Tangle - The ESG debate.

Episode Date: March 8, 2023

Last week, a Republican bill to prevent pension fund managers from basing their investment decisions on things like climate change cleared Congress, setting up what is expected to be the first veto of Joe Biden's presidency. Plus, a reader question about my view on prisons.You can read today's podcast here, today’s “Under the Radar” story here and today’s “Have a nice day” story here. From the Blindspot Report, a story the left missed here and a story the right missed here. Today’s clickables: Quick Hits (0:50), Today’s Story (2:30), Right’s Take (7:05) Left’s Take (12:47) , Isaac’s Take (17:48), Your Questions Answered (20:53), Blindspot Report (23:58), Under the Radar (24:37), Numbers (25:24), Have A Nice Day (26:12)You can subscribe to Tangle by clicking here or drop something in our tip jar by clicking here.Our podcast is written by Isaac Saul and edited by Zosha Warpeha. Music for the podcast was produced by Diet 75.Our newsletter is edited by Bailey Saul, Sean Brady, Ari Weitzman, and produced in conjunction with Tangle’s social media manager Magdalena Bokowa, who also created our logo.--- Send in a voice message: https://podcasters.spotify.com/pod/show/tanglenews/message Hosted on Acast. See acast.com/privacy for more information.

Based on Charles Yu's award-winning book, Interior Chinatown follows the story of Willis Wu, a background character trapped in a police procedural who dreams about a world beyond Chinatown. When he inadvertently becomes a witness to a crime, Willis begins to unravel a criminal web, his family's buried history, and what it feels like to be in the spotlight. Interior Chinatown is streaming November 19th, only on Disney+. The flu remains a serious disease. Last season, over 102,000 influenza cases have been reported across Canada, which is Chinatown is streaming November 19th, only on Disney+. yourself from the flu. It's the first cell-based flu vaccine authorized in Canada for ages six months and older, and it may be available for free in your province. Side effects and allergic reactions can occur, and 100% protection is not guaranteed. Learn more at flucellvax.ca.

From executive producer Isaac Saul, this is Tangle. Good morning, good afternoon, and good evening, and welcome to the Tangle podcast, the place we get views from across the political spectrum. Some independent thinking without all that hysterical nonsense you find everywhere else. I'm your host, Isaac Saul, and on today's episode, we're going to be talking about ESG funding, more specifically, what may turn into President Biden's first veto. Before we jump in, though, as always, we'll start off with some quick hits. First up, Starbucks founder and interim CEO Howard Schultz will testify before a Senate committee on the company's labor practices. Number two, President Joe Biden is going to host South Korea's President Yoon Suk-yeol on April 26th. Number three, Capitol

Police criticized Fox News host Tucker Carlson for releasing footage from the January 6th riot, saying they didn't get a chance to properly review the clips before publication. Number four, the Justice Department filed a lawsuit to block Jet Blue's acquisition of Spirit Airlines. Number five, Fed Chair Jerome Powell said the central bank is likely to have to increase interest rates higher than expected to continue to cool inflation. The Senate has voted to block the Biden administration from implementing an ESG investment rule, a mandate for retirement plans. Democrats Joe Manchin and John Tester broke with party lines and they sided with Republicans. President Biden is still expected to veto a bill that gets to his

desk. President Biden is vowing to use his veto power for the first time as president. And the target is a bill in the Senate that would no longer allow a Labor Department rule that does allow retirement fund managers to consider ESG factors when making investments on behalf of pensioners. The U.S. Senate voted 50 to 46 to adopt a resolution to overturn a labor department rule, making it easier for fund managers to consider environmental, social, and corporate governance or ESG issues for investments and shareholder rights decisions. Last week, a Republican bill to prevent pension fund managers from basing their investment decisions on things like climate change cleared Congress, setting up what is expected to be the first veto of Joe Biden's presidency. All across America, citizens rely on pension fund managers and asset management firms

