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The Politics of Values-Based Investing – The Harvard Law School Forum on Corporate Governance

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Senate Republicans are introducing legislation directing retirement plan sponsors to select investments solely based on monetary factors, an extension of the position adopted by the Trump Administration Department of Labor. The sponsors to the legislation defend it by arguing that retirement accounts should be off limits to politics. The debate stems from the increasing criticism of pension and mutual funds that incorporate environmental, social, and governance (ESG) factors into their investment policies.

In challenging investment managers’ focus on ESG data, however, critics conflate two distinct issues. A body of empirical literature makes the claim that ESG data is relevant to evaluating a company from an economic perspective. We term this a “value-based ESG strategy.” For example, portfolio managers may invest in companies that they believe face strong growth prospects because they have products to help in the mitigation and adaption of climate change, or in companies that have strategies which will enable them to transform their business models in the fact of climate change. This is a value-based strategy. Of course, this assumes a particular perspective on the risks associated with climate change—one can argue that climate change is not real or that, even if it is, regulators will not impose costly changes on companies. The point, however, for such portfolio managers climate change is an economic risk, and their incorporation of climate-related data is a value-based investment strategy.

Investors who believe you can make money by investing in companies that are addressing this problem can invest in the BlackRock Future Climate and Sustainable Economy ETF (BECO). Notably, BECO purports to be investing for value, not values, stating that it “seeks to maximize total return by investing in companies that BlackRock Fund Advisors (“BFA”) believes are furthering the transition to a lower carbon economy.” Similarly Morgan Stanley touts its sustainable equity funds as outperforming their traditional peer funds.

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In contrast, Senate Republicans’ real concern appears to be investments that employ values-based strategies—that is, investing according to a set of principles irrespective of any link between those principles and economic value. An example of a values-based fund is the S&P 500 Catholic Values ETF (CATH). As the fund’s prospectus explains, “The S&P 500 Catholic Values Index applies exclusion criteria to the constituents of the S&P 500 in order to create a benchmark aligned with Catholic values. These values are consistent with the Socially Responsible Investment Guidelines outlined by the United States Conference of Catholic Bishops (USCCB). The index is designed for investors who wish to track a benchmark that is consistent with USCCB guidelines.” Notably, the fund’s website contains an explicit disclaimer about the risks of a values-based strategy: “CATH’s consideration of the Guidelines in its investment process may result in choices not to purchase, or sell, otherwise profitable investments in companies that have been identified as being in conflict with the Guidelines. This means that the Fund may underperform other similar funds that do not consider the Guidelines when making investment decisions.”

Concededly, the line between values-based investing and value-based investing is unclear, and few funds are as explicit in disclaiming the link as CATH. At the same time, many such funds are explicitly marketed as tools by which investors can invest according to their values. As a result, it may be difficult for investors to determine whether they are foregoing economic value when they invest in an ESG fund.

For example, on September 6, 2017, Point Bridge Capital, LLC launched the “Point Bridge GOP Stock Tracker ETF,” now called the “Point Bridge America First ETF,” with the ticker symbol of MAGA. In large and bold letters the homepage of the website for the fund states: “Bring Republican Investment Values to Life by Investing in the MAGA ETF.” The website explains Politically Responsible Investing® as “allow[ing] people to invest in companies that align with their Republican political beliefs.” The MAGA Index is made up of “the top 150 companies from the S&P 500 Index whose employees and political action committees (PACs) are highly supportive of Republican candidates.” MAGA is thus a good example of values-based investing.

Notably, nothing in MAGA’s fund materials purports to tie its investment strategy to economic value. Rather, the underlying rationale for the fund is that:

Money matters in politics, affecting elections and the creation of policy in Washington. Corporations continue to take political stances and actions that ignore the political beliefs and shared values of millions of Americans. The left is using corporate America to silence conservatives and promote their agenda. While some people have boycotted companies with whom they disagree, they remain invested in these companies in their mutual funds and stock portfolios. We have created the MAGA ETF as a solution to these issues.

