The Impact of Pension Bills on the Municipal Bond Market

In this episode, Kelly Mitchell of journalistic watchdog group Documented discusses Republicans’ furious pushback against ESG funds due to their ostensible greenness, and the ridiculousness of said vehemence since ESG ratings are actually a poor reflection of companies’ true environmental impact.

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Text transcript:

David Roberts

For the last few years, the fastest growing segment of the global financial services industry has been ESG (environmental, social, and governance) funds.

Here’s how it works: one of several ratings firms uses its own proprietary formula to rate how well a company is responding to environmental, social, and governance risks. An environmental risk might be: will the county where you’re locating your data centers have sufficient water supply in coming years? A governance risk might be: have you filed all the proper disclosures?

Fund managers like BlackRock then gather highly rated companies into ESG funds, which are sold to investors as socially responsible. Hundreds of billions of dollars flow into ESG funds every year.

Note that there’s a bit of a shell game at the heart of the enterprise. What customers and investors generally think is that a company gets high ESG ratings because it goes above and beyond in those areas, that it is trying to “do well by doing good.” But in reality, high ESG ratings simply mean that a company is responding to material risks — maximizing its profits, as public companies are bound by law to do.

So Tesla gets no ESG credit for accelerating the electric vehicle market, but it can pull a low ESG rating (and fall out of ESG funds) over vulnerability to lawsuits over working conditions. (This is why Elon calls ESG “the devil incarnate.”) McDonald’s loses no ESG points for the enormous carbon impact of its supply chain, but it gains points for reducing plastic in its packaging, because regulations against plastic packaging are imminent in Europe.

So investors get to feel like do-gooders and big companies are rewarded for carrying out their legal obligation to assess risks to their business. There’s not much social benefit to the whole thing, but everyone feels good and green and happy.

Except now there’s a problem: Republicans bought it. The whole sales pitch — they believe it. They believe that companies in ESG funds are going out of their way to do social and environmental good … and they’re furious about it.

Over the past year or two, an enormous, billionaire-funded backlash against ESG has consumed the GOP, leading to multiple congressional hearings, hundreds of proposed state bills, and red-state treasurers vowing never to do business with woke lefty activist funds like [checks notes] BlackRock.

It is stupid almost beyond reckoning. And I’m just brushing the surface. To dig into the deep layers of dumb and where it all might go, I called Kelly Mitchell. She’s a senior analyst at the journalistic watchdog group Documented, which uncovered emails and other communications between the architects of the anti-ESG campaign that led to a New York Times exposé.

All right then, let's do this. With us, we have Kelly Mitchell from Documented. Kelly, welcome. Thank you so much for coming to Volts.

Kelly Mitchell

Thank you, David.

David Roberts

Kelly, when I first decided to do this episode, I started looking into it, thinking, you know what, this all seems kind of stupid. But what happened is as I dug in and explored it into the nooks and crannies, some of the background, some of the work you've done, some of the work Documented has done, what I discovered is that it is actually so much stupider than I ever could have imagined. The depth of stupidity here is remarkable. So I just want to thank you. I feel like you should get hazard pay for what you do. And I just want to thank you for immersing yourself in this. It must be wearying.

Kelly Mitchell

It is. It's like the Thunderdome of stupidity. But I'm glad we can talk about it.

David Roberts

Yes, let's talk about the levels. Okay, so let's bracket for the moment what ESG actually is in reality. We'll get to that later. Bracket for the moment the merits of the criticisms that conservatives have of ESG and let's just talk about what's happening. So I think probably normal news consumers are aware that sort of ESG, or the sort of boogeyman of ESG, has come up sort of out of nowhere and is everywhere now. So maybe just tell us a little bit about what has happened here, who's doing what and what are the bills? And tell us the phenomenon we're discussing.

Kelly Mitchell

Well, the current iteration of this phenomenon really kicked into high gear probably in about 2021. And there's been a long history of folks who have opposed corporate social responsibility, who have opposed any restriction on investment in things like coal or natural gas. But a lot of gasoline was thrown on the fire in 2021, probably for two major reasons. So first is that Larry Fink, the CEO of BlackRock, published two back-to-back letters to his clients, to corporate CEOs, basically saying that BlackRock, the largest investment firm in the world, was now going to consider climate risk as a fundamental investment risk and wanted CEOs to do the same.

And the second is that in May of 2021, an activist investor company called Engine 21 or Engine No. 1 rather, bought a small slice of ExxonMobil and used that slice to wage a battle to get new board seats on Exxon's board that would take into account climate risk and against a 100 million dollar campaign by Exxon. They succeeded. And they succeeded with the help of large institutional investors like BlackRock. And I think those two moments sort of broke a lot of people's brains. Wall Street is not supposed to be against the fossil fuel industry, it's not supposed to be against the right-wing apparatus.

And it provided this galvanizing moment for a lot of dark money groups to look for ways to mobilize state agencies and state legislatures against ESG.

David Roberts

Brains then broken, what do they start doing?

Kelly Mitchell

There's two fronts that open up. So first you see a big infusion of resources by groups like the Heritage Foundation by Leonard Leo's, Consumers' Research into weaponizing state treasurers to attack, quote, unquote, woke investing or ESG. And it's a smart play because state treasurers are people that nobody pays any attention to.

David Roberts

What are they? Maybe just take a minute and tell us. Like, I know that such a thing exists, but I couldn't tell you in a million years what they do.

Kelly Mitchell

Yeah. So basically they're in charge of managing large pools of money that the state uses to pay its bills for the long time, to receive tax money, to give tax money to folks who need it. And in that role they get to decide who manages that money, how that money is invested —

David Roberts

Pension funds and the like.

Kelly Mitchell

Exactly. And so there was this big opportunity to kind of utilize these folks to start pulling money away from asset managers that they believed were in some way boycotting fossil fuels or in other ways, looking down on disfavored industries.

David Roberts

Being woke.

Kelly Mitchell

Being too woke, not wanting to put their money into investments that were going to lose them lots of money. The worst woke sin of all.