to handle their savings. Since 2004, there has been a movement afoot for those managers to more strongly consider the environmental and social impacts of their investments. That movement got an injection of energy in 2021 when BlackRock CEO Larry Fink penned a letter to CEOs encouraging them to consider ESG. BlackRock is one of the quote-unquote big three asset managers, along with Vanguard and State Street, that manage some $20 trillion in assets. During Donald Trump's presidency, his administration issued a rule clarifying the 1974 Employee Retirement Security Act that required those overseeing pension and 401k plans to always consider economic interests ahead of non-pecuniary goals. In other words, the rule said that

investment must be based on positive returns over any other considerations. Under Biden, the Labor Department issued a rule that allowed retirement plans to consider climate factors and other ESG issues in their investment decisions. The rule went into effect in January. Republicans have largely argued that anyone making investment decisions for retirement funds should base them solely on whether they enhance savings and are working to ban the practice of considering ESG. They have introduced a resolution that would nullify the Biden administration's Labor Department rule. The House voted 216 to 204 to pass that resolution. With votes from all 48 Republicans and Senators Joe Manchin,

the Democrat from West Virginia, and John Tester, the Democrat from Montana, the Senate was able to pass the bill, 50 to 46. Democratic Senators John Fetterman, Dianne Feinstein, and Jeff Merkley were all absent from the vote, as was Republican Senator Mike Crapo from Idaho. Republicans used a tool called the Congressional Review Act to bypass the customary 60-vote Senate threshold to challenge a rule from the Labor Department. In effect, the Republican-passed resolution will prevent fund managers from basing their investment decisions on ESG factors primarily, but will not prevent funds from considering ESG factors altogether. This just simply says the primary criterion has to be the financial return on investment, Republican Senator Mike Braun,

who sponsored the bill, told Reuters. In 2022, ESG funds lagged non-ESG funds for the first time in five years when fuel shares soared. A Harvard analysis of the ESG rules notes that the rule Biden implemented is actually similar to a rule former President Donald Trump put in place in 2020, though both have been framed differently in the press. Part of the confusion is due to each having initially drafted stronger rules that were then compromised and pulled toward the center after a public comment period. From the analysis Harvard published, neither final rule singled out ESG investing for favored or disfavored treatment. The final Trump rule did not use the term ESG. The regulatory text of the final Biden rule refers once to ESG investing, but only to state that ESG factors may

be relevant to a risk and return analysis depending on the individual facts and circumstances. This statement is true for all investment factors, ESG or otherwise. Still, the prospect of Biden's first veto and the Republican-passed bill has set off a debate about ESG investing. Today, we're going to take a look at some of the commentary around that debate. First up, we'll start with what the right is saying. Many on the right criticize ESG and support Republicans' efforts to change the rule. Many on the right criticize ESG and support Republicans' efforts to change the rule. Some argue that ESG-focused investments have been performing badly, and funds focusing on ESG could endanger retirees.

Others say investors shouldn't be facing political and social pressure, they should just be focused on making their clients more money. The Wall Street Journal editorial board said the resolution protects worker savings from political investing. The Senate and House this week voted to overturn a Labor Department rule that lets retirement fund managers use worker savings for political causes, the board said. As Mr. Manchin explained, the rule lets retirement plan fiduciaries consider environmental, social, and corporate governance, or ESG, factors and prioritizes politics over getting the best returns for millions of Americans' retirement investments. The Biden rule reversed a Trump-era clarification of the 1974 Employee Retirement Income Security Act, which required retirement plan fiduciaries to consider solely

pecuniary factors that have a material effect on investment risk or return. ERISA, the Employment Retirement Income Security Act, is intended to prevent retirement funds from using savings for their own purposes. The Biden rule protects fiduciaries from lawsuits for considering ESG factors that could be relevant to investment performance, such as a company's greenhouse gas emissions or workforce diversity, the board said. This broad standard would essentially let managers invest retirement savings however they want. The rule would also augment the power of proxy advisory duopolist

Glass-Lewis and institutional shareholder services ISS by directing fiduciaries to rely on efficient structures such as proxy advisors managers that act on behalf of large aggregates of investors. ISS and Glass-Lewis are voting force multipliers on ESG shareholder resolutions. The rule would drive more savings into ESG funds that typically charge higher fees by letting retirement sponsors offer them as default options in 401k plans. Workers can opt out of default plans, but usually don't. Why isn't Mr. Biden lambasting ESG funds for charging junk fees? In National Review, Noah Rothman said Biden's ESG extortion was rightly rebuked by Congress.

