The Muddled Attack on ESG

Ever on the lookout for threats to the American way of life, the Right has begun pointing its finger at a surprising set of adversaries: BlackRock, Vanguard Group, State Street Corporation and other leading asset managers.

According to a chorus that includes former Vice President Mike Pence and Florida Governor Ron DeSantis, the three firms are part of a “woke Left” that is seeking to impose a radical environmental, social and governance agenda on big business. The allegations are part of an effort to make ESG into a bogeyman for investors similar to the way critical race theory, or CRT, has been used to scare parents of school-age children.

To some extent, the attack on ESG is simply another way to attack Democrats. One of its proponents, Vivek Ramaswamy, published an op-ed in the Wall Street Journal, the favorite soapbox of the movement, headlined “Biden’s ESG Tax on Your Retirement Fund.” The target of the piece was a proposal by the Labor Department to allow pension funds to consider climate-change-related financial risks in making investment decisions.

Ramaswamy has a vested interest in the anti-ESG effort. He wrote a book titled Woke Inc. that is regarded as the bible of the campaign, and he created an investment management firm called Strive to cash in on the backlash to ethical investing. Strive has a fund called DRLL that enthusiastically invests in fossil fuel companies and urges firms of all kinds to resist ESG pressures.

The problem for the rightwingers is that their issue is far from new. There has been a debate going on for decades over the proper role of large corporations when it comes to environmental and social issues. Ramaswamy and his ilk are parroting the arguments made half a century ago by economist Milton Friedman, one of the leading proponents of free market fundamentalism. His 1970 article entitled “The Social Responsibility of Business is to Increase its Profits” is the most famous expression of the idea that corporations should concern themselves with nothing other than making money for their shareholders.

That notion has remained popular in some circles, but most of big business has come to realize that it is simply not practical. Some companies such as Patagonia have made environmental and social engagement part of their brand. Some such as Exxon Mobil resisted change for many years but eventually began to make concessions. And some such as Koch Industries are engaged, but with a rightwing slant.

Modern-day ESG is largely a response by large companies to various external pressures, especially those coming from environmental groups and other corporate accountability activists. These days they also need to deal with the fact that many consumers are unwilling to do business with firms seen as contributing to the destruction of the planet.

Far from being radical, ESG often serves as a form of greenwashing, allowing companies to give the impression they are taking bold steps when their actions are actually quite limited. Much of the purported progress toward ESG goals is based on company self-reporting with limited verification.

The anti-ESG crowd is particularly upset at the role asset managers are playing in encouraging companies to set goals for net-zero greenhouse gas emissions. Yet many companies are planning to meet those goals through the purchase of dubious carbon offsets rather than major changes in their own operations.

When ESG initiatives lead to real changes in corporate practices, that is usually a reflection of changes in market dynamics. Companies such as General Motors are not putting more emphasis on electric vehicles as part of some secret leftist agenda, but rather because that is what its customers are demanding.

Oddly, the rightwing critics seem to pay little attention to the fact that several major ESG investment managers, including Goldman Sachs, are reported to be under investigation by the SEC, which is also seeking to adopt tighter rules on which firms can use the ESG label. Inquiries into whether ESG investment advisers engage in deceptive practices are also underway in Germany, where the offices of Deutsche Bank’s ESG arm were raided by investigators earlier this year.

Instead, the Right’s anti-ESG crusaders are promoting the moves by red-state attorneys general to do their own investigations, focusing on the influence of giants such as BlackRock. Those investigations, however, start out with exaggerated assumptions about the power of ESG, while the SEC seems to be concerned that those impacts are actually less significant than the advisors are leading investors to believe.

In an editorial celebrating the anti-ESG backlash, the Wall Street Journal warned that the changes being promoted by BlackRock could lead to new regulations. This betrays a fundamental misunderstanding of ESG. One of its primary aims is to use voluntary corporate initiatives to make the case that government mandates are unnecessary.

Although they go about it in very different ways, ESG proponents and rightwing critics are both seeking to limit the role of government in overseeing corporate behavior. That is where both groups fall short.

Whether large corporations are claiming to save the world or are simply maximizing profits, they cannot be left to their own devices. The same goes for the big investment managers.

Take the example of State Street Corporation, one of the big firms the Right is trying to make into a major ESG villain. Last year, State Street paid a $115 million criminal penalty to resolve federal charges that it engaged in a scheme to defraud a number of the bank’s clients by secretly overcharging for expenses related to the bank’s custody of client assets.

The problem with State Street and many other large companies is not that they are too focused on promoting virtue but rather that they may be lacking in virtue themselves.

Note: My colleagues and I are seeking a research analyst to work on Violation Tracker. Details are here.