ESG guidelines seem innocuous enough, so why the backlash?

The optimist’s case for ESG 

What’s the point of ESG? Why is so much capital being allocated based on a set of contentious metrics? Some investors prefer that their savings be invested in green or ethical companies. Moreover, some ESG proponents believe that this movement of investor dollars may encourage companies to become more sustainable, socially responsible, and well-governed (others strongly disagree). Requiring companies to examine and report on their practices may have a positive effect. In an ideal case, when companies find that they are competing with other companies on ESG dimensions, they will up their game, creating a positive dynamic that makes the whole field more sustainable. A race to the top, for the benefit of all.  

There is also the pessimist’s case: our carbon-intensive economy is hurtling our species toward extinction and governments seem incapable of taking collective action on something as basic as a carbon tax. Only large investors have the muscle to force global corporations to take the actions needed.  

The Right’s case against ESG 

A set of obscure metrics that investors might use to assess their portfolio choices seems technical and anodyne. It was thus somewhat surprising to see a full-scale assault on ESG emerge this spring from business and political leaders on the Right. Musk tweeted that “ESG is a scam. It has been weaponized by phony social justice warriors.”  The former Vice President, Mike Pence, wrote in the Wall Street Journal that “the woke Left is poised to conquer corporate America and has set in motion a strategy to enforce their radical environmental and social agenda on publicly traded corporations … the shift is entirely manufactured by a handful of very large and powerful Wall Street financiers promoting Left-wing environmental, social, and governance goals (ESG)”. 

Meanwhile, the Republican Texas legislature passed a law banning its state pension and investment funds (worth $330 billion) from working with asset managers who “boycott” investing in fossil fuels, a remit that could include many or most ESG firms. And Utah’s Republican governor and senators demanded that S&P Global stop rating states and their bonds based on their ESG performance, which they claimed was politicization of a fiscal matter. 

The source of this hysteria is the growing realization that three giant asset managers (BlackRock, Vanguard, and State Street) own nearly a quarter of the shares of the average S&P 1500 company, a level of concentrated corporate control not seen since the Gilded Age. And those wielding the votes are not the people whose capital is at stake. This potential power was demonstrated at ExxonMobil’s 2021 annual meeting, when the Big Three index funds voted to oust three incumbent directors and replace them with more environmentally oriented board members.

To hear the Republican establishment come out swinging against Wall Street, “woke” corporations, and ESG investors is something new. Railing against shareholders in the land of shareholder capitalism is puzzling.