In its recent updates, Apple iPhone introduced a clean energy charging feature. When engaged, it slows your phone's capacity to recharge its battery during your region's peak hours of electricity use, prioritizing renewable sources over on-demand fossil fuel-generated power. The practical effect of this feature is to slow the rate at which your phone recharges, which explains the spike in online inquiries from users who want nothing more than to turn the thing off. So-called ESG investing is the financial equivalent of the iPhone's green charging feature. It sacrifices the pursuit of returns on investment to one degree or another,

incorporating non-financial factors into the development of a portfolio. The goal of this practice is to reward firms that prostrate themselves before faddish progressive causes, from DEI initiatives to climate activism. Among investors who privilege their sense of personal gratification over their bottom lines, ESG investing is just another financial product, Rothman said. But transforming private finance into a vehicle for the pursuit of left-wing policy goals by non-political means isn't for everyone, particularly investors of limited means. Retirement fund managers, for example, are confronted with a conflict. They must now balance the social and political pressure to reward the firms progressives like and punish

those they don't against their fiduciary responsibility to seek maximum returns for their investors. Assets and sustainable investments are down by nearly half from their 2020 peak, from $17 billion to roughly $8.4 billion today. Maybe ESG isn't so sustainable after all. In Newsweek, former chairman of the Securities Exchange Commission, Paul Atkins, said activist investment puts millions of retirees at risk. With inflation soaring and investment returns falling, millions of retirees could end up with a smaller-than-expected retirement nest egg because their hard-earned savings will have been sacrificed for political causes, Atkins said. The final rule, which is set to take effect this month, will

undermine the decision-making principle that guides asset managers who have a fiduciary responsibility to maximize returns for workers and retirees enrolled in employee benefit plans. The demand for and prices of ESG-related investments have fallen in the wake of the COVID-19 pandemic and the Ukraine war as investors return to allowing market fundamentals rather than idealism to guide asset allocation. In December, it was reported that ESG funds suffered their first major outflows in a decade, suffering a 29% decline last year, more than 30% worse than non-ESG funds, he said. Nearly 80% of ESG products failed to keep pace with market index funds in 2022. The Labor Department announcement may be good news for struggling ESG funds,

but it could prove disastrous for the beneficiaries of retirement plans. Doing well by doing good seems a hollow promise. Federal bailouts and taxpayer-funded guarantees cannot go on forever, which makes investment returns all the more vital to the long-term health of retirement funds. The Biden administration has ample evidence that politicized investment strategies are not in the financial best interests of retirees. States have amassed more than $1.25 trillion in unfunded pension debt, thanks partly to politicized investment strategies that have hamstrung fund managers attempting to make up for the shortfall. All right, that is it for the rightist saying, which brings us to what the left is saying.

Many on the left support ESG and the Biden rule, arguing that it amounts to good asset management and profitability. Some say Republicans should support ESG and the freedom for investors to consider all factors. Others criticize ESG as corporate greenwashing and call for even more regulation than what Biden is proposing. The Financial Times editorial board called it good risk management. The rule only permits but does not compel managers to take ESG into account, and the president is defending sound investment principles, the board said. In some states, anti-ESG laws have been motivated by claims that asset managers are discriminating against powerful local industries, from oil and gas to coal or firearm

makers. The ESG industry remains flawed. It lacks clearly defined standards or measurement and performance, opening the door to greenwashing and other cynical practices. Compelling money managers to be bound by its dictates would be misguided. The White House rule contains no such compulsion. It merely allows fiduciaries to take ESG considerations into account as part of a prudent strategy, and asset managers increasingly realize that earning the best returns and avoiding losses means considering all risks and externalities related to any investment. Based on Charles Yu's award-winning book, Interior Chinatown follows the story of Willis Wu, a background character trapped in a police procedural who dreams about a world beyond

Chinatown. When he inadvertently becomes a witness to a crime, Willis begins to unravel a criminal web, his family's buried history, and what it feels like to be in the spotlight. Interior Chinatown is streaming November 19th, only on Disney+. The flu remains a serious disease. Last season, over 102,000 influenza cases have been reported across Canada, which is nearly double the historic average of 52,000 cases. What can you do this flu season? Talk to your pharmacist or doctor about getting a flu shot. Consider FluCellVax Quad and help protect yourself from the flu.

