It’s an open secret that Wall Street firms love to capitalize on any new trend regardless of whether it has merit or makes sense.
Crypto is a great example of an investing fad that has no substance but is embraced because it attracts new money.
But when it comes to ethical investing, Wall Street has no problem putting on its white hat and saying it has a long history of ethical investing that dovetails perfectly with a huge new investing trend.
So, it is no surprise that Wall Street marketers would jump on the environmental, social, and governance (ESG) bandwagon as soon as it became the wildly popular $40 trillion global investment magnet
To do this, Wall Street firms had to essentially lie or fake their commitments to the critical ESG principles and just insist to their investors that they were making their due diligence investigations of the companies contained in their ESG portfolios and making sure they adhered, to some degree, to practicing ESG practices.
In their haste to claim the high moral ground that ESG requires, investors trusted some of the biggest names on Wall Street to essentially become ethical investors overnight.
Another big mistake.
ESG, also known in its earlier iterations dating back to the late-1970s as “social investing,” meant that companies had to follow some ethical, environmental, pro-consumer, and anti-discrimination guidelines and then put them into actual practice.
In the early days, social investing focused on pushing companies doing business in South Africa to resist that nation’s apartheid policies. This meant companies followed the lead of the Jane Addams Hull House pension board and the Sullivan Principles, the anti-discrimination rules named after the Rev. Leon Sullivan, a civil rights leader and a member of the General Motors Pension Fund board of trustees.
That corporate and investment pressure produced results and the early days of social investing chalked up a major victory in reforming the apartheid practices in South Africa.
Flash forward almost 50 years and social investing has morphed into a multi-trillion investing program that is being funded by well-meaning investors who trusted their investment firms to actually follow ESG guidelines in the funds they were selling as ESG funds.
Another big mistake.
It seems the billion-dollar investment and mutual funds companies who offered, sold, and managed ESG funds had no, or little, idea about the ESG practices being followed in the companies they were investing in.
This is no surprise. The reason: Wall Street is faster to launch big marketing campaigns to match the competition and catch a new trend, such as crypto than they are to due the due diligence to investigate what is behind the good motives inherent in ESG investing.
If the Wall Street firms attract a few hundred million in new assets using a near-fake marketing message, it’s no big deal. The ethical side of the business (as it is) is vastly subordinated to the asset-gathering process.
Enter the SEC
Now, that it has become more evident that Wall Street firms have been faking their ESG due diligence, the activist SEC has now entered the picture and will hopefully bring some enforcement actions against the big investment firms that knowingly sold naive investors products that were not even close to being ESG-compliant.
In May 2022, the SEC proposed amendments to rules and reporting forms “to promote consistent, comparable, and reliable information for investors concerning funds’ and advisers’ incorporation of environmental, social, and governance (ESG) factors.” This is a small step, but it should also be accompanied by some penalties for firms that knowingly deceived investors.
But that false advertising is only part of the ESG story.
Conservatives Target ESG
The unprecedented global corporate activism sparked by the Russian invasion of Ukraine in February 2022 marked a turning point in ESG investing.
ESG investing has about $40 trillion in assets under management worldwide, but to social and economic conservatives, ESG investing poses a significant threat to the unchallenged authority of corporations.
This is why the rapid decision by major corporations worldwide to suspend business operations with Russia marked the largest concerted corporate protest focused around a single cause ever organized. It was also a huge milestone for ESG investing.
To date, some 600 corporations have suspended operations with Russia. But, while public opinion has overwhelmingly supported this new level of corporate activism, cultural and economic conservatives have condemned the Russian sanctions as a violation of corporate responsibilities that endangers corporate goals and violates the workings of free-market capitalism.
This is nothing new. As early as the 1970s, right-wingers have rung the bell that capitalism is under attack. In the famous 1971 memo to the conservative U.S. Chamber of Commerce, by Lewis Powell (later a Supreme Court judge), the Californian said the free enterprise system was under attack from liberal arts departments at college campuses, the New Left, television, Ralph Nader, the clergy, books, and intellectual journals. Looking back, Powell provided the fuel to start the culture wars that have become the daily fodder for the right-wing.
Powell wrote the Memo to the head of the U.S. Chamber of Commerce, the nation’s top lobbyist for the largest US corporations. He chose this group because these huge multi-national corporations were natural allies for Republicans. Powell knew that big business was always going to work with the Republicans.
Today, with ESG investing challenging the status quo, it looks like Big Business may have a new force to contend with.
Conservatives Fear ESG As A Paradigm Shift
Right-wing think tanks now equate ESG with a major shift in corporate management and ownership. In an article in the right-wing publication, Imprimis, from Hillsdale College, (December 2021) Michael Rectenwald traces ESG to “stakeholder capitalism” that emerged in the early 1970s (at about the same time as the rise of social investing), and then to the the “Great Reset,” a term that appeared in 201 after the 2008 mortgage crisis.
In his version of the story, the “Great Reset” is a process where stakeholder capitalism (aka ESG) confronts the free market system and corporate control to advance “increased government intervention in the economy.” This theory also involves COVID and climate change, but Rectenwald also said it will lead to “corporate socialism” and what an Italian philosopher Giorgio Agamben calls “communist capitalism.”
ESG advocates have probably never heard of this, but it is a powerful theme in right-wing renditions of ESG. In Rectenwald’s telling, “stakeholder capitalism involves behavioral modification of corporations to benefit not shareholders, but stakeholders.” If this sounds familiar, it should; it echoes Milton Friedman. But there is more. The Great Reset means more state control, more immigration, more printing of money, higher taxes, job losses due to vaccine mandates, and more state control due to the Fourth Industrial Revolution. And all this includes ESG investing as a major problem.
