The U.K. FCA And The U.S. GOP: A Potential Strategic Alliance
Today the comment period closes for the U.K. Financial Conduct Authority’s (FCA) consultation paper (CP) “CP22/20: Sustainability Disclosure Requirements (SDR) and investment labels.” The October 25, 2022 press release announcing this consultation stated that “We are proposing to introduce a package of measures aimed at clamping down on greenwashing. This includes sustainable investment labels, disclosure requirements and restrictions on the use of sustainability-related terms in product naming and marketing.” The final rules will be issued in the first half of this year.
I was pretty busy last fall keeping up with all of the exciting anti-ESG/anti-Woke initiatives by various Republican politicians and affiliated groups. It was only over the holidays that I had the time to read the FCA’s CP about how it proposes to deal with fund greenwashing. This is a very real problem where the FCA has already done some good work and I’ve written about this with the famous DWS whistleblower Desiree Fixler. Excessive claims about the performance and benefits of ESG funds and poor transparency regarding their portfolio construction by Sustainability Opportunists have provided great sustenance to the voracious maws of the always-hungry Sustainability Taliban and Sustainability Flat-Earthers.
Insert image of the FCA
To be honest, the 179-page document was a rather boring read compared to the letters, proposed legislation, and videos such as those I’ve written about over the past six months:
Being honest again, it was also uncomfortable reading and a bit of a culture shock compared to the fun I’ve been having. I mean, what am I to with an intelligent, thoughtful, well-written, logical, and constructive document that recognizes the importance of free capital markets without any political interference? A document with pragmatic suggestions about how to address an issue of concern to both the left and the right? A document that is addressing an issue important to millions of individuals who want to do (NB: Not forced to do) sustainable (NB again: not ESG) investing?
And then it hit me 🐥! Inadvertently, unconsciously, and probably unwillingly the FCA has produced a document that can be very useful to Republican politicians who are in a twit about ESG investing. Counterintuitive, I know, so I will explain. But first I need to lay some foundation.
There are four main sections in the CP: (i) classification and labeling, (ii) disclosures, (iii) naming and marketing, and (iv) distributors. But the guts of the CP that can be helpful to the GOP are in classification and labeling and so I will focus my attention here.
Figure 4 – Sustainable investment labels
The FCA is proposing three sustainable investment labels: sustainable focus, sustainable improvers, and sustainable impact. These categories are independent and mutually exclusive. For each one there is a clear sustainability objective, primary channel for sustainability outcomes, and secondary channel for sustainability outcomes. The beauty of what the FCA has done is that not only are these labels incredibly helpful to those interested in sustainable investing, but they are also helpful to those who are most clearly not interested in such products. They are like a BUYER BEWARE label to make sure people don’t accidentally invest in a product that will not only produce a financial return but might actually, God forbid 😱, have some positive environmental or social benefits. Sitting over there across the pond in Merry Ol’ I’m sure the good folks at the FCA never thought of this. Patting myself on the back for this keen insight 😍.
Let’s take a quick look at each one because they vary in terms of the degree of concern for sustainability investing specialists like former Vice President Mike Pence, Florida Governor Ron DeSantis, Representative Jim Jordan (R-OH-4), and Senator Tom Cotton (R-AZ).
“These products aim to invest in assets that a reasonable investor would regard as being environmentally and/or socially sustainable.” Ah, the “reasonable investor” thing. Just like we have with materiality where something is material if in the total mix of information it would influence a reasonable investor’s decision. The nice thing here is that there is good alignment across the political spectrum about what is and isn’t environmentally or socially sustainable. The only difference is whether the investor is a fan of sustainability or not. Thus, any product with a “sustainable focus” label should obviously be boycotted by folks like Mr. Pence and his friends.
Sustainable focus products must “have an objective to invest in assets that meet a credible standard of environmental and/or social sustainability, or that align with a specified environmental and/or social sustainability theme.” But they also have to be clear about the financial risk/objective and the same is true for the other two categories. The primary channel for their sustainability outcomes is influencing asset prices to reduce the relative cost of capital, and thus improve the stock price. In the secondary channel there is a focus on continuous improvement in sustainability performance of the asset through stewardship activities in order to improve financial performance.