It's the first cell-based flu vaccine authorized in Canada for ages 6 months and older, and it may be available for free in your province. Side effects and allergic reactions can occur, and 100% protection is not guaranteed. Learn more at flucellvax.ca. Company values can be affected by more than just financial performance. A Biden veto will ensure company pension plans can take ESG into account. Republican-run states will still have the right to bar public pension funds from doing so, but they should be wary of how they exercise that power, the board said. An Indiana fiscal watchdog last month estimated that by restricting fund managers' options, a proposed state law limiting their use of sustainable investment factors

could reduce returns of the public pension system by $6.7 billion over a decade. Blocking some investment considerations not only amounts to interference in the market of a kind Republicans have long claimed to oppose, it could result in the opposite of what is intended. In the Wall Street Journal, Democratic Senate Majority Leader Chuck Schumer said Republicans should be all for ESG. Investing in a free market economy involves choice. There are 8,000 securities listed on U.S. stock exchanges alone. Investors take many different factors into account when evaluating their investment decisions. Three such factors, environmental, social,

and governance, also known as ESG, have recently gotten a lot of attention from some conservative Republicans, including Florida Governor Ron DeSantis, Schumer said. ESG opponents are trying to turn it into a dirty acronym, deploying attacks they have long used for elements of a so-called woke agenda. They call ESG wokeness. They call it a cult. They call it an incursion into free markets. We've heard it all before. I say ESG is just common sense. Republicans conveniently ignore something very important. America's most successful asset managers and financial institutions have used ESG factors to minimize risk and maximize their clients' returns, he said.

In fact, according to McKinsey, more than 90% of S&P 500 companies publish ESG reports today. This isn't about ideological preference. Investors and asset managers increasingly recognize that maximizing returns requires looking at the full range of risks to any investment, including the financial risk presented by increasingly volatile natural disasters, aging populations, and other threats that the public doesn't normally associate with financial modeling. Nothing in the Labor Department rule imposes a mandate. It simply states that if fiduciaries wish to consider ESG factors and if their methods are shown to be prudent, they're free to do so. Nothing more, nothing less. In Newsweek, Robert Reich said Republicans are right about ESG, but for the wrong reason. They call ESG investing woke capitalism

and portray it as an illustration of Democrats and liberals trying to impose their views on the rest of society, Reich said. You may be surprised to hear me say this, but Republicans are right about ESG, though they're right for the wrong reason. The problem with ESG isn't that it's woke capitalism. It's that corporate money has corrupted politics so much that our democracy can't effectively deal with many environmental and social concerns. CEOs and pension fund managers who tout their records on ESG are engaged in greenwashing, designed to burnish their brands and attract investors, including retirees, who want to believe they're doing good while doing well. But investors don't want to do good

at the expense of doing well, he said. They'd do more good donating that money to non-profits seeking to protect the environment and advance various social causes. Corporations and institutional investors won't deviate from maximizing short-term profits and shareholder returns unless required to do so by law. And even then, they'll do so only when the penalty for violating the law, multiplied by the probability of getting caught, is higher than the profits from continuing with the illegality. All right, that is it for the left and the right are saying, which brings us to my take. So I rarely say this on issues that we're covering, but this is one of the noisiest nothing burger stories I can remember dominating the pundit class in a long time. Everything I've

read about the volley of rules and rhetoric around them makes me think the culture war is just devouring some rather benign action from the Labor Department. In essence, the rule Trump implemented required documentary evidence that any ESG choices had to be economically indistinguishable from non-ESG alternatives. Biden's rule eliminated the added documentation and added things like the economic effects of climate change as a potentially relevant way to analyze the investment. Both of these rules still require fiduciaries to act in the best interests of the people whose funds they are managing. Neither of the rules prohibited or mandated ESG investment. The new resolution

