Innovation – Not ESG-Based Divestment – Will Solve Climate Challenges

May 6, 2021

For the last several years, large asset managers such as BlackRock and JP Morgan have increasingly shifted their business priorities. Instead of profit and shareholder value, it seems “environmental, social, and governance” (ESG) ratings now get top billing. At least, that’s how their public statements read. We’ve discussed at length about how ESG ratings are too arbitrary. They result in no accountability for executives in the C-suite. Worst of all, they hurt both shareholders and employees.

But despite the swath of evidence that ESG hurts more than it helps, financial firms have only grown bolder. Last year, BlackRock, which controls $8.7 trillion in assets, announced that it would divest from oil and gas companies. They chalked it up to their effort to combat climate change. JP Morgan quickly followed suit, and other companies look to be moving in that direction as well.

What doesn’t appear to matter much to these firms formerly drove all their investment (and divestment) decisions: shareholder returns. For decades, the oil and gas companies that will suffer from this policy have been great choices for stable, reliable stocks. That’s why millions of Americans have their pensions, 401(k)s, IRAs, 529s, and other investment accounts invested – at least partially – in oil and gas companies.

No doubt such divestment will have an outsized negative impact on states with the company’s headquarters. Texas has taken notice. Moving through the legislature in response is Senate Bill 13. If the legislation passes, Texas will divest any public funds from financial firms discriminating against the fossil fuel industry. The bill sponsor, Senator Brian Birdwell, put it more succinctly: “If you boycott Texas energy, Texas will boycott you.”

A Better Answer than ESG: Innovation

This is not to suggest that Texas’ answer of financial firm boycotts to protest energy boycotts is the right answer. Far preferable would be for asset managers to reverse course. Rather than doing what they can to injure these companies, financial firms would better accomplish their goals by allowing oil and gas companies to come up with innovative solutions to the environmental challenges we’re facing. They have a track record of that kind of innovation. As Senator Ted Cruz notes, the U.S. has been a global leader in reducing emissions. Meanwhile, countries like China, which enjoy a far less free market, have exponentially grown their carbon footprint over the last several decades.

Innovation and problem-solving are the bread and butter of American companies, including in the oil and gas industry. By putting their thumb on the scales in opposition to this industry, BlackRock, JP Morgan, and other financial firms only stack the odds against the very companies that are most likely to develop solutions to global climate challenges. All the parties involved – from BlackRock and JP Morgan, to oil and gas companies, even to the retiree living on a pension invested in Exxon – would be better off stepping aside. In doing so, they’ll be allowing innovation to accomplish the global climate solutions that financial firms simply cannot.