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[Sunday Reads] Turning on the ESG Cartel, Tariffs, and Fiscal Insanity

It’s the Memorial Day weekend, and I hope you’re enjoying time outdoors with family and friends. For those moments when you’re taking a break from the summer temperatures… or escaping a rogue rain shower… here are some interesting articles you might enjoy reading.

Before we dig in, please remember that sometimes the articles we find valuable are behind paywalls. We make every effort to share with you pieces that don’t require a subscription, but we also don’t want to ignore those that do require one. Please understand that there might be some articles you won’t be able to read unless you’re a subscriber to that particular source. For this we apologize and hope you find as much value in those that are freely available.

With that said, here’s what we found to be the most valuable reads this week…

Turning on the ESG Cartel 

This week the Committee to Unleash Prosperity released a report highlighting that many large investment firms are still supporting Environmental, Social, and Governance (ESG) and Diversity, Equity, and Inclusion (DEI) policies of the companies they invest in via proxy votes. 

One of our core investing pillars at The Freeport Society is to beware of the ESG Cartel and to avoid investments where these policies hold sway, as they often conflict with the manifest objective of any publicly held company, which is to maximize returns for shareholders.

This report grades the proxy voting behavior of the 40 most active voters on the 50 most extreme shareholder proposals, from best to worst, relative to their support for ESG-related proposals that could pose a conflict to maximizing returns… for example, divestment of oil and gas interests, or adopting racial or gender quotas in hiring, among others.

While there are still many firms that prioritize ESG policies in their proxy votes – and who received “F” ratings for their voting record – there is good news in the report: Support for these proposals is diminishing, as billions were withdrawn from ESG-based funds in 2023. 

We applaud this trend. 

You can read the report here. 

In related news, Exxon Mobil (XOM) is pushing back on the ESG cartel by pursuing legal action against Arunja Capital, an activist investor group that has used the proxy voting process to advance its ESG climate agenda. 

As noted on its own website, Arunja’s mission is to not drive returns for its investors but to “press companies to better manage their Environmental, Social, and Governance (ESG) risks and opportunities.” Arunja further explains that “through shareholder activism, you can foster real change in corporate behavior on a range of issues, from climate change to racial and gender equity.” 

In this case, Arunja has attempted to leverage its shareholder position to force steep cuts in Exxon Mobil’s carbon dioxide emissions from the combustion of its products. 

In its suit, Exxon Mobil pointed out the obvious: These proposals would cause the company to “change the nature of its ordinary business or to go out of business entirely.”

Arjuna has since dropped its proposals, but Exxon Mobil has pressed on with its suit, in an effort to end the abuse of the proxy voting process by special interests that have no interest in the success of the firm. 

Unfortunately, Securities and Exchange Commission rules have enabled this abuse, leaving the courts as Exxon Mobil’s sole remedy to push back. 

The market, competition, and innovation should be the drivers of the clean energy revolution – not ESG-focused renegade shareholder activism. 

We’re on the lookout for investing opportunities that will be at the forefront of this market-driven revolution.

You can read the full Exxon Mobil story here.

We have cited previously that California is the anti-model for government regulation and market manipulation to drive lower emissions, at least on our side of the Atlantic Ocean. The anti-model on the other side of the ocean is the European Union, which is reckoning with a populist backlash to its aggressive climate agenda. 

One of our favorite reads about energy and geopolitics is from Doomberg, a subscription-based Substack, which writes this week that the political process is indeed a popularity contest, and that a policy agenda that necessitates deep cuts in standards of living are unpopular. 

This may sound on its face like a declaration that “water is wet,” but it is a truth the ESG cartel has been loath to acknowledge. The reality of physics, chemistry, markets, and ultimately the lived reality of the citizenry will force that reckoning. 

Unfortunately for the EU, it may lead to political upheaval.

You can read this Doomberg essay here (note, most of this post is behind a paywall).

How Not to Rebuild American Manufacturing

A policy that is popular, and therefore a plank in any populist platform, is tariffs. Both Donald Trump and Joe Biden are supportive of tariffs enacted to drive the rebirth of domestic manufacturing, and to push back against our primary trade adversary, China. 

However in a world economy that is so deeply integrated, tariffs lead to higher prices and diminished competition – they are taxes passed on to consumers, or lead to retaliatory tariffs that likewise raise prices. The end result: Higher inflation and a manufacturing sector that is no more competitive than it was before. 

One of our key investing tenets at The Freeport Society is deglobalization – but driven by innovation, not protectionist and inflationary policies. This essay from Reason rightly argues that the rebirth of the manufacturing sector should be driven by policy that would make industry more competitive – not by protecting it from competition. 

What can policymakers do? 

Reduce regulatory burdens, and simplify the tax code – each of which are material costs of doing business that eat at the bottom lines of manufacturers, making them less competitive. 

In other words, the government should do less, not more. Unfortunately, the populist urge in both political parties at present appears to be holding sway.

Read the full Reason article here.

Budget Watch

We shared recently that the U.S. Senate Budget Committee spends more time on climate change debate than actual budget management. Unfortunately, there is no evidence that this has changed. 

This week the Congressional Budget Office released a report detailing the long-term budget outlook in a series of scenarios.

The current projection is dire… 

If spending and revenues remain unchanged, the federal budget deficit would increase from 99% of GDP in 2024 to 166% of GDP in 2054, and in many plausible scenarios (higher interest rates, lower productivity, higher discretionary spending) could soar to 250% of GDP. 

Unfortunately, averting disaster will require a convergence of several scenarios to move in the opposite direction: lower interest rates, higher productivity, and lower discretionary spending. 

Our political leaders hold the key on spending. 

Will they rein themselves in? 

We would applaud this outcome, but would not bet on it. 

The greatest economy in the world drives ever improving productivity. Can we grow our way out of this situation? Certainly the great American economy puts us in an advantageous position relative to other economies, but we need spending reductions to make the math work.

Read the full CBO report here.

Unwinding of a Socialist State 

Charles Sizemore, our Freeport Society Chief Investment Strategist, has cited the bold economic transformation being led by Argentinian President Javier Milei, including his renowned speech at the 2024 World Economic Forum at Davos 

In that speech, Milei called out the limits of collectivism and rightly asserted that free enterprise capitalism is the only viable path to prosperity. He said, 

Thirty five years after we adopted the model of freedom, back in 1860, we became a leading world power. And when we embraced collectivism over the course of the last 100 years, we saw how our citizens started to become systematically impoverished, and we dropped to spot number 140 globally.

Upon Milei’s election (where he ran as an outsider “anarcho-capitalist” hell-bent on economic reform), Argentina was mired by runaway inflation in the triple digits, caused by rampant spending, government price controls, and other market manipulations. 

We’ve been observing the transformation Milei has been leading intently, and are glad to report that Argentina is gradually returning to solvency by reducing its central bank liabilities, refinancing its debt, removing currency controls, and moving toward the U.S. dollar as its primary currency. 

From Bloomberg: 

“The peso will become like a museum piece and when it becomes very rare, what do you think we will do?” Milei said in a keynote speech at a business event in Buenos Aires Tuesday evening. “We will dollarize and that way the peso will disappear.”

Hear, hear, President Milei. 

You can read the full Bloomberg article here.

That wraps it up for this week. We wish you and yours a happy Memorial Day as we remember our fallen heroes. We thank them and their families for their sacrifice so we may live free.