passed by Republicans strikes down Biden's version of the rule, but, like the Trump-era rules, does not explicitly prohibit or mandate anything, it just shifts the emphasis. As Bloomberg's editorial board put it, the entire fight is less than meets the eye. So what's the big deal? It all feels like one giant head fake. Republicans are on the war path on anything they can call woke, which apparently now includes thinking about how, say, climate change might impact future investments. Maybe I'm a naive woke lib, but I'd prefer the people managing my money prudently considered risk, like the future of fossil fuels and the potential political blowback against investing in them. That just seems rational. I want my finances

to grow, and I think it's reasonable that considering ESG may actually aid in that goal. Meanwhile, liberals' unwavering attachment to all things ESG also seems silly. The truth is, as Robert Wright rightly noted, ESG has mostly been used to greenwash corporations' bad environmental behavior. Hans Tarparia wrote in a 2022 op-ed that Wall Street's current system for ESG investing is designed almost entirely to maximize shareholder returns, falsely leading many investors to believe their portfolios are doing good for the world. In theory, ESG feels good, the idea that you are making money and investing in companies that consider their moral or ethical impact on the world. In reality, the whole thing is basically a sham. So what we really have here

is an idealistic goal like ESG that is supposed to usher in some ethical corporate behavior, but really isn't doing that. Unfortunately, these ESG funds have performed badly in the last two years. Now, Biden and Trump have volleyed two rules that are more alike than they are different, and Republicans, in a vacuous virtue signal for their side in the culture war, have made a frenzied push to kill the Biden rule that favors an ESG movement, which is a vacuous virtue signal for his side in the culture war have made a frenzied push to kill the Biden rule that favors an ESG movement, which is a vacuous virtue signal for his side in the culture war. It's probably going to usher in

the first veto of Biden's presidency and leave the very similar to what Trump did rule in place. The whole thing, as my grandfather might've said, is a tempest in a teapot. All right, that is it for my take, which brings us to your questions answered. Today's question is from Jake in Los Angeles, California. Jake said, in your answer to a reader question, you say that you're pretty much convinced that prison isn't the best way to punish criminals. Out of curiosity, what is the best way to punish criminals? We could clearly do a number

of things to prevent people from becoming criminals, but some crime will remain. How do we punish or deter those individuals? So I had a lot of readers write in with some version of this question, like, you said you don't think putting people in prison is good, so what should we do? I don't have one good answer, and replying to this question honestly probably necessitates an entire podcast, which is something I'll put on my list of things to do. Briefly, though, I can tell you a few things I've observed. First, every year, about 600,000 people are released from state and federal prisons. Another 9 million are let out of local jails. Within three years, two out of three former prisoners are

rearrested and more than 50% are incarcerated again. To describe this as anything other than a massive failure would require being truly delusional about what we are doing. So everything I'm saying starts from the perspective that the system we have now is fundamentally broken. Roughly two million people are in jails in our country as I write this. Statistically, most will now be trapped in the penal system for the rest of their lives. Second, when I lived in New York City, I wrote about a program called the Doe Fund. If you live in a northeastern city, you may be familiar with them. They are the men and women cleaning streets or doing work on public property, often wearing blue uniforms. The Doe Fund is based

on the fundamental premise that work works. They give the homeless and formerly incarcerated people jobs and housing fresh out of jail or off the street. Their program drastically reduces recidivism rates among its participants. Third, we have many alternative methods for imprisonment aside from human-sized cages. The most common is house arrest. Another form is probation. Both allow the government to monitor people with criminal records, create some insulation between the public and violent offenders, and use strong deterrents to prevent future crime. But house arrest is much less profitable to the prison industry than imprisonment and, not coincidentally, is much less common.