David Roberts

Yeah, we'll get to that later. So then the right-wing activists get to the red state treasurers and what then? What happens?

Kelly Mitchell

So they start to do a number of things. They begin to organize these treasurers onto big sign-on letters to do things like block appointments to the Fed, to chastise members of the Biden administration for speaking out against oil and gas. But then they start to take more direct action. You see states like West Virginia and Louisiana start to send letters to financial institutions basically saying they're no longer going to do business with them. West Virginia stops doing business with JPMorgan Chase, they stop doing business with BlackRock because they believe that these companies have been unfairly targeting and blacklisting fossil fuel investments.

They also transform a lot of these treasurers into big mouthpieces for the movement. You see treasurers going on Fox News, writing letters in the Wall Street Journal, and they have this kind of air of authority because they manage money. They're going out and really criticizing woke investing from that role as a state elected official.

David Roberts

Yeah, and as I read about this, I think traditionally, based on our rapidly crumbling norms in this nation, state treasurers were quite nonpartisan. They were quite distanced from the whole politics fight. They were supposed to be sort of technocrats. But the young generation of conservatives, they're all creatures of Fox, they're all activists. And so now they're getting in those positions as well.

Kelly Mitchell

Absolutely. And that's basically the deal that these treasurers were offered. If you look at the State Financial Officers Foundation, it's sort of a trade association of Republican elected state treasurers and auditors. They basically said, "Look, we're contracting with communications firms. We have access to this whole web of right-wing organizations, you're a nobody state treasurer who anyone's ever heard of. But if you join this anti-ESG effort, we're going to get you on the news. We're going to boost your op-ed, we're going to provide you communications training," and suddenly people who no one would have ever heard of are becoming household names because they've dove into this culture war issue around ESG.

David Roberts

Yes, this is, I think, for young conservatives why you get into politics in the first place, right? It's to get on Fox News. That is the, you know, the sort of middle stage where you actually do policy and affect people's lives has just kind of fallen out of it. Now they're all just like, "What can I say? This outrageous that will get me on Fox News." What about legislation?

Kelly Mitchell

Yeah, so we saw the first round of anti-ESG legislation launch in 2021. A think tank called the Texas Public Policy Foundation basically drafted a bill. It was basically governed contracts in the state. So it said that state governments, municipal governments, can't contract with organizations that boycott the fossil fuel industry. That went into effect in September 2021, and it kind of became this great natural experiment for what the impact of these bills are. And I know we might talk about it later, but —

David Roberts

Yeah, we're going to get to that in a second.

Kelly Mitchell

We see this first bill come out in 2021. In 2022, we see another 16 states kind of dabble with these anti-ESG bills. But where it really took off was this year where there were about 157 bills introduced in 36 states. So a huge amount of legislation.

David Roberts

Is that every red state?

Kelly Mitchell

Just about, yeah.

David Roberts

I think that's almost all of them.

Kelly Mitchell

And plus yeah. So they absolutely flooded the legislative market with bills this year, sometimes introducing multiple bills within a single state to discover what approach might have the best chance of success.

David Roberts

People familiar with the operation of the right wing these days will not be surprised to hear that. ALEC, The American Legislative — what is it?

Kelly Mitchell

Exchange Council.

David Roberts

Thank you. The American Legislative Exchange Council is known, I think, at this point, for having these sort of template bills where you just fill in the name of your state. They have those bills for this, right? I mean, that's how they proliferate so quickly.

Kelly Mitchell

That's right. And this year, there are about five different buckets of template bills, model bills that were introduced throughout the country. Some, yeah, came through ALEC, the American Legislative Exchange Council. Others came from the Heritage Foundation. Others came from the Foundation for Government Accountability. It's been a really instrumental bill on rolling back abortion access and voting rights in this country. So bills were everything from the style that the Texas bill introduced, which was restricting contracting within the state. We saw a number of bills that specifically went after pension funds, either putting restrictions on what asset managers pension funds could work with or even more insidious, introducing language — this is what we saw in Florida, for example, this year — that said that pension managers can only consider what they call pecuniary issues, sort of fiduciary, financial-return-focused issues when making decisions. And the best case scenario, the bill is effectively worthless because pension managers are already required by law to only look out for the best financial interest of the state's pensioners.

David Roberts

Indeed.

Kelly Mitchell

But what it actually did was sort of redefine what it means to hold that pecuniary interest in heart and said that if you're looking at systemic risks that violates pecuniary interests, if you look at risks with some margin, of uncertainty that violates pecuniary interests. And if you look at just a broad suite of kind of environmental or social criteria that potentially could violate your pecuniary interest. So it's basically rewriting the rules of what risks an asset manager can evaluate or not. And that's the stuff that really, I think, scared a lot of folks in the state because hamstringing investors like that could have some really big consequences down the line.

David Roberts

This, I think, gets to a key feature of all this, which is that the sort of rhetoric is like you need to just be focusing on money but in reality it's saying you cannot consider certain risks.

Kelly Mitchell

Absolutely.

David Roberts

Like there are certain threats to the money that you're not allowed to listen to, which is very different, the sort of contradiction there. So this is very much something that was sort of born and germinated in big money, right-wing circles. Right. It sort of starts with these big money groups which then sort of they just push out into the states.

They have this machine basically if all the big money people get worried about X, they just push it out and suddenly it's like in every state government it's on Fox all the time. But this is clearly a sort of big money originated thing, right? There's no popular outcry here.

Kelly Mitchell

Absolutely. This is not a grassroots movement. I mean, I think if you polled any person on the street they would have no idea what ESG even was, let alone have an opinion about it. Yeah, this has absolutely come from you have Texas Public Policy Foundation which has been a longtime recipient of Koch money, of oil and gas industry money. Leading this you have the Heritage Foundation super deep pockets and then within all of this you have groups like Consumers' Research which have been propped up by Leonard Leo, most famous for buying a Supreme Court justice or two.

David Roberts

Buying a couple? Yeah, he's completing a set.

And what do you give a man who already owns half the Supreme Court? You get him onto some new culture war issue and you know, we know his organizations have been pouring millions of dollars specifically into this anti-ESG woke capitalism fight. So very, very deep pockets. A lot of dark money on the right launching this effort.

