End of Week Notes

The Rise of ESG, Exxon ditches ALEC, and how a governor could have avoided a troubling investment

For weekend reading, check out “The Remarkable Rise of ESG,” by Georg Kell in Forbes. Kell provides a nice history and concludes with the claim that ESG, or sustainability, as a general concept, is becoming a way to think about and describe how markets, corporations, and society are changing:

The big challenge for most corporations is to adapt to a new environment that favors smarter, cleaner and healthier products and services, and to leave behind the dogmas of the industrial era when pollution was free, labor was just a cost factor and scale and scope was the dominant strategy. For investors, ESG data is increasingly important to identify those companies that are well positioned for the future and to avoid those which are likely to underperform or fail. For individuals, ESG investing offers the opportunity to vote with their money. And for policy makers, it should be a welcome market-led development that ensures that the common good does not get lost in short-term profit making at any cost.

Exxon quits ALEC over climate change

Bloomberg reported today that Exxon Mobil Corp. has quit the American Legislative Exchange Council over the group’s position on climate change. ALEC is a secretive operation heavily funded by the Koch brothers, fossil-fuel companies and other corporations with thousands of Republican state legislators as members. At ALEC’s winter meeting in Nashville last December, Exxon and Chevron opposed a move for the group to urge the federal government to stop claiming that climate change is a risk to human health.

ALEC has been called a “corporate bill mill” because its major activity is for corporate members to work with Republican legislators on model legislation that the latter then take back to introduce in their respective legislative bodies. ALEC keeps its corporate members a closely guarded secret. Why is that? Because member-companies like AT&T, Eli Lilly, Pfizer, UPS and a couple hundred others don’t want their customers and investors to know that’s how they are spending their time and money.

While Kell argues that ESG is a way of signalling which companies are well-positioned for the future, I’d say ALEC membership, which includes fossil-fuel, tobacco, for-profit education and prison companies, signals pretty much the opposite.

Gov. Rauner’s difficult predicament shows why politicians should be sustainable investors

Illinois Gov. Bruce Rauner has been fending off accusations that he is profiting from having a stake in a company that provides healthcare services to ICE detention centers, including facilities that hold immigrant families with children. Journalists and Rauner opponent J.B. Pritzker are using this to tie Rauner to the disgraceful Trump administration policy of separating immigrant children from their parents.

That’s a stretch, to say the least, that plays on widespread ignorance of some of the basics of investing. Pritzker, a billionaire himself, should know better. Glass houses and all that. Anyway, Rauner is invested in a private equity fund, GTCR Fund X, which, in turn, has invested in a company called Correct Care Solutions, which makes its money via contracts with prisons and immigrant detention centers. Although the fund is run by Rauner’s former firm, Rauner does not manage the fund and, since he’s been governor, a third party has been managing Rauner’s investments.

Many investors, large and small, can end up in similar predicaments. They trust their financial advisors to invest their money into funds, which, in turn, invest in companies. End investors often don’t know what companies are in the funds they own. Last spring, after the mass murder of high school students in Parkland, Florida, many investors were surprised and disappointed to learn that they were profiting from having stakes in gun manufacturers via their mutual funds.

Be that as it may, Rauner is the governor of Illinois, and there are ways to direct a financial intermediary to focus on investing in funds that pay attention to issues like these — by investing in companies that make their money ethically, that treat their employees well, and respect the environment. It’s called sustainable investing. In the end, investments do have impact beyond their financial return, so it’s a good idea for politicians who want to avoid this kind of embarrassment to invest that way.