When house arrest is used as a substitute for probation, there are real problems. But used as a substitute for jail, there are huge upsides. Namely, not locking a person in a cage, not separating them from their family or community, and not trapping them in a violent motel full of other criminals who inevitably become their community and sometimes criminal mentors. This is not to say prisons are always bad. Obviously, prisons can keep those of us on the outside safer from violent reoffenders. They can help someone get sober by cutting them off from substances they abuse. And the good ones provide treatment, education, and job opportunities. This is to say, though, that I think there are more imaginative alternatives out there

that get better results than what we are doing now. I'll have to write more about this in detail soon, but that's just a start. All right, next up is our Blind Spot Report. Once a week, we present the Blind Spot Report from our partners at Ground News, an app that tells you the bias of news coverage and what stories people on each side are missing. One story that left missed this week

was a proposal in Oregon to give homeless and low-income people $1,000 per month. There's a link to that story in today's episode description. One story the right missed was a proposal in Kansas that disability rights activists say will encourage employers to keep paying disabled workers less than minimum wage. There's a link to that story in today's episode description. All right, next up is our under the radar section. Last year's attack on the Nord Stream 2 gas pipeline has now been linked to a pro-Ukrainian group. A few weeks ago, we mentioned a theory floated by journalist Seymour Hersh and the criticism of that theory that the U.S. was behind the attacks. Now, the New York Times and a German national newspaper are both reporting that a yacht owned by two Ukrainian citizens is being investigated for sabotage. German prosecutors confirm they are searching for a vessel suspected of bringing explosives to the area where the blast

happened. There is no direct evidence or suggestion that the Ukrainian or U.S. government had any knowledge of the attack. The New York Times has the story and there's a link to it in today's episode description. All right, next up is our numbers section. The number of consecutive years ESG funds outperformed non-ESG funds before 2022 was five. years ESG funds outperformed non-ESG funds before 2022 was five. The amount of funds investors withdrew from the ESG stock bond and mixed asset funds between January and November of 2022 was $13.2 billion. The last time there was a new outflow of those funds before 2022 was 2011. The net drop in ESG funds between January and November of 2022 was 29%, and the net drop of non-ESG funds in that time period was 21%. The percentage of U.S. adults who said environmental issues were very or somewhat important to them when it comes to investments is 69%.

All right, and last but not least, our have a nice day story. All right, and last but not least, our have a nice day story. Amateur astronomers are being recognized for playing a role in affirming that NASA's Double Asteroid Redirection Test, or DART, was a success. In September, NASA's mission successfully ran a spacecraft into the Demorphis asteroid and redirected its trajectory. They were testing an asteroid defense system to protect Earth. Some 30 people across four continents observed the mission using their own unistellar smart telescopes from home, and NASA scientists used those observations to help determine if the mission was a success.

Now, those amateur astronomers are being recognized in a paper published in Nature as co-authors on the DART mission. The Independent has a story, and there's a link to it in today's episode description. All right, everybody, that is it for today's podcast. As always, if you want to support our work, please go to readtangle.com and become a member. You can also donate if you prefer. We'll be right back here same time tomorrow. Have a good one. Peace. Our podcast is written by me, Isaac Saul, and edited by Zosia Warpea. Our script is edited by Sean Brady, Ari Weitzman, and Bailey Saul. Shout out to our interns, Audrey Moorhead and Watkins Kelly,

and our social media manager, Matt Gwendoly-Bakova, who created our podcast logo. Music for the podcast was produced by Diet75. For more from Tangle, check out our website at www.tackle.com. We'll be right back. begins to unravel a criminal web, his family's buried history, and what it feels like to be in the spotlight. Interior Chinatown is streaming November 19th, only on Disney+. The flu remains a serious disease. Last season, over 102,000 influenza cases have been reported across Canada,

which is nearly double the historic average of 52,000 cases. What can you do this flu season? Talk to your pharmacist or doctor about getting a flu shot. Consider FluCellVax Quad and help protect yourself from the flu. It's the first cell-based flu vaccine authorized in Canada for ages six months and older, and it may be available for free in your province. Side effects and allergic reactions can occur, and 100% protection is not guaranteed.

Learn more at flucellvax.ca.