CNBC Does Blackrock's Bidding
Attack Interview By Faber
Woke up and got some coffee, turned on CNBC, and watched anchor David Faber attack South Carolina’s state treasurer Curtis Loftus. Faber was there to do Blackrock’s bidding. Here is the link to the interview.
Blackrock ($BLK) manages pension money from extremely large pools of capital like South Carolina, unions, and others. Blackrock is a public company and its CEO is the left-wing-focused Larry Fink. South Carolina’s treasurer is not alone in pulling money out of Blackrock.
Fink said he was going to redo Blackrock’s portfolio into an ESG portfolio. For those that don’t know, ESG stands for “environmental, social, governance”. Blackrock stock has been underperforming lately.
I have blogged about ESG in the past.
Here are a few facts about ESG.
There is no GAAP or FASB accounting standard for ESG. It’s the wild west.
I cannot compare United to American to Southwest to Delta on an objective ESG basis. You cannot do objective comparative analysis.
ESG is “values-based”. That means there is no objectivity at all. It is “normative” investing.
Because of those facts, there is no accountability to portfolio managers when returns go well or poorly. If things go wrong, a portfolio manager can point to some normative value standard and say things actually are going well.
I knew a hard left-wing trader in Chicago that was on the board of a midwestern university. With religious fanaticism, he was trying to get the university to pull out of all stocks related to fossil fuel. Of course, fossil fuel returned nicely after they pulled out hurting the university and the endowment. Phillip Morris ($PM) is one of the best-performing stocks for total return in the S+P. If you are an endowment manager and don’t own it based on ESG principles, you are hurting the people that rely on you.
Here is a conundrum. Is an oil company an ESG stock or not?
Suppose we had no fossil fuels for boats, rail, trucks, and cars. Electric can’t do it. So, how do we move goods? Sailboats? Wagons? We’d have horse poop all over the streets. The ESG people conveniently ignore the mining mess and opportunity costs the materials make that go into ESG products while fully calculating the opportunity costs of fossil fuels.
One thing that Faber asserted in his interview is that “Tesla stock has done really well.” It has! But what about Solyndra and the other messes and misses in ESG?
Cliff Asness wrote a seminal analysis of ESG. He is a University of Chicago PhD. It’s a tough place to be a scholar and I have had a glimpse into it. Cliff runs a huge hedge fund and invests funds on behalf of similar institutions that Blackrock does. He has made billions of dollars and has done quite well for himself so he is not a neophyte.
He starts out his piece like this:
Negative screening is a common application of Environmental/Social/Governance (ESG) investing. It avoids “sin stocks” and divests from industries or firms deemed immoral or having poor or undesirable standards along one of the three E, S or G dimensions. It’s promoted largely on the fact that it’s virtuous. While we may all define virtue differently, advocating for it in this way is fair and appropriate. However, employing these constraints is also often promoted as enhancing expected returns. That is, if you avoid certain companies, industries, and even countries, that are deemed non-virtuous, you should expect to make more money over time. Do good and make the same return or more! This is mostly wrong and, more the point here, actually at odds with the very point of ESG investing. Pursuing virtue should hurt expected returns. Some have discussed this fact. But, it’s still not widely understood or broadly accepted. This seems to arise from investment managers selling virtue as a free lunch, and from investors who very much want to believe in that story. In particular, and my focus here, accepting a lower expected return is not just an unfortunate ancillary consequence to ESG investing, it’s precisely the point (though its necessity may indeed be unfortunate). As an ESG investor this lower expected return is exactly what you want to happen and really the only way you can effect the change you seek.
Artificial constraints you place on yourself hurt your return. Same with venture funds or private equity funds. “I only invest in (fill in the blank) type of founder” hurts your return. That is not the same as, “I only invest in this (fill in the blank) sector” because anyone can do well in a sector. Not everyone meets some artificial criteria of skin color, gender, or some other artificial construct.
If the focus turns to bonds, the financial constructs become a bit clearer than they do stocks. An analysis of municipal bonds revealed that ESG muni bonds give less return than traditional bonds. In addition, ESG investors get a slap in the face because their investing action actually “yield benefit spills over to simultaneously issued ordinary bonds, suggesting that, rather than capturing the full benefit in a green price premium, municipal treasurers and their bankers spread the impact of green demand across simultaneous issuance. In so doing, they obscure the price premium (and hence lower future return) associated with green securities.”
When it comes to analyzing companies for investment, I have never ever seen a “green” company that can be profitable without government subsidies. Witness the recent giveaway by the government to car companies and the sticker price action of electric cars afterward.
When I rehabbed my house, I looked seriously at solar panels. After all, I live in Nevada and it’s pretty sunny here all the time. I pulled out a pencil and ran the calculations and it made zero sense for me to install panels and a battery storage system. My payback period was longer than 10 years and by then, I’d have to reinstall a new battery storage system which totally ate up any savings on electricity bills. Even with subsidies, the math doesn’t work.
If the ESG people want to see ESG companies do well, they would be better off going to Washington and telling the politicians to pull all subsidies from the market and let Mr. Market do its thing. When companies have to kowtow to competition and the marketplace, they do better. They innovate, and consumers get more stuff at cheaper prices.
But, the religious fanaticism and top-down ethos of the ESG community won’t let that happen. “Freedom of Choice” and “market competition” are not phrases in their vocabulary.
Former Presidential press secretary Ari Fleischer’s pinned tweet is apropos when it comes to ESG investing.
Only when Larry Fink gives up his Gulfstream jet (he probably has more than one) and reduces his own carbon footprint by selling all but one of his homes, and starts taking the subway to the office, will I believe he gives a rat's ass about the environment and the other religious-cult things he's forcing on those for whom the company he heads is a fiduciary.
Larry still wants to be Treasury Secretary. Gary got what he always wanted SEC chair. It's the Peter Principle writ large. What else is money for if not to buy power in their febrile minds. As far as Larry and Blackrock is concerned, state treasurers and others like-minded with big pots of money will start taking it elsewhere and when it becomes achingly apparent that ESG investing underperforms - adios.
As far as Faber, we all know what the NBC in CNBC stands for and I'm still pretty sure they have picked a side.