These products present more of a dilemma, but also an opportunity, to the anti-ESG investing crowd. “Products in this category aim to invest in assets that, while not objectively environmentally or socially sustainable at present, have the potential to deliver measurable improvements in their environmental and/or social sustainability over time, including in response to the stewardship influence of the firm.” Good grief! What if there’s an attractive asset out there that has studiously avoided this woke sustainability stuff for a long time but is about to change its mind? Should this happen, the anti-ESG investor is then uncomfortably invested in an asset that has some good sustainability creds. How to explain this at an Alt-Right or MAGA gathering, large (another “Stop the Steal” rally) or small (like a Boycott CRT Books Book Club).
There’s a good chance this unfortunate transformation could happen since the primary channel is investor stewardship. But, hey, stewardship can cut both ways 😎! If enough anti-ESG investors join forces, they can engage with the company and say, “Don’t you dare start doing this woke sustainability stuff!” The natural leader for this would be Harvard and Yale educated and prolific author and speaker Vivek Ramaswamy, co-founder of Strive Asset Management and the intellectual guru for a bunch of mental midgets. And, just in time, on January 10, 2023 Strive excitedly announced the “Strive Proxy Voting and Strive Outsourced Shareholder Engagement & Proxy Voting Consulting Services (OSEP), enabling investors to vote to maximize value with a new alternative to incumbent proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis.”
The ability of anti-ESG investors to monitor any dangerous ESG improvements being made by their portfolio companies would be greatly enhanced by standards for ESG disclosure since the secondary channel is “Portfolio construction and asset selection in ‘sustainable improvers’ products would be geared towards identifying those assets that are best placed to improve their sustainability profile over time.” By having more reliable information on sustainability performance, the anti-ESG investor can focus their stewardship activities on those companies that are straying from their historical anti-sustainability path. Thus, these investors should be active supporters of the SEC’s proposed rule on climate disclosure and insisting they report on Scope 3 emissions. If they’re smart (a very big if) they would also enthusiastically endorse the work of the International Sustainability Standards Board (ISSB).
These products are kryptonite to the anti-ESG/anti-Woke crowd since their express intent is to make the world a better place. They “aim to achieve a positive, measurable contribution to real world sustainability outcomes” such as investing “in sustainability solutions to environmental and/or social problems, often in underserved markets or to address observed market failures.” Even more galling, “Products in this category would invest in line with a clearly articulated theory of change and show how they select assets that align with this.” Change and conservatives in the Freedom Caucus crowd are like matter and anti-matter. The bar is high for firms selling these products since they are required “to deliver and report on its (the investor’s) contribution to a positive environmental and/or social sustainability outcome through financial as well as other types of investor additionality.”
These products are exactly what the anti-ESG/anti-Woke screamers are up in arms about 😡. They are using investors’ dollars to change the world. Towards making it a more sustainable one. Exactly the wrong direction! Thus, I’d like to suggest that products like this in the U.S. are preceded by a trigger warning. Something like, “I’m going to tell you about three sustainable investing products but the third one is very scary 👽 and could upset you very much so no problem if you want to cover your eyes and ears before I get to that one.”
The Potential Strategic Alliance
The FCA has articulated a rigorous process to protect those opposed to ESG and sustainable investing from having their investment dollars put to this nefarious use. Thus, I see a big opportunity here for the U.K. FCA and the U.S. GOP to work together. By why not, you may reasonably ask, keep this local and Buy American? After all, the SEC has come out with its own proposal for ESG fund labeling. Its categories are: (i) integration funds, (ii) ESG-focused funds, and (iii) impact funds. Well, one reason is that the anti-ESG/anti-Woke gang is mad at the SEC for all kinds of reasons like its temerity in suggesting it would be useful to have some standards for climate disclosures.
But the reason for partnering with the FCA rather than the SEC goes deeper than that and overrides doing a deal with the home team. The FCA has developed a much more robust labeling taxonomy. It maintains “that products without a sustainability objective, but which may use strategies such as ‘ESG integration’, would not qualify [emphasis mine] for a sustainable investment label” since ESG integration is only about good risk management and the proper exercise of fiduciary duty.