CATH and MAGA illustrate that responsible investing is not limited to left-leaning funds. In essence, each is a form of “Socially Responsible Investing (SRI),” just based on a different set of values for the screening process. The current rabid debate about ESG investing has its origins in SRI. While SRI can be traced back some 200 years to the Quakers, it can be said to have formally begun with the launch of the Pax World Fund (which still exists) in 1971 that by two “United Methodist ministers—Luther Tyson and Jack Corbett—looking to avoid investing church dollars in companies contributing to the Vietnam War, founded the ground breaking Pax World fund.” The original SRI funds, created for religious groups, screened out “sin stocks” like alcohol, firearms, gaming, and tobacco. Thermal coal, especially, and oil and gas are increasingly on the list for exclusion. Proponents of negative screening also often make the argument that this will put pressure on these companies to change, or even go out of business, by raising their cost of capital. This is a highly researched topic but a recent working paper with one of us as a co-author suggests that negative screening has no effect on the returns of sin stocks.

Although SRI started out on the left, it is now, somewhat ironically, being incorporated by the right. A March 26, 2021 Wall Street Journal article starts by saying “Values-based investing options for conservatives have lagged behind those available to investors concerned about climate change, diversity and animal rights.” It notes with satisfaction that “conservatives are taking a page from liberal investors.” Perhaps unwittingly, the WSJ is bestowing legitimacy on the use of SRI to influence company behavior, particularly when it is combined with strong shareholder engagement with the company’s board of directors and senior management. It’s just that what is “socially responsible” is a function of one’s political views.

The appeal of values-based funds—on either side of the political spectrum—is that people can invest their money in companies they think are living values they care about. For example, the SPDR® SSGA Gender Diversity Index ETF “seeks to provide exposure to US companies that demonstrate greater gender diversity within senior leadership than other firms in their sector.” State Street does not claim to be seeking “outperformance,” and there is a body of empirical research showing shows that more diverse groups make better decisions. But it is unclear whether State Street is seeking to market its fund in terms of economics or to those who are seeking a values-based strategy incorporating diversity.

Animal rights is perhaps more obviously a values-based approach. Those with this investment conviction can invest in the US Vegan Climate ETF (VEGN). “Through its passive rules-based approach VEGN seeks to avoid investments in companies whose activities directly contribute to animal suffering, destruction of the natural environment and climate change.” VEGN makes no performance claims, but it is conceivable that those companies for which this is an issue will attract better people and more customers.

A separate question is the extent to which values-based funds behave in a way that is consistent with their marketing. Recent articles, for example, have challenged so-called green funds for not living up to their claims because they hold investments in energy companies. The analysis is difficult, however, in part because there is no universal definition of ESG. Similarly, reasonable people can disagree on what investments are consistent with any values-based investment strategy. Again, consider the MAGA fund. MAGA is based on an index which “uses an objective, rules-based methodology” to identify Republican-friendly companies in the S&P 500® Index, defined in terms of campaign contributions and having at least 50% of their assets in the U.S.

Whether MAGA’s holdings can fairly be characterized as “companies that align with your Republican political beliefs” is less clear. At present, MAGA’s largest holding is Constellation Energy which proudly says on the homepage of its website: “Constellation is now America’s LEADING CLEAN ENERGY COMPANY! We’re the nation’s leading provider of carbon-free energy and are committed to being 100% carbon-free by 2040.” Another company in its top 10 holdings is NextEra Energy which states that, “A REAL PLAN FOR REAL ZERO. NextEra Energy has a plan to lead the decarbonization of America.” The homepage of its website also features its “2022 Environmental, Social, and Governance Report.” There is not a single major oil & gas company in MAGA’s top 10 holdings. This suggests that Republican values aren’t necessarily inimical to recognizing the reality of climate change and the opportunities to make money in addressing it. Indeed, it would appear that both companies would be appropriate holdings for the ESG funds spurned by Republicans.