Yeah. Even more top-down than usual, I think.

Kelly Mitchell

Absolutely.

David Roberts

And it's interesting, they are pretty explicitly trying to replicate what they did with CRT. The whole critical race theory thing. They realize, like, CRT means nothing to anyone, but that means it's just an empty vessel that we can fill with all sorts of bizarre, paranoid crap. They're trying to do the same thing to ESG, make it sort of another one of these kind of right-wing buzzwords that means just anything bad you can think of.

Kelly Mitchell

Yeah, absolutely. And they've been in the situation where in recent years it's sort of fallen out of favor to be an outright climate denier. But now with ESG, they found this vehicle to sort of drag climate denial kicking and screaming into the culture war.

David Roberts

Same thing. You can't be anti-racist in public anymore, but you can be against CRT. You can't be sort of just outright anti-climate anymore, but you can be anti-ESG.

Kelly Mitchell

But you can certainly believe that ESG is part of a globalist cabal that's forcing climate action on all of us.

David Roberts

Yeah, but one thing I wanted to get clarity on before we move on is just this is something I don't think I really got a sense of reading around is are the amounts of money that red states manage material to a giant firm like BlackRock? Like I get there are sort of PR issues here and sort of like public — how things look. But just in terms of the quantity of money, is this something that's going to materially affect the financial industry?

Kelly Mitchell

The short answer is probably no. So in general, blue states, even though there are fewer of them, typically have much larger pools of money in their pension system than red states. And when you talk about a company like BlackRock, I mean, BlackRock has $9 trillion. That's an amount of money I don't understand. So one of the biggest pieces of action we've seen this year is that the state of Florida pulled $2 billion out of BlackRock and that was sort of the single largest withdrawal of funds that we saw from states in the last couple of years.

And $2 billion is a rounding error to BlackRock. But I think to your point where the real issue has been is that it has kind of created this chilling effect where now you see Larry Fink and BlackRock not wanting to use the words ESG. And now you have this completely bizarre phenomenon that the New York Times has dubbed "green hushing," where you see insurance companies, financial actors continuing the practices they had before of evaluating climate risk, of looking into environmental considerations, but just not talking about it anymore because they're afraid of the political attention that's going to get directed their way. So, yes, on a dollar for dollar basis, BlackRock has more money under management today than it did when this campaign began, and it'll probably have even more next year.

But I think folks just don't want the ire and they don't want the spotlight.

David Roberts

Yeah, this is just a classic example of a very small group of people with extremely unrepresentative views and interests just having the raw money to make a lot of noise and just look bigger than they are. Right, you see this over and over again. They make so much noise that somebody in BlackRock is like, well, I just don't want to deal with it. You just would, like, at some point, they just run this same scam over and over again. At some point, you'd like some leader of a big institution like Larry Fink to just say, you know what?

There aren't that many of these people. They don't represent anyone. Screw them. I don't care. But no one ever does. They're so easy to intimidate.

Kelly Mitchell

Absolutely.

David Roberts

These big leaders are —

Kelly Mitchell

If I was in charge of $9 trillion, I think I would feel a little more confident.

David Roberts

Like, I own you people. I could crush you. Yeah, I don't get it. So I want to go through a couple of amusing aspects of this whole thing. There are several. One is it seems like it's mostly been a flop so far, both with the public and even with red state business communities. So maybe tell us a little bit about what we know about polling and what we know about how the actual financial institutions in these red states are taking this.

Kelly Mitchell

It's been a deeply unpopular effort, I think, for its attempts to copy CRT. It hasn't hit in the same way. So first off, if you poll folks about should the government be intervening to limit investment decisions based on ESG? It's a pretty unpopular thing. I mean, even among Republicans, I think about 70% of polled Republicans oppose it when they're asked about it, and polling can be what it is. But I think in this case, the proof is in the pudding in terms of how this stuff played out in the state. So 165 bills, 83 of them dead as a doornail.

Some that are sort of lingering on to maybe continue into the next legislative session, a few that are pending and haven't quite had committee hearings. But overall, this hasn't been a slam dunk. And as much as I wish it was because maybe environmental advocates were showing up in these state houses, a lot of the opposition has come from the banking community, from chambers of commerce, and from pension managers in these deep red states. And they have been coming out hearing after hearing after hearing with strong language to oppose what's happening in these bills. The bankers are worried about compliance risks and costs.

The Chamber of Commerce see this as a huge assault on the free market. Pension managers are worried about how this is going to reduce returns for teachers and firefighters over the next ten years. Even in the state of Wyoming, we saw the Wyoming Petroleum Association come out to oppose the bill because they even thought it went too far because some of their members have some methane emissions plans and work, and it's helped them to attract some financing and they don't want to put that at risk.

David Roberts

Right.

Kelly Mitchell

We're talking about states where Trump won by huge margins and they're coming out in force to oppose these bills.

David Roberts

You're threatening the money. It's like one thing when you're like, waving bloody flags and causing parents to go yell at school boards, but you're starting to step on the money here. And that's —

Kelly Mitchell

I mean, a lot of money. So in some of the states that had bills specifically around pension funds, like I was talking about earlier, those often came with the highest price tags. So in the state of Indiana, their pension board system said it would reduce pension incomes by over $6 billion. In the state of Kansas, they said $3.6 billion in reduced pension returns.

David Roberts

You mean if these laws are passed.

Kelly Mitchell

If these laws are passed, yeah, because it's going to restrict who they can do business with, and it can restrict the amount of risk that they can continue to evaluate when making investment decisions.

David Roberts

There was a study maybe that's what you're referring to, was it in Texas, where they sort of because Texas passed this bill and then they measured the increase in borrowing costs. It's not theoretical. It's been detected.

Kelly Mitchell

The effects yeah, that was the benefit of Texas going first is we got to see what the real life impact of these bills are that restrict contracting. And University of Pennsylvania Wharton School did a study on the municipal bond market in Texas before and after this bill, and they found that within the first eight months of implementation, it cost those municipal governments almost half a billion dollars.

