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DOES THE ANTI-WOKE MAGA ETF INADVERTENTLY MAKE THE CASE FOR ESG?
Shivaram Rajgopal
Contributor
Opinions expressed by Forbes Contributors are their own.
I am the Kester and Brynes Professor at Columbia Business School and a Chazen
Senior Scholar at the Jerome A. Chazen Institute for Global Business.
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Republican governors accuse ESG funds of not focusing exclusively on financial
return. The anti-woke fund MAGA picks domestic firms that donate to the
Republican party. MAGA’s firms simultaneously advertise their strong ESG
credentials, benefit from large state subsidies and pay out large fines for
violations related to workers, patients, investors and the environment. Despite
lobbying and generous state subsidies received by its constituents, MAGA has
lagged the S&P 500 since inception. Does MAGA simply support the belief of the
ESG movement that treating stakeholders well is also shareholder value
increasing?
Make America great again - road sign concept
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The political rancor around ESG continues. Most of this conversation is higher
on heat than light. For instance, the defense usually offered for the regulatory
actions enacted by the governors of Texas, West Virginia, and Florida on ESG
funds is that such funds force investors to focus on considerations other than
financial return.
Hence, I thought it might be instructive to look at the so called “anti-woke”
funds to assess how these asset management vehicles implement such an ideal of
considering financial return at the exclusion of ESG factors. Consider the case
of MAGA ETF, the Point Bridge GOP Stock Tracker Fund. The prospectus states that
fund reflects the Point Bridge America First Index which, in essence, “tracks
the performance of U.S. companies whose employees and political action
committees (“PACs”) are highly supportive of Republican candidates for election
to the United States Congress, the Vice Presidency, or the Presidency
(“Candidates”) and party-affiliated federal committees or groups that are
subject to federal campaign contribution limits (e.g., Republican National
Committee, National Republican Senatorial Committee) (“Committees”).”
Under the hood of MAGA
How is this index constructed? The prospectus states, “by using (i) electoral
campaign contribution data from the Federal Election Commission (the “FEC”) to
eliminate companies whose employees and PACs have made aggregate reported
political contributions of less than $25,000 across the two most recent election
cycles and (ii) aggregated financial statement data from FactSet (or another
market data source) to eliminate companies that do not have U.S. assets greater
than or equal to 50% of total assets.” The prospectus goes on to state that a
proprietary screening process is then applied to short list 150 companies to
invest in.
The fact sheet states that MAGA ETF “is the first ETF of its kind, providing
investors with the opportunity to make investment decisions based on their
Republican political beliefs.” Those beliefs are not defined or spelled out by
the fact sheet or the prospectus. Ironically, MAGA is formally similar to all
socially responsible investment funds, as pointed put by Bob Eccles and Jill
Fisch in their piece for Harvard Law School.
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In essence, MAGA is a bet on domestic U.S. companies that give to the Republican
party. Such an asset tilt leaves out the large technology heavy multinationals
that have recorded substantial stock market growth in the last decade. The
countervailing force, of course, is that lobbying is hugely profitable. We will
look at actual performance of the fund later in the article.
As per their fact sheet, of 8/31/22, the top holdings of MAGA include: (1)
Constellation Energy Corp (0.91% of assets); (2) Cardinal Health Inc (0.89%);
(3) NVR, Inc (0.86%); (4) Paycom Software, Inc (0.81%); (5) CF Industries
Holdings, Inc (0.79%); (6) Motorola Solutions, Inc (0.79%); (7) Charles Schwab
Corp (0.76%); (8) Verisk Analytics, Inc (0.76%); (9) Republic Services, Inc
(0.76%); and (10) Nextera Energy, Inc (0.75%).
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MAGA holdings are ESG heavy as well
The list of holdings is itself rife with contradictions with respect to ESG
values. Five of the top 10 holdings actively market their ESG friendliness:
· Constellation Energy claims that it is the “#1 producer of carbon free energy
in the U.S.” They go on to promise that “we have set own ambitious climate
goals, including: 95% carbon-free electricity by 2030, 100% carbon-free
electricity by 2040, 100% reduction of operations-driven emissions by 2040,
providing 100 percent of our business customers with customized data to help
them reduce their own carbon footprints.”
· CF Industries states on its website, “Our mission is to provide clean energy
to feed and fuel the world sustainably.” They go on to state, “meeting the
challenge of climate change is at the center of our Company strategy, which is
focused on supporting and accelerating the world’s transition to a clean energy
economy.”
· Verisk Analytics claims on its website, “Balancing 100% of our carbon
emissions is only a start. Verisk is committed to corporate social
responsibility: environmental, social, governance. We support the UN Global
Compact sustainability initiative, and we’re facilitating the global transition
to clean energy.”
· The first thing that an investor sees on Republic Services website is its
advertisement that the company sells “environmental services for a more
sustainable world.”
· Nextera, a company well known to ESG investors, states they have “A Real Plan
for Real Zero: NextEra Energy has a plan to lead the decarbonization of
America.”
Is MAGA a bet on corporate welfare?
Values aren’t the only reason for political giving. There is usually an
instrumental aspect as well. Lobbying is a highly profitable endeavor as the
payoff to a dollar of political giving can be as high as 20X. Hence, my first
port of call was data on state subsidies given to these companies.
The Subsidy Tracker database, run by the non-profit Good Jobs First, is an
excellent place to start that inquiry. Here is what I found:
· Nextera Energy, based in Florida, has received $396 million in state and local
subsidies and $2.4 billion in federal grants and allocated tax credits since
records were traced by Subsidy Tracker (2007 for state subsidies and 2000 for
federal subsidies). On top of that, Nextera has received $3.1 billion via
federal loans, loan guarantees, and bailout assistance. These numbers represent
a lower bound on the actual dollar value as many of the numbers are actually not
disclosed by many states.
