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How the investing market uses ESG to impose ideology on companies

The recent exclusion of Tesla from the ESG (Environmental, Social and Corporate Governance) index adds to the chorus of voices that accuse certification of being a means of imposing woke ideology on companies.

“ESG is a farce. It has been used as a weapon by false social justice warriors”, reacted Elon Musk, on Twitter, in 18 May, on news that S&P Dow Jones has excluded the electric car maker from its S&P 409 ESG Index (designed to measure the performance of bonds that meet sustainability criteria).

“(Oil company) Exxon is ranked among the world’s top ten in environment, social and governance (ESG) by S&P 500, while Tesla is not part of the list!”, joked the billionaire.

No In early April, before Tesla was excluded, Musk had already protested, also through a tweet: “I am increasingly convinced that corporate ESG is the devil incarnate.”

BlackRock and the pressure for ESG

Almost an imperative for companies looking to stand out in the market, ESG owes a lot ( if not all) of his popularity to Larry Fink, president and CEO of B lackRock, the world’s largest fund manager (more than R$ 44 trillion in assets under its management, five times Brazil’s GDP in 2021, which was BRL 8.7 trillion).

“Fink takes advantage of this immense power to compel the companies in which BlackRock invests to pursue an aggressive climate change and diversity agenda in their operations,” says Richard M. Reinsch II, Senior Fellow at the Heritage Foundation (a research and education institution whose mission is to build and promote conservative public policies).

In 2020, in his traditional annual letter to CEOs, Larry Fink stated that sustainability would become an investment criterion and that companies that did not adapt would end up running out of capital. In the document the following year, he reinforced that “we are at a historic crossroads on the path of racial justice – a crossroads that cannot be resolved without corporate leadership.”

“When issuing sustainability reports, we ask that your talent strategy disclosures fully reflect your long-term plans to improve diversity, equity and inclusion, as appropriate by region,” he advised.

One of the controversial points of these measures, in the opinion of critics, is that ESG requirements are expensive for companies and can lead to competitive disadvantages. In other words, for a company to be considered attractive to investors today, more leftist militancy guidelines (such as the existence of a sustainable action plan and diversity in its management staff) are taken into account, for example, than financial returns. that the company guarantees to its shareholders.

“ESG has therefore become a very pernicious driving force in American business, which is leading companies to adopt political over traditional business values,” says writer Stephen R. Soukup, author of “The Dictatorship of Woke Capital: How Political Correctness Captured Big Business.” Grandes Corporations”, in free translation), not yet published in Brazil.

This week, Republican Senator Ted Cruz, from Texas, heavily criticized the CEO of BlackRock, in an interview with CNBC, for the so-called “investment ‘woke’ decisions”. According to Cruz, investment managers should be prohibited from voting on behalf of investors “to promote their own political interests.”

“This is not capitalism, this is abusing market”, said the senator. “What Larry Fink is doing is taking his stock and my stock and millions of old ladies who have invested in funds, and he is aggregating this huge amount of capital and has decided to vote no to maximize his returns, because apparently, his fiduciary duty to clients is not a priority. Instead, he’s voting on his policy.” when he comes in and takes a stand against oil and gas, even if that reduces the returns on the accounts he manages.” “There is a Larry Fink surcharge, every time you fill up your tank you can thank Larry for the massive and inadequate ESG pressure,” he criticized.

Writing to CEOs earlier this year, Fink justified that “stakeholder capitalism [conceito que defende que a geração de valor de uma empresa vai além do retorno acionário, mas deve levar em conta seu impacto a todos os envolvidos, como funcionários, fornecedores, consumidores, governo, etc.] is not about politics”. “It is not a social or ideological agenda. It is not ‘woke’. It’s capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers and communities your business depends on to thrive. This is the power of capitalism”, he defended.

Focus on social x relations with China

Among the 44 companies that are part of the S&P 409 ) ESG Index, names like Apple appear, with the highest index (9,657%), Microsoft (8,

%), Amazon (4,297%) and Exxon, with weight 1,443%. Apple and its CEO, Tim Cook, by the way, are named as darlings of the ESG wave by Stephen R. Soukup. “No social justice issue occurs in this country [Estados Unidos] without Tim Cook feeling like he needs to get involved, write an article, make a statement, or use some of the company’s money to try to draw attention to the issue,” says the writer. .

