On November 18, 2022, The Hill published an op-ed by ATR Federal Affairs Manager Bryan Bashur. The op-ed discusses how ESG ratings are pushing capital toward firms controlled by the Chinese Communist Party.
The piece begins by noting that ESG ratings, along with the Biden Administration’s subsidization of electric vehicles, has misallocated capital to Chinese controlled firms and encouraged the politicization of retirement funds. It explains that there is no agreed-upon definition for ESG, and the effects of such a lack of clarity reveal themselves in the European energy sector:
“European-based ESG equity funds have been increasing their investments in firms like Shell Plc and Repsol SA since Russia’s invasion of Ukraine upended the energy markets.” ESG’s traditional exclusion of carbon-intensive companies suddenly shifted in order to ameliorate the supply crunch on oil and gas.
The article goes on to show that ESG ratings agencies all use different formulas and metrics to evaluate companies, disagreeing on major aspects like how environmentally conscious companies are. As stated in the piece:
The ratings are subjective, immaterial and lack concrete indicators that outline the true financial performance of a company.
The op-ed next details how Sen. Pat Toomey (R-Pa.), the Ranking Member of the Senate Banking Committee, and some academics have called for more transparency from rating agencies, saying that some of these companies use information that is not material or financially relevant under federal securities law.
The piece continues by showing how the state of Utah has been leading the charge to depoliticize the ratings, accusing one agency of giving a higher score to a Chinese state-owned petroleum company than an American one, regardless of Chinese human rights violations. The piece explains:
The subjective ESG ratings are facilitating the allocation of capital to Chinese companies with questionable business practices. The S&P China A 300 Sustainability Screened Index includes China Merchants Bank, which was accused of lending discrimination against African American neighborhoods in New York.
The op-ed also explains how the subsidization of the electric vehicle industry has allowed China to consolidate large swaths of the EV supply chain. ESG indexes include certain Chinese battery manufacturers that are owned by Chinese cobalt producers and use forced and child labor in the EV supply chain. Allocation of capital to index funds is encouraged by the fact that Congress passes legislation artificially propping up the EV sector. This is how it happened:
The Inflation Reduction Act offers tax credits on new EV batteries that require the use of critical minerals, including cobalt, that are largely mined outside of the United States.
This means that taxpayer dollars are bolstering a supply chain that relies on Chinese state-owned companies.
The article finishes by arguing that:
Ratings firms should be required to prove that their rating methodologies complement their customers’ fiduciary duty to their clients and only include products that consider the expected future financial returns of a company — not ancillary ESG factors.
The op-ed concludes by stating that Congress must continue to investigate ESG ratings agencies and consider drafting legislation aimed at preventing irrelevant information from being considered when evaluating companies.
Click here to read the full op-ed.