David Roberts

Good grief.

Kelly Mitchell

And if you're talking about small towns in Texas, like an extra million or $2 million you're paying to service a bond, I don't understand how these legislators go to these folks and say, "Oh, you're not going to build your library this year, but guess what? We really stuck it to the globalist cabal." So it's all good guys.

David Roberts

Yes. It's amazing. It's such a punching yourself in the face phenomenon, right? That's just one of the levels of stupidity here, is like, even if the bills passed, none of the hated targets will be inconvenienced in the slightest. Like no one is going to be hurt by this that they're trying to hurt. They're literally just hurting themselves.

Kelly Mitchell

Right. They're literally just like reducing the amount of money a firefighter can retire on, having a little less money for roads in a small town somewhere. And all just to make a political point in the culture war.

David Roberts

So the business community hates it, the banking community hates it, the public hates it. The attempt to replicate CRT is not working. Another amusing aspect of this, I thought, is that if you could go back five years, ten years, and make your index fund hyper woke by taking all the oil companies and gas companies out of it, you would have performed like gangbusters these past five to ten years. Like energy stocks have been for s**t these last five to ten years.

Kelly Mitchell

Absolutely. I mean, oil and gas was the worst performing sector of the entire market in the 2010s. Like, you would have been better off, yeah. Just taking your money and putting in a pile and lighting half of it on a fire than investing in a lot of energy companies during that period. We saw hundreds of bankruptcies during that time. So, yes, it would have been a much sounder investment philosophy in 2010 to pull oil out of the equation.

David Roberts

Yeah. If you had gone woke, you wouldn't be so broke.

Kelly Mitchell

Absolutely.

David Roberts

Which is hilarious to me. Another amusing aspect: Our favorite presidential candidate, Vivek Ramaswamy.

Kelly Mitchell

Oh, yes.

David Roberts

People might sort of know him peripherally. He's one of these Republicans running for president, and he's sort of made his name by being kind of the lead anti-ESG guy, the lead critic of "woke capital," upon which he allegedly has some credibility because he's a finance guy, he's a money guy. So it turns out, I couldn't believe this, it turns out he runs a fund that he wants states to do business with. Like, he's literally a competitor in this space trying to work up this hysteria to hurt his competitors. It could not be more like it's not even hidden.

Kelly Mitchell

Yeah. To his credit, he's the most transparent grifter in this entire fight. His whole story is amazing. Right. So he founds this pharma company, and then after BLM takes off, he has to quit because it's so hard to, I don't know, say true things. After BLM —

David Roberts

He's one of these guys who cancels themselves because he just knew he was going to get canceled.

Kelly Mitchell

Right. He pre-canceled himself to go become an anti-woke crusader, and then he really immerses himself in the dark money. Right. So he's a frequent guest at Heritage Foundation. He's part of Teneo, which is another Leo Leonard sort of vehicle for young, up and coming culture warriors on the right. He embeds himself with the State Financial Officers Foundation and starts making all these connections with state treasurers, and then he decides to, I'm sure by coincidence, launch his own investment firm, Strive Asset Management. And then we see in case after case, how he uses the relationships he formed through the State Financial Officers Foundation with treasurers through Heritage to gain kind of special access to pension fund managers.

So you can look at all these emails with pension fund managers where he's getting a special introduction from the treasurer and they're talking about how fun it was that they all had that steak dinner together. And then he goes before these pension fund managers to pitch either his proxy advising services. So he'll help you kind of vote your shareholder resolutions or he'll hold on to your money and directly invest it. So he's playing both ends, sort of churning up the anti-woke sentiment and then trying to find a way to profit off of it.

David Roberts

Yes. And the state of Indiana went for it.

Kelly Mitchell

Yeah.

David Roberts

Their pension fund is now signed up with what is it? Strive.

Kelly Mitchell

Strive Asset Management. Yeah, they signed up for the proxy advising firm and a reporter out there was able to get a leaked copy of the contract and it included a $4,000 per hour fee for Vivek Ramaswamy's personal consulting services. Good work if you can get it.

David Roberts

I know. So he's out on Fox stirring up anti-ESG sentiment, then going with his own fund to hoover up that business and subsequently making $4,000 an hour advising Indiana. Even by our degraded standards these days, such a transparent grift. And nobody says "boo". Like, he's on the team. So boggling.

Kelly Mitchell

Absolutely.

David Roberts

Okay, so you've got this massive anti-ESG movement that's sort of stirred up by the right-wing money people through the right-wing money groups, through these treasurers in red states, opposed by the public, opposed by the red state business and banking community, a failure. Where it succeeds, where it is passed, it just causes states to lose money without hurting the woke targets at all. And it's just sort of the site of an amazing amount of grift. So just like all that together just makes it such a perfect crystalline example of conservative politics circa 2023. So let's talk about then, just briefly, because this is, I think, the real mind blower and something that a lot of listeners probably don't know. A lot of —

I think a lot of people even involved in this argument don't know, which is what is ESG really doing? What is it really? Because I think people have the impression that you take your company to these ESG ratings firms, right? There are these firms out there that will assess your company and give you an ESG rating. And if they give you a high rating, then you can be part of an ESG fund. And there's tons and tons and tons of money flooding into these funds. So there's reason to want to be highly rated on ESG. These ratings firms, the sort of intuitive understanding that people on the street have is the rating firm goes and looks and tries to find out, are you a do-gooder? Do you have sort of like charitable initiatives? Like, are you doing good things on race? Are you doing good things on climate because of the goodness of your heart? And if you are, then we'll give you some points, right, so that the people who rate high on ESG do so because they are do-gooders, that are doing good in the world. That, I think, is people's intuitive understanding of what ESG is, but that is, in fact, not at all what ESG is.

