So-called anti-woke funds like Strive Asset Management’s US Energy ETF have attracted significant backing and Republican lawmakers are visibly challenging woke initiatives. Laurie Havelock asks whether these developments signal a true turning point for ESG
The importance of ESG has become almost unquestioned in recent months. Issuers, investors and most of the financial markets are convinced of the material importance – and financial reality – of ESG issues for companies. But that has not stopped what has been termed the market’s first anti-woke ETF from gaining significant backing in its first months of operation.
In September, Strive Asset Management’s US Energy ETF – with the ticker symbol ‘DRLL’ – reported it had attracted $315 mn in less than a month even as other anti-woke funds failed to attract nearly as much.
At the time, Vivek Ramaswamy, executive chairman of Strive, said it showed everyday people did not agree with asset managers using their cash ‘to advance social and political agendas they do not agree with’. The fund’s success, he added, showed that ‘people are voting with their feet’.
Though the numbers are relatively small, the US Energy ETF has been backed by PayPal co-founder Peter Thiel and hedge fund manager Bill Ackman. So far, it is largely pegged to the XLE Energy ETF, which in turn tracks the largest US oil firms, with the majority of its holdings split between ExxonMobil, Chevron, ConocoPhillips and EOG Resources.
Strive has also launched another fund that tracks the Solactive GBS United States 500 Index and a US Semiconductor ETF that promises to back only US makers of computer chips, to avoid any problems that might arise from geopolitical issues in Taiwan.
Ingrained in all of them, says Ramaswamy, is a mission to ‘serve clients’ financial interests without regard to social or political objectives’. He has already started writing to firms including Chevron and Disney to lambast them for bowing to pressure from other holders like BlackRock, State Street and Vanguard to adopt climate-friendly measures.
Meanwhile, lawmakers in Republican-leaning states have claimed asset managers are pushing a political agenda by divesting from fossil fuel firms. Texas officials cite a 2021 law that it said should protect its oil firms from being boycotted by BlackRock or other investors. BlackRock, for what it’s worth, has pushed back on claims it is putting its climate agenda ahead of its clients, sending a letter to attorneys general in 19 states to defend itself.
Many asset managers are using client funds to advance politicized corporate agendas that those very clients disagree with
A movement or a moment?For Justin Danhof, Strive’s head of corporate governance, it’s about the tide turning. ‘The more interesting debate has begun regarding what we refer to as ‘green smuggling’ – managers using ESG and stakeholder capitalism principles in corporate governance matters – both proxy voting and engagement in funds that have nothing to do with ESG or stakeholder capitalism,’ he explains. ‘In other words, many asset managers are using client funds to advance politicized corporate agendas that those very clients disagree with.’
Danhof adds that the response from state officials ‘calling out’ asset managers and proxy advisers shows that awareness is growing among investors, retail and institutional alike, of the importance of fiduciary duty: the proper stewardship of assets to promote their best interests. He points to UBS downgrading BlackRock to a neutral rating based, in part, on ‘the firm’s ESG positioning’ and the possibility that it may lose more funds on that account.
Whether that can turn this current momentum into more of a movement remains to be seen, says Todd Rosenbluth, head of research at VettaFi. ‘I am skeptical that there is a strong pushback against ESG happening,’ he says, adding that while Strive has done an ‘excellent job’ of getting attention and raising visibility, it is still a relatively small player on the grand stage. He describes anti-ESG ETFs as a ‘niche’ product, despite the recent launch of products similar to Strive’s, such as the God Bless America ETF that launched on Wall Street in October.
‘There is an investment pendulum that swings in normal times, and it has swung toward ESG from an ETF perspective in the past,’ Danhof says. ‘It’s inevitable there will be some pushback, perhaps because not everybody will be in agreement that ESG attributes should be rewarded.’
Sarah Spray, head of IR at AP Moller-Maersk, says while she feels the anti-woke movement in the capital markets has been ‘brewing for a while’, it is not the beginning of a turn or trend of different behavior from a corporate perspective. ‘I think it’s a meme stock type of fad,’ she adds. ‘It’s capitalizing on momentum, not fundamentals.’
Spray understands the ESG movement instead in terms of generational change. By 2025, 75 percent of the US workforce is expected to comprise Generation Zs and millennials, according to Department of Labor statistics, and they naturally have priorities different from those of older people who tend to occupy management and C-suite positions. For example, a survey of 16 to 25-year-olds by law firm Gowling WLG shows that 70 percent will investigate a company's ESG credentials before even considering working with it.
Spray believes it is that intergenerational conflict that is fueling interest in anti-woke investing. ‘It’s clearly driven by the propaganda forces out there that aim to split society and turn different groups against each other,’ she says. ‘Latching onto the anti-woke cause seems to be an effective way to raise funds from certain demographics – for the moment. And companies are caught in the crossfire.’
The corporate responseOne thing the anti-woke argument seems to miss is the widespread acceptance that ESG factors are a great indicator of a firm's long-term health. A mission to serve all stakeholders, including the wider world and future generations, is often calculated into ESG ratings or account standards.
For Spray, it is a fundamental error to assume that paying attention to ESG risks is detrimental to financial performance. ‘So far, the research shows the opposite,’ she says, citing research such as that carried out by the Center for Sustainable Business at NYU Stern and Rockefeller Asset Management, which finds not only that ESG drives positive financial performance in 58 percent of cases, but also that efforts to decarbonize business operations are strongly correlated with financial performance.
‘Remember that SASB was conceived in the context of understanding that non-financial risk factors can have financially material consequences, particularly in a litigious environment such as the US,’ Spray adds. ‘You ignore that at your peril.’
Being a more environmentally sound and diverse company from any perspective ‘makes us stronger, fitter and more resilient,’ she adds. ‘The last thing we would want to do is to encourage a culture of clones. I think we all know the danger of a ‘yes man’ culture, and diversity is your best protection against that.’
Funnily enough, in terms of what IR should do, Danhof asserts it comes down to the usual hallmarks of great IR: consistency and transparency. ‘The issue can be solved through the marketplace with transparency of strategy, including corporate governance – both proxy voting and engagement,’ he explains. ‘IR teams should serve as proactive marketers of a company’s story.’ He adds that another priority should be to ‘narrow that divide’ between what institutional investors and retail shareholders consider important.
We all know the danger of a ‘yes man’ culture, and diversity is your best protection against that
Rosenbluth agrees, but notes that Strive and a minority of activist investors are going to try to push back on ESG initiatives in the coming months. Firms would be well advised to stick to their current mandate of preserving shareholder value, he adds.
‘Companies need to be prepared to raise the visibility of what their efforts are, if the audience is there,’ Rosenbluth notes. He says those targeted by anti-woke money may well publish press releases to push back, even if that might have a double-edged effect of validating investors’ efforts.
Spray advises IR teams against adjusting in light of interest – or ire – from anti-woke money. ‘Stay the course,’ she recommends. ‘Do what you know is right for your company, from a commercial, operational and ethical perspective, knowing you have to hold all those aspects in balance.’