A final concern is that investors may lose money by investing in values-based strategies. There are two main criticisms of SRI. The first is that negative screening reduces diversification and thus increases risk and suboptimizes returns. The second is that exclusion of “sin stocks” may be leaving money on the table. There is no empirically conclusive evidence that negative screening hurts performance as shown by the 30-year history of the MSCI KLD 400 Social Index vs. the MSCI USA Index. The market value of MAGA’s shares is down by 11.04% since inception (the S&P 500 is up about 72.88% in the same period of time). By comparison, the shares of CATH are up by around 11.67% since inception and 10.72% over the past five years, the shares of SSGA Gender Diversity Index ETF are up 8.95% since its inception on March 7, 2016, and the market price of VEGN is up 9.96% since its inception on September 9, 2019.

The experience of a specific values-based fund does not, of course, condemn a values-based investment strategy. We also note that many of the values-based funds, both those on the left and those on the right, have expense ratios that exceed industry norms, and expense ratios are one of the most important drivers of fund returns. The expense ratio for the MAGA fund, for example, is 0.72 %, the expense ratio for BECO is 0.70%, and the expense ratio for VEGN is 0.60%, MAGA’s expense ratio seems particularly high in that MAGA a passive fund. According to the latest Morningstar report on fund fees, the average for a passive U.S. equity fund like MAGA is 0.08%. The report also notes that fees for passive funds have fallen about 25% since 2017 and states that “The downward pressure on fund fees is unlikely to abate.”

Whether a values-based strategy underperforms, however, is not the point. In values-based investing, people should be free to invest their money however they want, even if at a potentially lower risk-adjusted return. The real problem is that values are obviously in the eye of the beholder and what is value investing for one person may be perceived as values-based investing by another. This is what is at the heart of the current controversy over ESG investing in terms of criticisms from the Right. If some people do not believe climate change is real, that is their point of view. But it goes too far for them to call a value-based climate strategy a values-based one. Nor is a fund that loads up with oil and gas stocks to seek outperformance engaging in a values-based strategy.

We do not expect the controversy about ESG investing to disappear anytime soon. Much of it is healthy, such as correcting for excessive claims that an ESG fund “will make the world a better place” when there is no demonstrable way to show that it will. Conservatives who complain that ESG investing is a way of forcing a social and environmental agenda on companies that has nothing to do with company profitability, perhaps even hurting it, need to look in the mirror if they are creating anti-ESG funds of their own. This is simply swapping out one set of values for another. Both are forms of Socially Responsible Investing.

We also suggest that those buying into these funds look carefully at the holdings. Do the companies in the fund really reflect the values the fund is claiming to support? Just as those concerned about climate change are unhappy when they find an ESG or climate fund owns shares in an oil and gas company, those who have invested in MAGA need to decide if Constellation Energy and NextEra Energy truly reflect their Republican values—even if these companies are major donors to the GOP. Whether on the left or right end of the political spectrum, it is unlikely one can find a fund that ticks every values box.

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NDP calls Russian sanctions ‘political theatre’ as data shows little action on assets – Global News

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The NDP is accusing the Liberals of basing their sanctions regime on “political theatre” as data suggest few funds have been frozen and none have been seized.

“This government constantly pats themselves on the back for adding individuals to the sanctions list,” NDP MP Heather McPherson said Tuesday in the House of Commons.

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“The Liberals claim sanctions are a key piece of our foreign response, but there is no enforcement, there’s no investigation and there is almost no seizing of assets.”

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The federal government has been announcing sanctions almost weekly that bar people associated with authoritarian regimes from having financial dealings in Canada and from entering the country.

Yet publicly released RCMP data show barely any change in the amount of money frozen in Canadian bank accounts between June and December of last year, despite hundreds of people being added to sanctions lists.

As of June 7, Canada had ordered frozen $123 million in assets within Canada, and $289 million in transactions had been blocked, both under sanctions prohibitions related to Russia.