In fact, ESG is how you react to risks to your business posed by environmental, social, and governance issues. So, for instance, I'm sorry I'm ranting here, but this blew my mind as it sank in. Like, McDonald's, for instance, is highly rated in ESG funds. Why? Because they're doing something on plastic packaging. Why does that get them a good rating? Not because they're doing it out of the goodness of their heart, but because a bunch of European countries are contemplating regulations on plastic packaging. So McDonald's is reacting to a business risk by paying attention to its packaging, whereas McDonald's is an enormous source of climate pollution throughout its supply chain.

But according to the ESG ratings firms, there's no imminent threat of regulations on that stuff that might affect McDonald's. So the fact that McDonald's isn't doing anything on climate is neither here nor there. It just doesn't affect their rating at all. The climate is immaterial to their rating because it's not currently posing the business a risk. So it's literally the opposite of what people think. These are not out of the goodness of your heart, do something good for the world. It's literally assessing businesses based on whether they are responding to risks. But do people who are following this fight get this, even like the pro ESG people?

How well understood do you think this is?

Kelly Mitchell

I mean, I think this is the layer where the entire ESG story jumps into absolute brain melting territory.

David Roberts

That's just why I'm ranting. I can't even —

Kelly Mitchell

I will give a shout out to Kate Aronoff at the New Republic, who I think has probably done the best piece so far on this. Just this whole idea of the right coming after this "woke investor class" when obviously no such thing exists. To the extent BlackRock or any of these guys are talking about climate risk, it is recognizing with eyes open that the world is decarbonizing. So depending on what industry you are in, how is that going to affect your bottom line? It's recognizing that the climate is changing in different ways. And if you have operations perhaps near a coastline or in a floodplain or in an area where wildfires are sparking up every five minutes, that's going to have a real impact on your business.

It recognizes that there's an incredible amount of public political pressure for new regulations. The plastic stuff you mentioned that is eventually going to change and that the companies that are aware of these risks and can adapt to these risks and are taking the proactive steps now are the companies that are going to be successful in the long run. This is all in service of people continuing to make more money. And ESG overall, I think has been a pretty great thing for the oil industry because there are these rating agencies and each of them kind of have their own sort of standards and metrics that they use.

David Roberts

Yeah, we should just pause to say people take these ESG ratings for granted. But these are mysterious black boxes. They're just, private firms, who do not even tell you, who do not even necessarily have to tell you what criteria they're using.

Kelly Mitchell

And they all use different criteria. So I think in this muddiness, right, in the muddiness of having different rating agencies, in the muddiness of no one understanding what ESG even means, oil companies are kind of in the sweet spot right now where they get to put out their methane reduction plan. They get to put out their 2050 net zero plan. They get to kind of speak the language of risk and responsiveness, but they don't really have to do anything because at the end of the day, as of today, this moment, there is no government agency that's going to come and round you up and put you in cuffs if you're lying about your ESG plan.

And so oil companies have kind of had the best of both worlds in some ways, where they can speak the language of sustainability via ESG without really having to do anything. And banks get to do the smart bank thing, which is evaluate risk, but they still get to pour billions and billions of dollars into oil and gas companies because they can make the claim that there's no existing regulation that makes that too risky of an investment for them.

David Roberts

Right. And then when there are regulations, which are a bunch happening on methane, right, methane is subject to furious regulation all over the place. Of course, oil companies have to do something about it. They have to. They literally have to. And yet they all get brownie points on these ESG funds for doing the thing that they have to do. So it's not like the ESG funds are saying you are going above and beyond on methane. You oil companies, so you get extra points. It's just like you're responding to this obvious looming risk, here are some brownie points.

And they're all doing it. So they're all getting the points for it, right. So it's not you're even distinguishing among and between oil and gas companies on this?

Kelly Mitchell

No. And it's like when I ask my kids to clean their room or take the trash and they're like, well, what are we going to get out of it? I'm like, that's just the rule of living here. You don't get points for it. The stuff we reward these guys, we're just basic compliance with the law. We're like, wow, you're really stepping up.

David Roberts

You get points for not breaking the laws.

Kelly Mitchell

Right? But I think it speaks to sort of another fear that has animated the ESG stuff. So I spoke to the Larry Fink letter and the Engine No. 1 letter. But the other kind of looming threat that is driving a lot of this anti-ESG work is the threat that the Securities and Exchange Commission is actually going to throw a wrench in this plan and put in place some requirements that will force companies to disclose their emissions in a much more rigorous way and to actually have some teeth and enforcement behind ESG claims as we started to see in Europe. I mean in Europe, if you lie about your ESG goals, they do come and lock you in bank jail or whatever you do.

But I think the fear of our government through the SEC actually starting to take some action and move ESG out of this black box amorphous "We're just just making sure companies evaluate risk" and actually force companies to put plans on the table that they're going to comply with and to really disclose the emissions impact of their products when used as directed. That stuff is scary and it's probably the place where for all the hilarity of the anti-ESG movement, what a disaster this has been in the states, what a disaster it's been in congress when they've tried to hold hearings. The one place where potentially it has had some impact is that it has given the illusion that there is enough resistance to climate action in the financial sector that maybe the SEC should be a little more cautious in implementing rules or maybe congress, because this is a hip new culture war thing, maybe congress should pitch back.

David Roberts

There are sides and if the SEC does something it's taking a side exactly.

Kelly Mitchell

It moves it out of that risk management, let's keep our financial system in working order space. And now suddenly the SEC having a disclosure requirement becomes a culture war issue. And that's where potentially things get a little less hilarious than the bulk of the anti-ESG movement.

David Roberts

Well, one background question that I think occurs to a lot of people right around at this point in the discussion, which is if in reality ESG is just businesses responding to material risks to their bottom line, why is it a special thing? Why isn't it just part of the natural operation of business?

Kelly Mitchell

Yeah, it should be part of the natural operation of business. I think the biggest issue is that it's really easy for businesses to do that when there are these immediate, time-bound, practical, tangible risks. Like if you know that a road is going to be built near your factory, you can have a plan for that. I don't know why that's the best example I can think of a tangible material risk. But when it comes to some issues like climate change, or if you have some issues like addressing some really big disparities around race or gender in the workplace, they're so big.