· CF Industries, headquartered in Illinois, has received $810 million in state
subsidies. Of this, $681 million came from the state of Louisiana.
· Republic Services, based in Arizona, has received $155 million in state loans
from the state of Arizona.
· Motorola Solutions, headquartered in Illinois, has received $79.2 million in
federal assistance and $9.6 million in state subsidies. This is on top of $161
million in federal loans.
It would be useful for the taxpayer to know about undisclosed subsidies and the
payoff to the state and the company from these subsidies. How many new jobs were
created? What were the incremental taxes paid? Is there any association between
the political giving and the terms of such assistance?
MAGA’s top holdings stakeholder track records are quite poor
It might also be useful to consider the regulatory rap sheet for these companies
as a rough proxy for how they treat stakeholders. I want to use something
transparent and replicable. Hence, I relied on the Violation Tracker database,
also published by Good Jobs First. The database aggregates the enforcement
records across hundreds of federal and state agencies. It also reports
settlement payouts on lawsuits filed on behalf of workers and the environment,
and enforcement actions by other regulatory agencies such as the SEC. A subtle
but important point needs to be made here. Regulatory penalties are a tiny
fraction of the actual social value lost on account of lobbying. Hence, these
numbers likely understate the true cost of wealth transfer from stakeholders to
these firms. The rap sheets of these top ten firms are not flattering:
· Cardinal Health has paid a whopping $6.8 billion on account of healthcare
offenses, $156 million due to safety offenses, $53 million in employment related
offenses, and $31 million due to financial offenses since the year 2000. What is
behind the big healthcare offenses payment? Three major pharmaceutical
distributors—McKesson, AmerisourceBergen and Cardinal Health—reached a $21
billion settlement with a group of states to resolve litigation alleging the
improper sale of pain medications, contributing to the national opioid epidemic.
· Charles Schwab has paid a substantial $824 million due to investor protection
violations and $6.3 million due to employment-related offenses. Two large
settlements contribute to that investor protection payout. In 2009, TD
Ameritrade, bought by Schwab, agreed to return $456 million to investors as part
of the resolution of multistate litigation alleging it misled customers in the
marketing and sale of auction rate securities. More recently, the SEC charged
three Charles Schwab investment adviser subsidiaries for not disclosing that
they were allocating client funds in a manner that their own internal analyses
showed would be less profitable for their clients under most market conditions.
The subsidiaries agreed to pay $187 million to harmed clients to settle the
charges.
· CF Industries has paid $195 million on account of environment related
offenses. In 2010, CF Industries Inc. agreed to spend approximately $12 million
to implement facility-wide operational changes to reduce and properly manage
hazardous wastes generated at its Plant City, Fla., phosphoric acid and
ammoniated fertilizer manufacturing facility as per the Justice Department and
Environmental Protection Agency. The settlement was to resolve CFIs Resource
Conservation and Recovery Act (RCRA) violations and required the company to pay
a civil penalty of $701,500 and provide $163.5 million in financial assurances
to guarantee appropriate closure and long-term care of the facility.
· Constellation Energy has paid $61.4 million in payouts or fines related to
environmental offenses and $9.9 million due to competition related offenses. Of
the $61.4 million, $54 million relates to a private lawsuit payout. In 2008,
Constellation Energy agreed to pay $54 million to settle litigation brought by a
group of Anne Arundel County residents who alleged that their water supplies
were contaminated by fly ash from the company's power plant.
· Motorola has paid $25 million due to accounting irregularities to the SEC.
· Nextera has paid $25 million on account of competition related offenses, $2.5
million for an environmental violation and $2.3 million due to employment
related offenses.
The pattern of violations indicates the stakeholders that are most likely to be
impacted by the firm. For instance, Cardinal Health’s most important stakeholder
is likely the patient. For Schwab, it’s the investor or saver who banks with
them. CF Industries is an ammonia and fertilizer producer that needs to care
about environmental damage.
Moreover, discovered violations, captured in Violations Tracker, typically
represent a fraction of undiscovered wealth transfers from stakeholders to
shareholders or management. Hence, it might be useful to know from the company
how many offenses have gone unreported and what might be the economic value of
the wealth captured by shareholders on account of such stakeholder
transgressions.
MAGA is not a star performer
The annual report of MAGA ETF for the year ended June 30, 2022 reports that the
average annual return is 9.51% since inception (9/6/2017) relative to a 11.28%
return on the S&P 500. The return does not include an expense ratio of 0.72%. As
an aside that expense ratio is orders of magnitude higher than a standard index
linked ETF. The Vanguard S&P 500 ETF has an expense ratio of 0.03%.
I find the under-performance somewhat surprising given that political lobbying
is hugely shareholder accretive, as shown in one of my papers. Perhaps the
performance of these companies would have been even worse without the lobbying.
One could counter-argue that firms that lobby aggressively are almost inherently
more likely to have violations. The logic here is that they have a “market”
mentality in that they may not care as much about government regulations. They
arguably give money to weaken enforcement or even weaken the regulations.
Where does this analysis leave us? Even the major holdings of a so-called anti
woke fund tout their ESG credentials. Funds that tilt towards political giving
risk supporting companies likely reliant on corporate welfare but are also more
likely to identify companies with poor track records with stakeholders. Does
MAGA simply support the belief of the ESG movement that treating stakeholders
well is also shareholder value increasing?
Follow me on Twitter or LinkedIn.
Shivaram Rajgopal
I'm the Kester and Byrnes Professor at Columbia Business School. I attempt to
bring academic research and insights to questions of interest to CFOs and
securities
... Read More
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