By late December, the RCMP said $122 million in assets were listed as seized, and $292 million in transactions had been blocked _ despite hundreds more people associated with Russia being put on the sanctions list.


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The RCMP also noted in late December that no banks had informed them of any sanctioned Haitians or Iranians holding assets in Canada.

Meanwhile, parliamentary disclosures requested by McPherson show that Ottawa has still not used a law it passed last June that allows the government to take possession of funds from sanctioned people and divert them to victims of wrongdoing.

The government issued an order for the restraint of property in December to start the process of forfeiting US$26 million held by a firm owned by Russian oligarch Roman Abramovich, but it has yet to file an application in court.

McPherson argues that Canada is using sanctions as a symbolic tool, without taking the steps to actually disincentivize support for autocracies.


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Foreign Affairs Minister Melanie Joly responded to the criticism by offering to work with the NDP on using sanctions to forfeit assets and divert them.

“We’re the first country in the world doing this, and we will lead,” she told the Commons.

“We’ve imposed extremely strong sanctions against Russian oligarchs, Belarusian oligarchs, Haiti elite members as well as Iranians.”

Sanctions experts have long argued that Canada lacks the means to properly monitor its regime, such as by tracking financial transactions and following how assets are traded.

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For years, the U.S. State Department has deemed Canada to be a “major money laundering country” due to its weak enforcement of laws.

In March 2022, the department included Canada in a published list of 80 countries it considers to have inadequate tracking of financial dealings.

Canada’s new law on forfeiting assets is the first among G7 countries that attempts to seize financial holdings using sanctions law.

Analysts and lawyers have said it marks a major change in how countries use sanctions, which are normally created as temporary measures to try changing behaviour, with the idea of later unfreezing accounts.

The new law instead seeks to punish the people accused of human-rights abuses. The funds can only be used to compensate victims, rebuild affected states or support peace initiatives.

&copy 2023 The Canadian Press

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Philip Steenkamp: Food security should be next on B.C.’s political menu

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Certainly not all of us — anyone who has relied on a food bank knows what it’s like to worry about where the next meal is coming from. But many British Columbians, especially those in positions of power and influence, are used to the luxury of leaving food security questions to other people.

Those days are over.

We got a taste of food insecurity early in the pandemic as grocery-store shelves emptied. The race for the last package of toilet paper or bottle of hand sanitizer got the headlines, but even the availability of household staples like flour and eggs was suddenly in doubt.

Then, just as that was settling down, the November 2021 atmospheric river swept in. Floodwaters overtook huge swaths of Fraser Valley farmland, and drowned cows, chickens, pigs and even bees by the thousands. Landslides and bridge collapses cut off trucking routes and rail lines — and once again, supermarket shelves emptied out.

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On the heels of that disaster came a massive surge in inflation. COVID-19’s on-again, off-again supply-chain disruptions were supercharged by Russia’s brutal war on Ukraine. And while prices rose across the board, food prices have been the ones to keep stubbornly increasing. (Not that frustrated consumers will be willing to place the blame entirely on supply chains while grocery chains are reaping record profits and memories of the 2017 bread price-fixing scandal are still fresh in customers’ minds.) In one of the most expensive places to live on Earth, that’s having a serious impact on the ability of people with a limited income to feed themselves and their families.

Today, in the aftermath of an even more devastating atmospheric river and widespread flooding in California — the source of a lot of B.C. produce, especially in the winter and spring — questions are arising of where the next shortages will show up. Even at that, our situation pales in comparison to developing countries that until now relied on wheat from Ukraine. Russia has not only blockaded exports from that country, but is also launching relentless attacks on the energy infrastructure that helps keep food production running.

If there was any doubt before, it’s gone now: Food security is a critical issue. The assured, ready supply of a wide variety of food that we’ve been accustomed to is in jeopardy.

That may be disheartening to hear, given the many other dangers and challenges we’re facing, but then those crises have more than a little connection to a safe, reliable, affordable supply of food. Climate disruption means more extreme weather events; rising authoritarianism and nationalism threaten to unleash more wars; our global economy, built on assumptions about stability that today seem hopelessly naïve, can be expected to falter again and again.