And the time horizon is so long, that I just don't think companies are very well built to figure out how to integrate that into their business decision. So in the best case of ESG, if you're steelmanning ESG, it actually provides a framework for companies to try to evaluate some of those really kind of long-term risks in a way they're not typically suited to do.

David Roberts

And I think you could fairly say that just the way public opinion is moving and the way sort of advanced democracies are moving. There's just more attention to these issues.

Kelly Mitchell

Absolutely.

David Roberts

More regulations, more laws, more action. And so it's just, I think, areas that corporations traditionally were just not that cognizant of, didn't have to be that cognizant of. So I think that's why it sort of has this sort of air of novelty to it, because it is a little bit new for them to be caring about this.

Kelly Mitchell

Definitely. And they have to, for better or for worse. Yeah.

David Roberts

And they have to, which is the most cosmically, stupid — oh, and this is also a good time to — I opened this up on Twitter and the one question a ton of people have because this is sort of one of the times when ESG broke the surface of the news cycle and kind of poked itself into everyone's attention. Which is why Tesla lost its ESG rating. And then Elon Musk subsequently comes out — what I forget his exact words.

Kelly Mitchell

Like ESG is the devil, I think is literally a tweet.

David Roberts

Yeah, the devil incarnate. That was it. There you go. So people were confused by that, because people have it in their heads that ESG ratings are just a rating of how good a company is for the environment and society. Right. Which is not, again, not what these ratings are. So, like, if there are no imminent regulations forcing people to switch to EVs, then there's no brownie points for making EVs. Right. Whereas what they got dinged for was the race stuff. Right. Which is a material threat that they are not responding to.

Kelly Mitchell

Yeah, I think that too. And then there's the G, which I think is the piece of ESG that no one really likes to remember is there, which is governance. And that covers really basic issues like, do you have an independent board of directors or is it all your dad's golf buddies? And Tesla has suffered from some very serious governance issues.

David Roberts

Yes. Are you making massive decisions on the fly on Twitter, half-joking might be like a governance issue. For instance, as you say, these dumb critiques of ESG tend to occlude the reasonable critiques of ESG, of which there are many. One of which is just, why is this a basket? Why are these three things in a basket together? It just muddies everything for them to be mushed together like this.

Kelly Mitchell

Yeah, it's really wild, actually. So the whole reason we got started looking at this anti-ESG work back in 2020, 2021 —

David Roberts

Say briefly what Documented is doing and how you ... I forgot to ask that early on, but sort of how did you dig up stuff on this?

Kelly Mitchell

So, Documented is an investigative watchdog group. We cover oil and gas issues, but also sort of democracy issues, things like voting rights and just the large influence of the dark money right. Increasingly creeping over our politics. And with this issue in particular, the way we came about the anti-ESG movement is for a while, we were attending industry conferences for the oil and gas industry, and we were noticing this trend that at every conference there would be some presentation from an ESG consultant that was actually there to talk to the oil industry basically about how to boost its ESG scores.

And they would say things like, ESG doesn't have to mean green. It's just about saying this in your document and saying this in your document. And say —

David Roberts

It hardly has to mean anything, really.

Kelly Mitchell

Exactly. It was all about how the oil industry effectively could kind of game the murkiness of ESG to attract more investments. And so we were following that for a while and about to potentially do a little write up exposé on some of those consultants that were making big money from this. And then, yeah, it was kind of around that time, that 2021, 2022 space, where suddenly the script flipped. And it wasn't really necessarily about how to game ESG anymore. It was about how ESG is sort of a threat to democracy and low energy prices and the stability of America.

And it got politicized just really quickly. And so that's kind of where we started, just filing thousands of public records requests and tracking how this was playing out in different states.

David Roberts

I don't know if this is like a function of me paying more attention these days than I used to, but it seems like the scheming of the evil empire has just gotten less and less hidden. These emails you have uncovered are just like, I don't know, they're all in a bubble together, so I guess they just don't no longer feel any need at all to kind of, like, use euphemisms or to disguise what they're doing. It's all very straightforward. So let's talk about these hearings, because nothing really came of them. But I feel like we just need to at least spend a minute on how dumb these hearings are, even, again, relative to our degraded baseline standards for how dumb a congressional hearing can be, these were some spectacularly dumb hearings.

Some of the accusations in these hearings. Are just —

Kelly Mitchell

Yeah, so the house oversight committee held two hearings in the last month or so on ESG, and, oh, man, they were a mess. So to start off, the star witness in the first hearing was the attorney general of Alabama, Steve Marshall. If for some reason the attorney general of Alabama is familiar to you, it's because he's been sort of a longtime leader in the Republican Attorneys General Association, including heading up the org that sent robocalls directing people to the January 6 insurrection. So he has a couple of questions about the election, but he's here to tell us the facts on ESG.

David Roberts

He's just asking questions. Yeah, he's an attorney general. Not, we should just point out, say, pension manager or no, someone in the financial industry. Someone who knows anything about the financial industry.

Kelly Mitchell

No, but he has some feelings about cabals. Basically, the testimony from the attorneys general, who were their star witnesses and the members of the Republican caucus was like a bingo card of culture war catchphrases. Like, we had to talk about Bud Light and Dylan Muvaney. We had to talk about a cabal of global elites.

David Roberts

Oh, the SVB. The bank.

Kelly Mitchell

We had to talk about that bank.

David Roberts

That only went under, as we all know, only went under because of wokeness.

Kelly Mitchell

We had Representative Grothman worried that ESG meant that certain men of, quote, European descent would no longer be able to get jobs in this country.

David Roberts

This is what we all know ESG is moving toward, not allowing corporations to hire white people anymore.

Kelly Mitchell

Exactly. My favorite, though, was Lauren Boebert. She described with a complete straight face, BlackRock, not as the world's largest asset manager, not as the world's second largest investor in fossil fuels. She described them as a left-wing activist fund.

David Roberts

$9 trillion. Imagine if lefty activists had a $9 trillion fund on their side. Just imagine the possibilities.

Kelly Mitchell

Oh, man. So, yeah, they basically brought out all the hits. I think they probably had to pinch themselves under the table to not say, like, the Jews and just talk about global elites and their secretive cabals instead. I mean, the anti-Semitism was certainly dialed up to ten on this one.

