Don’t mess with ESG in Texas

Teachers in Texas are already operating in some of the most underfunded schools in the US. Now their retirement savings — along with state funds used to bankroll the schools they work in — have become a political football.

As Patrick writes today, Texas’s government is forcing its state pension and school funds to divest from 10 financial companies and hundreds of mutual funds that it considers to have “boycotted” the fossil fuel industry, threatening the economy of the oil-rich state. The announcement came a day after Florida governor Ron DeSantis ordered that state’s fund managers to exclude “ESG considerations” from their work.

There is an intelligent, if provocative, argument to be made that institutional investors should have a narrow focus on financial goals. The irony here is that these state governments are making it virtually impossible for their fund managers to take such an approach.

A portfolio manager for Texas’s giant Teacher Retirement System will no longer be permitted to buy shares in BlackRock, even if this looks like a winning bet. And while the Florida directive tells the state’s retirement funds to focus entirely on “pecuniary factors”, this sits uneasily with the strident accompanying statement from DeSantis, with its bald claim that “ESG considerations will not be included”. That will sound intimidating to a Florida fund manager who wants to address, say, the very real financial risks that the energy transition poses to the state’s fossil fuel sector holdings.

Also today, Kenza digs into the rising heat around the UK government’s big-budget net zero strategy — and the award of a major green contract to a two-person business in Penzance. Have a good weekend. (Simon Mundy)

Investment in developing countries is essential to tackling climate change and global inequality. Yet for ESG investors, social challenges, governance flaws and poor data can be obstacles to including emerging market companies in investment portfolios. This is the topic of our next Moral Money Forum report. In your ESG investment strategies, are you directing less capital to EM companies — or avoiding them altogether? What are the obstacles to allocating more capital to companies in these markets? And what compelling research and data have you seen that might inform our reporting? Share your thoughts here.

Lone Star state joins the attack on ESG

The famous “don’t mess with Texas” slogan was initially created by the state as part of an effort to promote recycling. For now, Texas appears to have jettisoned any environmental benefits from ESG investing to placate the Donald Trump wing of the Republican party.

On Wednesday, Texas declared that BlackRock and nine listed European financial groups “boycott” the fossil fuel industry, and launched a process for the state’s pension funds to divest from these companies.

These 10 companies were designated in part for pledging to the Climate Action 100+ and the Net-Zero Banking Alliance or Net Zero Asset Managers initiatives. They also were determined to have 10 or more funds that prohibit or restrict oil-and-gas investments.

Then on Thursday, BlackRock punched back. “Trying to stop a US company from doing business in its own backyard is bad for business,” Mark McCombe, the head of BlackRock’s US business, told our colleague Brooke Masters in an interview. “It looks opportunistic in this climate.”

BlackRock-managed funds are the second-largest shareholder in ExxonMobil, the oil supermajor that has its headquarters in Texas. And Exxon is the 11th-largest holding in BlackRock’s biggest ESG exchange traded fund.

The response to Texas’s announcement is raising questions about whether such moves by Republican state governments are hurting their party’s friendly relationship with Wall Street.

Texas’s boycotting decision “will only harm” the state’s pensioners, said the Investment Company Institute, the main lobbying group for asset managers in Washington.

“This decision impacts billions of dollars in retirement savings for many Texans,” ICI said. “We urge Texas policymakers to prioritise Texas families over partisanship.”

Divesting from these 10 companies will not be the end of the threat. Texas pension funds must still determine if their investment managers discriminate against oil and gas companies. And Florida on Tuesday passed a resolution banning its pension fund managers from taking ESG considerations into account with their investing strategies.

These actions underscored how political ESG has become, and that asset managers would be increasingly targeted ahead of the US midterm elections in November, said Joe Miller, an analyst at Cowen. 

A Republican-controlled Congress is expected to investigate ESG, he adds. Though this will probably generate much buzz in the near term, it “is unlikely to result in a major legislative push before 2025”. (Patrick Temple-West)

A Cornish net zero tale

The UK’s push to achieve net zero carbon emissions by 2050 will involve huge amounts of state spending. For some observers, recent developments give cause for concern about the care and transparency with which that money will be deployed.

Last month, public entities ranging from local councils to healthcare trusts and universities were invited to join an accelerated public-sector procurement process called “Everything Net Zero”. The initiative aims to drive investment in areas including heat pumps and nuclear technology, with total spending expected to reach up to £70bn.

An entry on the government’s contracts website shows that the company selected to run the tender competition for all of these purchases is a tiny business called Place Group Limited. With just two employees, based in the picturesque Cornish town of Penzance on the south-western tip of England, it was the only company to apply for the contract.

Because of the scale of the project and a perceived lack of fair and open competition in how the contract was awarded, the Good Law Project has instigated a judicial review process to check whether procurement law has been followed. It is also in talks with the East of England Broadband Network (E2BN), the consortium of local councils that awarded the contract, to obtain more information.

Place Group has stressed that the £70bn figure refers to the upper limit of deals that could be contracted by public bodies in future through the framework that it would manage — rather than the value of its own contract. It adds that it charges a “very small framework levy that suppliers pay if they win contracts”. E2BN said the agreement guaranteed “best value” to public sector buyers, and provided “excellent service standards”.

The UK government has said businesses must commit to net zero by 2050, and publish carbon reduction plans before they can bid for big government contracts. But campaign groups are on high alert for signs of opacity in the way taxpayers’ cash is put towards green goals, especially given the government’s recent record. Perceptions of cronyism and waste hung heavily on the public sector contracts approved by the UK government during the pandemic.

The UK’s Office for Budget Responsibility has priced the public cost of the transition at £344bn until 2050 — and about a third of that could be spent procuring goods and services from the private sector.

The Good Law Project is far from alone in raising legal challenges around the government’s green agenda. A judge ruled in July that the government’s wider net zero plans broke the law because they did not include enough detail on how targets would be met. This week another legal challenge was launched against the government’s lack of detailed plans to reduce carbon emissions through its food strategy for England. 

Meanwhile, there has been scrutiny of some green technology companies that have been receiving government support. Experts have raised concerns over the executive pay policy and highly ambitious production targets of Pensana, a UK rare earth processing company that has received millions of pounds in government investment. This month, Orral Nadjari abruptly resigned as chief executive of Britishvolt, which has been awarded a large grant of government funds for a battery plant project that has been hit by financial challenges, according to leaked documents reported in The Guardian.

After a consultation last year, the government dropped a proposal it had previously put forward suggesting charges by contracting authorities such as the Place Group should be “proportionate and used solely in the public interest”, and that fees should be published online. The Cabinet Office said that draft procurement legislation would achieve similar levels of transparency.

Private-sector contracting agreements of the kind awarded to the Place Group are overused and can be a drain on the public sector purse, argues Rebecca Rees, head of public procurement at the law firm Trowers & Hamlins. These agreements can come with expensive commissions on contracts awarded, she said, arguing that the government should invest in public entities’ capacity to choose their own suppliers and contractors.

Given the huge sums set to be invested in pursuit of the UK’s net zero ambitions, critics warn, standards need to be tightened — for the sake of the public purse, as well as the planet.

“We could fall into practices where things are getting waved through because they are net zero,” said Ian Browne, legal manager at the Good Law Project. “We want net zero to be an objective which is taken seriously, and it is necessarily going to take huge action across the public sector to do it.” (Kenza Bryan)

Smart read

• As the co-head of investment at London-based Schroders, it’s no surprise that Rory Bateman has good things to say about the merits of active management. “But hear me out,” he writes in this column, arguing that investors who take sustainability seriously should steer clear of low-cost passive ESG funds.