All of the anti-ESG railing going on in the U.S. is ducking the real problem—sustainability. I keep trying to explain to the GOP folks that “ESG is about material risk factors for improving financial performance.” So pass all the “No No! ESG” legislation you want. Investors will keep exercising their fiduciary duty to consider material risk factors and just not call it ESG. You won’t have solved the problem you’re really worried about—sustainability. This is where, Lordie Be, the products and services of a company are making the world a better place while making a lot of money at the same time.
Like NextEra Energy which, as it proudly states on the homepage of its corporate website has “A REAL PLAN FOR REAL ZERO: NextEra Energy has a plan to lead the decarbonization of America.” It is also interesting to note that Next Era qualified for the Point Bridge America First ETF (MAGA). Point Bridge is an advocate of Politically Responsible Investing® (PRI), not to be confused with the other PRI (Principles for Responsible Investing). There are so many ironies in this…
The SEC’s “integration funds “are simply an unhelpful distraction. Even worse, they fall prey to the ridiculous framing being given to ESG by its right wing haters. Once the dust settles on what ESG is really about, all this label will tell you is that “material risk factors are being considered.” This label would only be meaningful if we had a label for investment products that don’t. Call them Risk Ignorant Funds (RIF). Maybe there would be some Freedom Caucus and their ilk takers for those?
“ESG-focused funds” apply a broader ESG sweep such as through screening or a thematic focus. They are similar to the FCA’s sustainable focus funds and thus a useful warning label. But it’s not quite as good because it uses the term “ESG” when the real enemy is “sustainability.”
Finally, the SEC gets itself twisted up in its own knickers with its “impact funds” by treating them as a subset of the former and completely confounding ESG and impact (i.e., sustainability).
Here’s the structure of the strategic alliance. The U.S. government would license from the FCA its three labels. Given the economic woes facing the U.K., I’m positive Prime Minister Rishi Sunak would enthusiastically sign this deal. Licensing the FCA’s labels would absolutely ensure that those not wanting anything to do with sustainable investing will have their hard-earned dollars protected. Fund managers would be forced to use these labels but they would come at NO COST to the U.S. taxpayer. The cost would be passed on to customers of sustainable fund products. If these pernicious progressives want sustainability, make ‘em pay 💲💵 💰for it!
To get the ball rolling on this the House of Representatives needs to pass the “Protecting The Right From Sustainable Investing Act.” Then it goes to the Democratic controlled Senate which says, “Okay, I’m good with this but you have to agree to raise the debt ceiling, so you won’t plunge America and the rest of the world into a recession.” This might be too much for Speaker McCarthy and his new best friends in The Freedom Caucus to swallow.
The Senate then plays the ace in its hand. In an act of patriotic American bipartisanship. It says: “Okay, forget the debt ceiling thing and we’ll worry about that down the road. Here’s the deal. Since we all want free capital markets where people can invest their money in whatever way the choose to do so, the Act must have language to the effect that investment firms offering these products won’t be accused of boycotting. Since we’ve protecting the right of the right against sustainable investing, we also need to protect the right of the left to embrace ii.”
And if the House isn’t willing to take up this legislation? “We’re too busy” is no excuse given the political capital they’re trying to generate with their anti-ESG campaign. The only real explanation is that this crowd really doesn’t believe in free capital markets. Rather, and disingenuously, they want to use the capital markets to impose their own ideology and restrict the right of all Americans to invest their money in whatever way they see fit. Fittingly and ironically, market forces will eventually deal with this purloined purpose.
In the meantime, get ready for some captivating political theatre (spelled that way on purpose in thanks to the FCA for its contribution to America) when the House Hearings on ESG commence. Hopefully soon since I’m coming to the end of “Yellowstone” and looking for more great TV entertainment!
Invoking “Yellowstone” demands I give a tip o’ the cowboy hat to Rep. Ryan Zinke (R-MT-1) who on the House floor ominously warned us that “ There is no doubt the federal government deep state coordinates with liberal activists and uses politicians and willing media to carry their water,” and “In many cases, they want to wipe out the American cowboy completely, remove public access to our lands and turn Montana into a national park.”
Be comforted, Rep. Zinke. Y’ain’t got nuthin ta worry about on that National Park thang, cowboy. I’ve got John Dutton on speed dial.