Back to the Reality of ESG Today
While the “great Reset” may or may not unfold, the current focus of ESG opponents has been on the corporations that have disengaged from doing business with Russia. This means the role of ESG investing has now become the focal point for pro-free marketers, cultural conservatives, economic conservatives, and anti-ESG opponents.
Today, conservatives oppose ESG investing for four reasons:
- ESG policies detract corporations from their primary goal of making the most significant profits possible;
- ESG gives shareholders too much influence over guiding corporate policies outside of direct business operations;
- ESG is a threat to traditional corporate and political power.
- ESG is incompatible with free-market capitalism and conventional economic theory.
What makes the anti-ESG movement powerful is that it combines cultural and economic conservatives. By definition, ESG seeks to advance issues related to environmentalism, workplace diversity, corporate transparency, and the belief that corporations have a societal obligation that extends past geographical boundaries and how business practices will impact future generations.
In almost every area of ESG policies, these goals are challenged by cultural and economic conservatives. For instance, on the financial side, economist Milton Friedman in a famous New York Times op-ed on Sept. 13, 1970, “The Social Responsibility of Business Is To Increase Its Profits,” argued that asking corporations to pursue social responsibilities beyond profit was akin to preaching socialism. This meant that corporations had to include expenses, such as protecting the environment or advocating for affordable housing, as activities that would interfere with market processes.
Under traditional economic theory, environmental pollution was considered an economic “externality” or an issue not related to business operations. Externalities are external costs to a neutral third party that arise due to an action effect of another party’s activity. Externalities especially include environmental items, such as air, water, and wildlife, that have poorly defined property rights, according to the Corporate Finance Institute.
Traditionally, corporations never paid for the costs of their environmental pollution unless the courts, and later, public opinion, forced them to act.
On the cultural side, conservatives “generally criticize corporate social and political engagement because of the sorts of causes corporations have tended to support as of late. These include issues, such as environmentalism, racial equality, and LGBTQ rights, which are on the other side of the culture war,” according to Abraham A. Singer, Director, Center for Applied Research at the Loyola Rule of Law Institute, Loyola University, Chicago.
In a recent example, Florida Republican Governor Ron DeSantis, Singer said DeSantis”didn’t seem to take issue with Disney being politically involved, but it deigned to criticize his legislative and social agenda. Had Disney, say, criticized CRT or mask mandates, I doubt cultural conservatives would have an issue with it (whereas free-market conservatives who have a principled commitment to Friedman’s sort of claims might).”
From Russia’s Invasion to the Magic Kingdom
At the economic level, conservatives opposed to ESG investing frequently invoke the names of conservative economists, such as Friedrich Hayek, the Austrian-British academic who advocated classic liberalism, and free-marketer Milton Friedman. Both taught at the University of Chicago, and they established the role of corporations in a free make economy. Milton Friedman famously said of Corporate Social Responsibility (the term used earlier for ESG investing) back in 1970, “a corporation’s responsibility is to make as much money for the stockholders as possible.”
Friedman was elevated to corporate economist superstar status because he theorized about the links between a competitive, free market, private enterprise, and capitalist system as the critical ingredients of freedom.
But Friedman certainly has his critics. One critic, Robert Ashford, specified the shortcomings in Friedman’s understanding of private property and economics. This criticism included how they distorted his free-market model so that “it created economic power in a plutocracy, perpetuated chronic underemployment of labor and capital, and suppressed the freedom of most people.”
Liberal economist Karl Polanyi also criticized extreme free marketers for their belief that the ascent of the markets could “lead to the end of politics.” In an article, Dan Pearson called this “a destructive fiction,” which was proven because self-adjusting markets failed to address economic inequality.
More Free-Market Critics of ESG
Another strong critic of Friedman, who specifically addressed the tension between the unbridled pursuit of maximum corporate profits and any social responsibility, was Nico Vorster. In his book, “An Ethical Critique of Milton Friedman’s Doctrine on Economics and Freedom,” Vorster took issue with Friedman’s amoral position that “the very foundation of a free society as the acceptance by corporate individuals of a social responsibility other than to make as much money for their stockholders as possible.”
Vorster went on to say that corporate executives “are not civil servants and have no right under their contract to act on their own preferences, to make discretionary decisions or to expend resources of the firm to achieve social goals that cannot be directly related to profits. Any social action would require a business manager to spend money rightfully the property of employees and even customers.”
Friedman also advocated that as long as corporations pay a tax, “there is no justification for permitting deductions for contributions to charitable and educational institutions.” This narrow band of thinking even extended to the environment.
As Vorst said, “Friedman’s separation of economics and ethics also has severe consequences for the relationship between the economy and the environment. Environmental degradation is, according to Friedman, acceptable insofar as the benefits exceed the costs to the people involved.”
Friedman did not live long enough o see the impact of environmental destruction or the huge corporate tax loopholes created by lobbyists. If he did, he may have tempered his belief that corporate taxes would pay the bill for destroying the environment. Still, he would never have considered labor issues and corporate transparency.
The decision by corporations worldwide marks a new milestone in ESG history. Today, ESG investing continues to become more popular worldwide. But its popularity is vigorously opposed by people who believe ESG values threaten capitalism. Today, conservatives believe capitalism is being threatened; it is not. But, it certainly is being modified by many of its corporations.