ESG is a type of investment grading system on which corporations are evaluated for their adherence to certain values — essentially a social credit score. Those values mirror many progressive bailiwicks like reaching net-zero emissions; promoting LGBT and minority-focused social issues, often described by the umbrella term “equity”; and unionization.
There is currently no centralized scoring system, and it can vary based on who is scoring. For example, BlackRock, the world’s largest portfolio manager, has its own scoring system.
Travis Stice — CEO of Diamondback Energy, a Midland-based Fortune 1,000 company worth $13 billion — defended the application of ESG practices in his company at the annual Texas Independent Producers and Royalty Owners (TIPRO) Association gathering. He said that the shareholders have demanded it and “It’s the right thing to do.”
Later in the day, two attendees remarked on Stice’s comments. “I was surprised hearing the Diamondback [CEO] talking as much ESG as he did,” one attendee said to another. “Five years ago, that would’ve been unthinkable.”
The other responded with, “It’s the public companies, man.”
Ed Longanecker, president of TIPRO, told The Texan, “[ESG] an important topic because many financial institutions are requiring these actions as part of their investment criteria.”
Among TIPRO’s members, Longanecker said the view of ESG varies. “Some see it as another attempt to burden domestic producers, while others have fully embraced it as part of their long-term strategy.”
ESG is in vogue right now, not least because of the weight thrown behind it within the boardrooms of the world’s largest companies.
The strategy — similarly constructed to the “Boycott, Divestment and Sanctions” strategy against Israel — is aimed at the purse strings of companies, not just oil and gas producers, who are tied to fossil fuels.
Because they have shareholders, public companies of all stripes are responsive to public opinion and market trends.
But the chase for ESG is also occurring from within. Through investments, ESG proponents can take hold of boardroom positions and push their priorities.
Similar to Elon Musk’s recent plurality purchase of Twitter stock and subsequent flirtation with joining the company’s board, an environmental activist hedge fund purchased $50 million in ExxonMobil stock and put two climate change-focused members on the board. Another was added shortly after.
This is referred to as “shareholder activism,” a strategy spurred by those who actually own stock in companies.
Another function exercised through shareholder activism is proxy voting. Third-party portfolio managers, like BlackRock or Institutional Shareholder Services, exercise proxy voting capabilities on behalf of their clientele, the actual shareholders of the respective company. This proxy voting power feeds the above-mentioned corporate board room effort as board members are elected by shareholders.
But rather than the individual pensioner who owns a relatively small tranche of stock voting on board members, these middlemen vote on behalf of their clients.
The election of those Exxon board members was aided by the support of BlackRock, State Street, and Vanguard — three large portfolio managers who voted by proxy on behalf of the actual shareholders they represent.
Another factor applying the financial pressure is the underwriter — the banks.
Banks across Europe cut fossil fuel company financing by nearly 30 percent last year. Pressure to do the same is increasing within the board rooms of the six largest U.S. banks — aimed at reducing current investments and spurning new financing deals for fossil fuel companies.
Reuters reported last year that the U.S. Federal Reserve would prioritize ESG-type metrics in their lending.
Climate activists are encouraging banks to require potential lendees to sign “sustainability statements” committing to ESG metrics.
While BlackRock and its competitor portfolio managers may control sizable portions of a company’s capital, for private companies seeking business loans, banks control 100 percent of the capital.
The flip side of that is “stakeholder activism,” a strategy aimed at the same objective, but spearheaded by public pressure campaigns. This is similar to what’s been occurring on university campuses across the nation for years — student groups, usually aided by outside activists, apply pressure to the university board of governance to remove any of its portfolio investments from entities unfavorable with the activist crowd. It’s played out with divestment from Israel and from fossil fuels.
Public pressure campaigns have not only been aimed at corporations but it’s also been something they’ve willingly joined.
Over 60 of the world’s largest corporations joined the Human Rights Campaign in publicly objecting to Governor Greg Abbott’s directive to the Department of Family and Protective Services to begin investigating puberty blockers on minors as child abuse. Stakeholder activism has tended to be sweeping, touching as many political and social issues as possible.
Of the companies that signed the Human Rights Campaign’s letter criticizing Governor Greg Abbott for directing the Texas Department of Family and Protective Services to prosecute gender transition procedures as child abuse, only a handful do not have ESG webpages on their sites.
Each also has Diversity, Equity, and Inclusion (DEI) pages, another item on the multi-pronged activism pitchfork prodding corporate boardrooms.
Texas responded to this growing trend by passing Senate Bill (SB) 13, with only 30 Democrats between both chambers voting against it. The bill requires the comptroller to evaluate the state’s investment portfolio for companies that hold fossil fuel divestment policies, and if found to remove that state money from those entities.
Texas Comptroller Glenn Hegar is currently eyeing 19 financial companies for violations of SB 13’s provisions, chief among them is the world’s largest investment company BlackRock. At the TIPRO conference, BlackRock President Rob Kapito swiftly denied the accusations against his company. He also defended ESG as a concept to the gathering of oil and gas executives.
“Let’s be serious folks. We need to protect our environment. So why can’t we figure out how to do both things and get better? ESG is just a framework. It’s not a demand.”
Kapito contended that they are only filling a desire from its clientele, echoing Stice’s comments about the groundswell of support from shareholders and other miscellaneous investors. Last year, investments into ESG-focused channels totaled $120 billion in the U.S., up 130 percent from 2020. Globally, it’s an even bigger trend, totaling $2.7 trillion last year.
But BlackRock CEO Larry Fink has insisted the company is actively pushing for behavioral change rather than passively following the direction of their clients. “You have to force behaviors [to change in companies.] At BlackRock, we are forcing behaviors,” Fink said at a 2017 New York Times forum on stakeholder capitalism and pushing DEI policies.
“If you don’t force behaviors, whether it’s gender or race … you’re going to be impacted [financially].”
It’s a “get with the program or else” push.
DEI and ESG are sister endeavors aimed at forcing changes in how companies operate, and fund managers like BlackRock are admittedly pushing them.
Longanecker stated that “ESG is here to stay.”
“As discussed during my session with Travis Stice,” he added, “even if those criteria went away tomorrow, most operators would still continue with these initiatives as part of their normal business practices.”
And that, Longanecker indicates, is the hand Texas’ oil and gas producers find themselves dealt: how to deal with the trend in front of them.
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Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.