David Roberts

So there's the cabal, and they're saying insofar as they're making any tangible accusations, they're trying to say to their base that these companies like BlackRock are boycotting fossil fuel companies, gun companies, agriculture companies, all the companies that are crucial to the heartland, et cetera, et cetera, et cetera. And just, you know, they're not.

Kelly Mitchell

They're definitely not at all. Yeah. I mean, look at any major oil company in this country, and look at who the top investors are, and it's all the companies that are supposedly boycotting them.

David Roberts

This is a hearing that Katie Porter, who has been to her share of hearings, called the stupidest hearing I've ever been a part of, which is, if you can get that out of Katie Porter, who's sat through a lot of dumb hearings, that's very impressive. So I just hardly know what to say about it. So is anyone in charge over there? And if so, what do they want out of this? As we've seen, insofar as they succeed in any of the things they're trying to do, it does literally nothing but hurt their own states. It just makes borrowing more expensive.

It just makes running the pension fund more expensive. It increases the bills for municipal budgets. Is there a discernible goal here?

Kelly Mitchell

Any goal would be a little bit of speculation on my part, but that's why you come on a podcast. So you can just wildly speculate —

David Roberts

Wildly speculate here that's what we do.

Kelly Mitchell

I think for a lot of the individuals involved, to them it's like a ticket to higher office, quite frankly. We talked about how the treasurers have gotten communication support through doing anti-ESG work. So Riley Moore of West Virginia is riding his recent anti-ESG fame to make a congressional bid. There's a number of places where you're seeing state reps and treasurers who have been on the forefront of this anti-ESG movement seek higher office, governor's offices, AG's offices. So I think for them it's really a personal branding issue. It gives them a stake in the culture war for their base.

And then I think for the folks with really deep money, like the Leonard Leos of the world, the folks who are running some of the bigger dark money groups like Heritage, it potentially accomplishes a couple of things. Like Leonard Leo has talked about how he basically wants to build a Federalist Society for everything. It's not enough that he built an organization —

David Roberts

What a nightmare phrase that is.

Kelly Mitchell

It's terrifying, right? And he sees himself saying "Okay, I was able to do this for the courts. I was able to cultivate young lawyers, young judges through the Federalist Society and then eventually" —

David Roberts

Widly successfully.

Kelly Mitchell

Wildly successful. And now he's saying, okay, well how do we do that in entertainment, how do we do that in finance? How do we do that in other areas of government? And so I think this is potentially a bit of a little salvo for him to see how he can sort of cultivate and deploy his own network.

David Roberts

Get some drones into the financial industry.

Kelly Mitchell

Or boost the profile of actors like Vivek Ramaswamy or these are sort of state treasurers that he wants to have a long term stake in. And then I think from the perspective of the oil and gas industry, they've had a really interesting role in this. They're not the folks who are on the ground lobbying for these bills. They are not the folks testifying in Congress. They've actually been quite quiet on the anti-ESG stuff, I think, because they want to have their cake and eat it too. Like they like the ESG apparatus for what it's able to get them in the near term and muddy —

David Roberts

They're pulling in all kinds of investment through it.

Kelly Mitchell

Exactly. So they're not going to cut off that gravy train just yet.

David Roberts

Just literally the opposite of what Boebert et al. are saying. They're saying ESG channels investment away from oil and gas and ESG literally does the opposite by doing these notional mild steps, many of which are required by regulation anyway. Oil and gas companies get more investment, extra investment.

Kelly Mitchell

But what I think they do like is people in state houses, people in Congress falling on a sword to talk about how the worst thing we could ever do as a society is cut off financing to the fossil fuel sector, whether or not that's what ESG is doing at all. You have these champions of investing in industry now in all of these states and you have a lot of resistance within Congress to SEC regulations around climate disclosure. And so what I think that the fossil fuel industry has gained in this process is just creating potentially some new champions and potentially creating a little bit of doubt among the Biden administration and other regulators about how —

David Roberts

Spooking people.

Kelly Mitchell

how aggressively, exactly, they can move on this front. And so I think that will be something that's paid dividend. We haven't talked about it quite as much, but it's like we know that American Petroleum Institute has been in the mix with the treasurers a bit. We know they're coming out now publicly in favor of a bill that's going to be marked up this July in Congress around these issues. So they are starting to creep into the mix a little bit here through the trades. But I think the world is better for them when there are more people who want to block action on climate change.

David Roberts

Yeah, I wonder that's the calculation for them, the sort of tangible benefits of ESG as currently operating for them versus the sort of more difficult to quantify, but possibly quite larger benefits of just kind of shifting society away, spooking society away from taking climate seriously.

Kelly Mitchell

Exactly.

David Roberts

A real devil's bargain there. So I just want to pause to say, like, yes, there are some of those potential benefits attenuated benefits, but really even more than the usual right-wing kind of moral panic, two-minute hate or whatever they call it, even more than usual, this is like almost entirely self-contained and without consequence. You know what I mean? It's just a show for the show's sake. There's not even things in the world that are hinging on it anymore. It's just they are just performing for one another now.

Kelly Mitchell

Absolutely. I mean, it's your best audience but no, I'll give you just one example. So, I was at a petrochemical conference earlier this year and not the greatest champions of the environment historically, but the whole conference was a love note to ESG. And you had guys come to the stage and they say, "Look, you might hear a little bit about the political pushback, but in reality no serious investor is going to stop looking at ESG criteria." And that's how folks are opening their speeches. And I was able to talk with a pretty high up exec in a global petrochem conference and I asked her that, I said, "Look, with all this political pushback, are you going to be changing your practices?

Are you going to be abandoning your DEI initiative? Are you going to abandon your ESG initiative if you're given political cover to not have to do it?" And what she told me was "No, because we'll never be able to hire anyone again." And so I think this stuff is so baked into the system where investors can't look away from these risks anymore, companies can't look away from these risks anymore. There's a real question of how much anyone here is really going above and beyond. But yeah, the fighting from the movement on the edges is super performative.