All of these conditions erode the security of our food supply.

In turn, an insecure supply of food can undermine the stability of governments and local economies, prompt large-scale migrations and humanitarian crises, and heighten conflicts between countries.

This is life under the polycrisis — interconnected, mutually reinforcing crises that affect everything from severe rainfall warnings to the ever-rising prices at the grocery checkout.

Giving Garden Harvest Fall 2022 event at Royal Roads University near Victoria. Left to right: University president Philip Steenkamp, Jesse Willis of Upbeet Garden and Anna Maria Stone of Iyé Creative. Steenkamp and Stone hold a variety of winter squash to be donated to local community groups.
Giving Garden Harvest Fall 2022 event at Royal Roads University near Victoria. Left to right: University president Philip Steenkamp, Jesse Willis of Upbeet Garden and Anna Maria Stone of Iyé Creative. Steenkamp and Stone hold a variety of winter squash to be donated to local community groups. Photo by Trevor Henry

Addressing food security requires a broad range of co-ordinated responses at every level, from individual neighbourhoods to international co-operation. We urgently need to have long-overdue conversations about just what that response must look like.

But not all the answers will have to be planetary in scale — or even provincewide.

As you read this, the Giving Garden in the Farm at Royal Roads University is nearly ready for the first harvest of 2023. Driven by Dr. Hilary Leighton, program head in our School of Environment and Sustainability, it is both a living laboratory for Royal Roads students and a growing source of fresh produce for the Greater Victoria community, directly addressing food insecurity in the region.

The impact of the Farm at RRU is real and significant, with over 1,000 pounds of fresh vegetables distributed last year to food-insecure seniors, single parents and newcomers to Canada. That contribution will keep increasing in the coming years.

Meanwhile, Dr. Robert Newell, the new Canada Research Chair in Climate Change, Biodiversity and Sustainability, is studying the use of systems mapping to show relationships among local farms, transportation networks, grocery stores, communities and key social and environmental issues. His program also looks at sustainability and novel food production methods, such as vertical agriculture (growing crops indoors using stacked shelves) and cellular agriculture (growing meat directly from cell cultures instead of relying on animals).

Solutions like these are being developed throughout B.C. and Canada. But we need to co-ordinate them. One obvious vehicle for that co-ordination is government: Indigenous, municipal, provincial and federal. There are many ways they can support that work — from developing up-to-date standards for measuring food insecurity to bringing a food security lens to bear on every aspect of public policy.

That can only happen if leaders at all levels start convening the public conversations needed to shape that vision.

If any good is to come from the food supply shocks of the past three years — and the more severe incidents that are sure to come — it’s that they’ve given us all an appetite for those conversations. It’s time for our leaders to get cooking.

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Trump 2024 is locked and loaded, analyst says

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More than two months after his presidential announcement, Donald Trump now has the key tools he will need to make his entry into the race complete: access to social media.

Recently, Meta, the parent company of Facebook and Instagram, announced reinstatement of Trump’s social media accounts following a two-year suspension.

The suspension was levied in the aftermath of the deadly insurrection at the U.S. Capitol on January 6, 2021.

This was certainly good news for the Trump campaign and his legion of loyal and dedicated supporters.

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However, as the wreckage inflicted on that cold January day still lingers, political opponents, real and perceived, are bracing for the potential dangers that could lie ahead.

In 2016, Trump used social media to great effect in his bid to win the U.S. presidency. During his tenure in the White House, he often made news and kept the entire media landscape on edge with a robust social media presence. His posts ran the gambit from inflammatory to bewildering.

CLAIMS SHATTERED NORMS OF PRESIDENTIAL ETIQUETTE

The unceasing and outlandish claims made by the former reality television star shattered the norms of presidential etiquette. Even accusing former president Barack Obama of spying on him! Like a maestro leading an orchestra, his cadre of henchmen and followers soon began to play along as if on cue.