Paradoxically, in the last two decades, Big Tech has invested in China – whose disregard for human rights and individual freedoms is evident -, and Cook is considered a ally by Beijing.

A champion of identity politics, Larry Fink, with his BlackRock, also maintains “extensive operations in China”, points out Richard Reinsch. “[…] including being invited by the Chinese Communist Party to be the first foreign company to sell mutual fund investments to Chinese investors.”

Reinsch recalls that BlackRock has an equity stake in Chinese companies iFlytek and Hikvision, both blacklisted by the US government for participating in human rights abuses against Uighur Muslims in Xinjiang. “BlackRock invested in both and increased its stakes in Hikvision after the blacklist.”

Tesla

If the index is far from being a consensus among investment agents and executives, the Tesla case makes it clear that being sustainable is not enough to integrate it. That’s because the purpose of the scores, according to S&P, is to show the risk that a corporation’s stock faces due to ESG factors.

What’s at stake, therefore, it is not the impact of a company’s activity on climate change, but the risk mitigation measures it manages to show the market. This would explain an oil company such as Exxon Corp joining the index and an electric car maker such as Tesla not.

À Gazeta do Povo, S&P Dow Jones Indices said it would not comment on Musk’s tweet. The company stressed that the ESG index “is governed and maintained by an analytically independent index committee, based on the application of a publicly available, transparent and rules-based methodology”.

S&P Senior Director Margaret Dorn noted that the autos and components group, in which Tesla is valued, has seen an overall increase in its average score in this edition. “So while Tesla’s S&P DJI ESG score has remained fairly stable year-over-year, it has been pushed further down the rankings relative to its global industry peers.” Among the criteria that led to Tesla being excluded from the ESG are “low carbon strategy” (the assessment takes into account the exposure of the current portfolio to regulatory risks) and “codes of business conduct”. Although its electric cars contribute to reducing carbon emissions, the automaker lost points due to “allegations of racial discrimination and poor working conditions at Tesla’s factory in Fremont (California)” and its treatment of an investigation. government “after several deaths and injuries were linked to their autopilot vehicles.”

“While Tesla and others may not have been included in the index this year, the beauty of the annual rebalancing is that they will once again have the opportunity to be reviewed for inclusion in the coming years,” added Margaret Dorn.

Not yet It is possible to measure the impact of the exclusion of the S&P ESG index on Tesla’s shares, since the bonds had already been falling since the beginning of April, amid the uncertainties of the purchase of Twitter by Elon Musk and the fear that the Chinese lockdown could hinder the vehicle production.

Both S&P and MSCI (another power supplier) indices for the market, which still kept Tesla on its ESG) declined to detail Musk’s company’s ESG score. Reuters news agency had access to a copy of May 3, sent to investors, showing that social issues overshadowed the automaker’s green credentials.

On environmental issues , while the industry averaged 6.5, Tesla achieved 9.1 (the maximum is ) , which represented 18% of your ESG score. In governance, the company scored 5.1 against an average of 3.2. As for social issues, where the average was 3.5, the grade was 1.4.

“The whole thing is very subjective”, opined the Toscafund Hong Kong chief investment officer Mark Tinker in an interview with Reuters. He points out that aspects of corporate and social governance are being used “for politically motivated cancellations” and that a company’s contribution to the environment can “mean whatever you want it to be”.

Gazeta do Povo contacted BlackRock and Tesla, but did not obtain return.

Utah authorities criticize ESG

In 21 in April, top elected officials from Utah, United States, including Governor Spencer Cox, wrote a letter to the president of S&P Global Ratings questioning the use of ESG factors as “credit indicators”. “Considering recent global events, the current economic situation in the US and the unreliability and inherently political nature of ESG factors in investment decisions, we see this new focus on ESG as politicizing the rating process. It is deeply counterproductive, misleading, potentially harmful to classified entities and possibly illegal”, says the document, signed by Republican politicians.

One of the signatories of the letter, the Utah treasurer Marlo M. Oaks said ESG is a way to “control and enforce behavior.” “It tries to do through capital markets what activists and their government allies could not do through democratic processes. It is a political score that, intentionally or unintentionally, can cause market participants to use economic force to drive a political agenda,” he declared, in a statement.

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