David Roberts

Yeah, just like dealing with risk. That's the thing, the big companies will do a lot of things in service of right-wing culture wars, but they won't risk money. They won't risk their bottom line. That's where they draw the line. It's like, "Wait a minute, we're actually making money off this hold up. We'll take down pride displays, but we're not going to risk money." I guess, insofar as it's almost entirely performative. How do you anticipate it playing out? Is anything going to come out of this? Is there a next step? Is it going to go anywhere or is this just going to sort of fade and they'll be hysterical about something else next month?

Kelly Mitchell

I think there are two places where we see it heading and they're both around legal issues. So they've kind of played the legislative card for the time being. I think what we'll see next is we've had a number of attorneys general, similarly organized through the Republican Attorneys General Association, who have threatened to bring antitrust cases against companies that are part of any partnerships.

David Roberts

What is the European group? Zero —

Kelly Mitchell

Yeah, there's a G fans and an N fans and a Glasgow.

David Roberts

Yeah, I forget what all the acronyms are for, but there's lots of these associations of companies who are about taking these risks seriously and trying to alter their portfolios in response. Is that I mean, with legal issues these days, it's almost immaterial to ask if there's any merit to it since if it gets to the Supreme Court, who gives a crap with it?

Kelly Mitchell

Leonard Leo stacked the deck for us.

David Roberts

Exactly, because Leonard Leo finished his job there. But is there any merit to the antitrust angle here?

Kelly Mitchell

My understanding is if there is, it's slim and it's probably if there's any place where there may be some merit to it, it's with insurance companies. Now, I won't explain why because I'll say a bunch of things that aren't probably true, but that's sort of the legal read I've been given. And I think that's why we've seen a number of insurance companies who have dropped their membership in some of these alliances. And interestingly enough, none of them have rolled back any of their climate-related policies. Like, they're all still taking into account climate risk. They're just not going to do it through these global alliances because their lawyers have informed them that potentially there is some amount of risk involved.

David Roberts

Right. Why take on the hassle? That's the thing to intimidate these people. It's like a little bit of hassle, why bother?

Kelly Mitchell

So I think we'll see the antitrust stuff continue to rev up and again, it's like, yeah, when you have people like Ken Paxton, when you have some of these AGs that are just really aggressive and really political, like you said, they'll bring a suit whether the merits are there or not. And so I think that could create a bit of a chilling effect.

David Roberts

If there's anything goofier than Republicans suddenly pretending to care about high school girls sports, it's Republicans suddenly worrying about trust.

Kelly Mitchell

Real champions of antitrust —

David Roberts

Antitrust champions. There's one thing they worry about. It's corporate concentration of power.

Kelly Mitchell

So we may see that, and I think it will follow the same path of being mostly very stupid and nonsensical, but then having these little moments of real-world impact along the way because people get spooked. And then the other area where we could see some evolution is we've now seen two class action-esque lawsuits filed. So one in New York State against the New York State pension system, and one in Texas, but actually against the American Airlines pension board, whoever manages the board, and basically their lawsuits against those two pension bodies for either divesting from fossil fuels or for offering ESG options in their pension fund.

David Roberts

Jesus.

Kelly Mitchell

My sense again is neither of them have an incredible amount of standing. I mean, the American Airlines one is wild to me because it's not even that they took this guy's pension money, the guy who's suing and invested it in some vehicle he didn't like. It's just that they offered ESG funds in the menu of funds that pensioners can self-select. So it was a complete opt-in environment, but just the existence of that opt-in checkbox is sort of prompting his lawsuit.

David Roberts

Good lord.

Kelly Mitchell

So what I could see happening potentially is that similar to the legislative strategy where they just threw nearly 200 bills across a number of states to these hearings where they're testing out every conspiracy theory. Maybe we enter this phase with antitrust action from AGs and or these private citizen suits where they're again, just sort of trying to test the water and see if there's any ground here to stand on.

David Roberts

Well, pushing it into the legal realm is that's where Leonard Leo has already done his work. So the merits are going to matter a lot less in that territory than when you're talking to actual money people who actually care about actual money. Super dumb. But I think it's fair to say, just by way of kind of summarizing and tell me if you agree, the broad global trend of big money taking climate risk into account is unstoppable. You're not going to turn the clock back on that?

Kelly Mitchell

No, it's left the station and you can't not take it into account. There's too much actual change happening in the world for any sound money manager to ignore it at this pace. So in the long run, I think this is where the investment community is headed. I think a lot of executives will take this stuff and integrate it into their company's decision making.

David Roberts

And young people, one of the reasons all this started is that whether you like it or not, old guy on the board, young people care about this stuff and you need to be able to hire young people.

Kelly Mitchell

Absolutely, yeah. I think for the oil industry in particular, it is a huge problem for them. They offer very good salaries, like, they pay their workers very well. Now, sometimes they're not always doing the most desirable work, but they pay well. They've been a great ticket to opportunity in a lot of communities and they are struggling to hire given their current reputation. And so, yeah, this type of action is what makes it palpable for a young engineer to come work for ExxonMobile.

David Roberts

Yeah, and I forgot to actually mention, even though it's in the headline of this pod, but the reason we're doing this now is that July is, according to Republicans, ESG month. This means at least for the next month, it's going to be an absolute festival of dumbassery and further ridiculous hearings.

Kelly Mitchell

I think they're doing two a day on some days this month. They're doing double-header ESG hearings in the middle of July, which is a real way to know an issue.

David Roberts

How many conspiracies are there? Like, how do they fill up the time? I'm not going to hurt myself by watching, but I honestly wonder sometimes, once you've run through the top-ten, Fox News — What do you talk about after that?

Kelly Mitchell

I think you just rinse and repeat.

David Roberts

All right, thank you so much, Kelly. Thank you for digging into this and documenting what's going on and thank you for walking us through it. And again, I commend you for maintaining your psychological health throughout this process.

Kelly Mitchell

Thanks, David. No, it's been fun and, yeah, thanks for having me on. I really appreciate it.

David Roberts

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