Donald Trump, over the years, enlisted a powerful chorus of voices from Congress, the media, state capitals and beyond all belting out conspiracy theories, laced with violent undertones, on one note; one accord; in unison.

The twice-impeached ex-president has access to all the social media tools that not only fuelled his political rise but also served as a catalyst to the growing political violence playing out across the nation.

With 34 million followers on Facebook; 23 million on Instagram; and 87 million on Twitter; Trump has built a formidable and engaged audience that hangs on his every word.

AN ALREADY FRAGILE POLITICAL LANDSCAPE

Showing no remorse and characterizing the suspension as an injustice, the ex-president said on Truth Social, his own social media platform: Such a thing should never again happen to a sitting president, or anybody else who is not deserving of retribution!

Trump has continued his penchant for perceived grievances and victimization exacerbating an already fragile and unstable political landscape. Now, with the ability to enact a mob in 280 characters or less, Donald Trump wields these accounts like a loaded weapon.

Political onlookers are bracing for the onslaught as the ex-president ramps up his presidential campaign. Laura Murphy, an attorney who led a two-year audit of Facebook stated: I worry about Facebook’s capacity to understand the real world harm that Trump poses…

This “real world harm” Murphy describes is already a stark reality. Recently released video footage of the violent attack on the husband of former U.S. House Speaker, Nancy Pelosi, is sending a collective shiver through the political class.

The assailant, David DePape, 42, claimed: “I’m sick of the insane f——— level of lies coming out of Washington, D.C.” He is charged with attempted murder, residential burglary, false imprisonment and threatening a public official. Some on the right, including Donald Trump Jr., made fun of the attack, sharing an image of a Paul Pelosi Halloween costume that included a hammer, as it was a hammer that was in the assault.

In the aftermath of the recent 2022 midterm elections, the nation breathed a sigh of relief as the results came and went with no acts of violence and the results reported largely without incident. Unfortunately, that moment of euphoria was only fleeting.

Failed GOP candidate, Solomon Peña, was arrested by Albuquerque police accused of paying and conspiring to shoot candidates that won. Prior to the attacks, Peña (like Trump) alleged the election results were fraudulent. An arrest warrant affidavit obtained from police says the suspect “intended to (cause) serious injury or cause death to the occupants inside their homes.”

Trump’s proclivity for subjecting maximum cruelty on others has been a mainstay since he entered politics. His affinity for tyrannical government; fascist and dictatorial leaders; combined with an ambivalence for democratic institutions makes his return to the political arena fraught with peril.

TRUMP FIRMLY BACK IN CONTROL OF SOCIAL MEDIA ACCOUNTS

In a recent article, columnist Charlie Sykes described Trump’s penchant for violence as: Brutality is an ideology, not just an impulse. Many of the MAGA crowd eagerly subscribe to this ideology. Close confidante and fellow MAGA conservative, Congresswoman Marjorie Taylor-Greene, said recently at a Republican event in New York, if she had organized the January 6 attack on the U.S. Capitol “we would have won” and “it would’ve been armed.”

Donald Trump’s inner circle continues to push the big lie and foment violence. Now that Trump is firmly back in control of his social media accounts, nothing stands in his way of once again eschewing political safeguards and standards in favor of amplifying sharp, abrasive, and yes, violent rhetoric aimed at perceived enemies and institutions.

Trump’s hold on rank-and-file Republicans remains just as strong today as it did the day he descended that gold-plated escalator in 2015. His loyal lieutenants continue to engage in violent and inflammatory language and some have even escalated to full-scale physical attacks on their opponents as evidenced by recent events in New Mexico and San Francisco.

Trump 2024 is locked and loaded and many would-be targets are in the crosshairs. By allowing Trump back on social media, companies such as Meta and Twitter might think they are lowering the political temperature. However, Trump’s truculence knows no bounds and could certainly end up backfiring. That fire nearly consumed the nation on January 6. Now, with a second chance, Trump gets to finish what he started.

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