the U.S. solar installation industry). And we haven’t even started talking about what goes on behind the scenes to make these panels (lots of forced labor, dirty coal power, and scorched earth strategies to get the rare earth metals needed). Expect more to follow from us on this deeply concerning global security issue.
What it means: German law enforcement raided the office of Deutsche Bank on suspicion that their asset management arm, DWS, made fraudulent “greenwashing” claims in their ESG/sustainable funds. The investigation is likely a direct result of whistleblower Desiree Fixler, former Head of Sustainability. Ms. Fixler asserted that the company lied on its 2020 Annual Report, stating that over half of its assets were managed to ESG criteria. As she was fired only eight months into her job, she hopes that the audit completed on DWS’s ESG processes be made public. DWS and its parent, Deutsche Bank, have remained largely quiet to date, though they have denied all allegations and appointed a new CEO.
Sage’s View: Asset managers knew the day of increased scrutiny from regulators over greenwashing would arrive, and that time is now. It’s surprising that it took this long for the German financial regulator BaFin to act, given that Desiree Fixler’s media circuit criticism of DWS and the ESG investing world has gone on for almost a year. The big question is, will the SEC also go after DWS? The SEC put the industry on blast with the BNY Mellon settlement, but the next violator will likely not be as lucky. Whether or not the new SEC disclosure rules get approved in their current format, asset managers should be diligently working on codifying their ESG frameworks. Not only will it help protect against regulatory scrutiny, but it will aid in bringing some confidence back into the notion of ESG investing, which has taken a lot of hits lately.
What it means: Many people may not have ever heard of the Thrift Savings Plan (TSP), a retirement plan that manages almost $800 billion for 6.5 million military and federal employees. TSP has moved to the forefront of the larger ESG debate going on in the United States. Last year, announcements were made that changes were coming to the plan, including the opening up of a mutual fund window, which would provide participants more choice in their retirement options. Included in the anticipated 5,000-plus funds would be ESG options, which was supposed to go live on June 1. As the government matches a portion of participants’ deposits, some politicians are concerned that the government is not being a good fiduciary by pushing ESG issues, which include scrutinizing the oil and gas industry and encouraging diversity, equity, and inclusion initiatives. So, by allowing money to flow into these funds taxpayers would ultimately be funding these perceived ESG agendas. Led by Congressman Chip Roy (R-TX), the bill proposed would eliminate “ESG” funds within the TSP window. Other concerns about Chinese investments have also been raised as a point of contention. The window may not be an attractive option, ESG or otherwise, because current choices already have very low management fees, whereas those that utilize the mutual fund window will have to pay an annual maintenance fee and for each individual trade (while also likely buying a fund with a higher expense ratio).
Sage View: It’s funny how, depending on what side of the political aisle you fall on, ESG has either become a requirement for being a fiduciary or completely goes against it (Sage is in the former camp). But since we aren’t going to come to a consensus on that debate, the real discussion should be about providing choices for plan participants that also fit into their overall retirement goals. A recent Schroders survey revealed 74% of employees wanted investment options to follow ESG goals, yet only 37% of plan sponsors provided any sort of ESG investing option. This disconnect is why TSP added the option. It is just one more step in how retirement plans have continued to evolve, with the SECURE Act of 2019 really setting this trend in motion. As defined contribution (DC) plans may be just one part of a retiree’s overall retirement goal, we can’t assume that DC plans should be a one-size-fits-all proposition. And to criticize where a participant’s money ultimately goes is a slippery slope. The matching funds are part of an employee’s compensation they have earned, so within reason it should be up to them how to invest, even if it means taking on too much risk or parking all of it in cash (sadly enough, the default option for TSP was 100% Treasuries up until 2015, so one can imagine how many people were disappointed at their performance when they first got a chance to look at their account summary). Plan sponsors should be searching for ways to provide more choices, which could include adding investment options or making it easy to purchase annuities upon retirement. So the key ingredient here is education. By educating plan participants on the long-term benefit of low-fee index funds, employees are less likely to opt into the mutual fund window and instead choose traditional TSP options. But at least give them the choice – they have earned it.
What it means: The “once in a lifetime” drought in the Southwestern United States has gotten really bad. Reservoirs such as Lake Mead have such low water levels that dead bodies from decades ago have started to emerge on the surface. But as disturbing as this trend is, the real “dead pool” is when the levels get so low that the Hoover Dam and others are unable to provide electric power or deliver water downstream. So, conservation of water is a theme throughout the region, as places like Los Angeles are being asked to cut water consumption by 35%. But the real user of water in the region is agriculture; for example, 75% of Lake Mead’s water goes to farmers, who are already feeling the effects, as some are electing not to plant this season due to lack of water. This is quite problematic for an area that provides a third of the United States’ vegetable supply and over half the fruit and nut supply. It is almost the perfect storm of problems, and only stands to get worse. Fortunately, many are focusing on innovation to try and mitigate some of the challenges. One example comes from the Arizonian company Source, which makes hydro panels that extract water from the air using solar energy. The amount created is usually only enough for drinking water, which is necessary in areas where water is not only limited but also potentially contaminated from agricultural chemicals. There is no solution in sight to provide means to water all the crops, but it is a step in the right direction.
Sage View: The bad news is that this drought continue to get worse by the week. In the short term, water levels in places like Lake Mead should be high enough to sustain some hydroelectric power, albeit at a lower output (the levels would have to drop ~100 feet to put the Hoover Dam power plant offline). But the nation should be very concerned about the potential problems this will cause in the winter with food shortages. The Southwestern United States is not the only place facing drought conditions, and the war in Ukraine is already stressing an already delicate global food supply. Big picture, we should all be talking about how to mitigate and adapt to these challenges. Whether we find ways to scale desalination more efficiently or continue to explore means to save water in irrigation, we should plan for severe droughts to be a regular part of life going forward.
What it means: The Russian invasion of Ukraine has brought criticisms of ESG to the forefront of many conversations. One key discussion involves how proponents of ESG are typically treating oil and gas companies. In the minds of some, such as Equinox Partners CIO Sean Fieler, the author of a recent Wall Street Journal opinion piece, the ESG movement is not only depressing oil and gas supplies but may also be a violation of U.S. anti-trust law. In his mind, ESG initiatives are forceful and undemocratic efforts to curb the supply of fossil fuels through corporate boards, such as with Engine No. 1 gaining seats on Exxon’s board last year. He also says that ESG proponents put our energy supply in jeopardy, and although they couldn’t predict the Russia-Ukraine war, there was ultimately a shortage of energy. Fieler’s bigger concern is that the ESG movement may be an anti-trust violation, since the restriction of supply has led to increased prices, and the share values of oil and gas companies have benefitted in the process. Hence, it was only a matter of time before politicians took action, such as Arizona’s attorney general launching an anti-trust investigation into this issue. Finally, Fieler concludes that ESG is merely an impulse to “do good” by force and that the movement has reached a peak.
Sage’s View: The opposition to ESG issues has become particularly concerning, not because there is criticism (there is plenty of room for criticism), but because of the areas opponents are targeting. Large shareholders of oil and gas companies are engaging in and voting on key ESG issues because they are concerned about their long-term interests in these companies. By just looking at trends, whether it be our push to electrify the economy or enhanced governmental action through regulation (e.g., tightening of EPA automobile MPG standards), it is clear that there are long-term headwinds for these companies. At some point, the risk of stranded assets may be realized, so it’s not fair to classify this as some sort of “do-good” coercive movement. It’s simply the world we live in. But shareholders are generally pragmatic, which is why Blackrock likely voted less in favor of climate provisions this proxy season given the energy crunch. But even looking at the bigger picture, the accusation really lacks logic. Why would Blackrock try to collude to prop up the price of their oil and gas stocks, which represent only a few percentage points of their overall portfolio? Most stock returns are suffering this year, in large part due to inflationary pressures where energy prices are a key component. When the largest owners of your company are Vanguard, State Street, and Blackrock, you are dealing with an investor that is cognizant of how that company fits into the big picture of the entire marketplace/economy. So, chalk up this collusion talk as another frivolous, baseless criticism on ESG investing.
- Wiessert, Will. Biden Orders Emergency Steps To Boost U.S. Solar Production. ABC News. June 6, 2022.
- Hetzner, Christiaan. Deutsche Bank Raided By Authorities Over ESG ‘Greenwashing’ Claims. Fortune. May 31, 2022.
- Braham, Lewis. The ESG Fight in a Big Retirement Plan. Barron’s. June 3, 2022.
- Morris, Regan et al. Drought-Stricken US Warned Of Looming ‘Dead Pool‘. BBC News. June 3, 2022.
- Fieler, Sean. The ESG Movement Is a Ripe Target for Antitrust Action. WSJ. June 2, 2022.
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