ESG: Bringing Finance to the Culture Wars

Politicization of all aspects of public and private life is nearly complete. From the meat and potatoes of schools and policing to the more amorphously metaphysical debates about identity and speech, the passion of politics has colonized each feature of social and civil discourse. This tendency to turn everything political – fostered by a political industrial complex working with a media industrial complex (a subject for another time) – has finally bled into the financial sector, laying the ground for one of the last places where people of nearly every stripe still participate together, i.e., the economy, to bifurcate along political fault lines. The current avatar for this? ESG.

What’s ESG? The letters stand for Environment, Social, Governance. It is a set of non-fiduciary metrics to be taken into consideration by those with fiduciary responsibility. The driving ethos behind it is to answer the following: Is saving the planet consistent with making a profit? Can good corporate citizenry reflect good global citizenry? There is every reason for the idea of combining doing good for the world and doing good for business to have appeal. Who doesn’t want to make the world a better place and turn a buck at the same time? Everybody wins.

This is the spirit that moves ESG. It informs investing and financing of companies based on how well those companies center their own practices around understanding risks from environmental factors, social issues, and questions of corporate governance. While the idea has been around in some unstructured form for a long time, it was more formally born in 2006 when midwifed by folks at the United Nations working with the financial industry. The thinking was that if business interests can be aligned with sustainability, which ESG metrics-informed investment decisions would foster – that is, companies that demonstrate quantitatively measured concern with the environment, societal betterment, and an operating structure that advances ethical behavior and transparency – then capitalism could continue unabated while at the same time being a boon rather than a bane to the world at large.

ESG has been a successful lens through which some variety of sustainability has been monitored; more than $35 trillion in assets worldwide are purported to quality as such. This is an increase of 55% since 2016, according to a recent article in the Economist. There are myriad coalitions that investors and banks and corporations have joined involving a pledge to lower carbon emissions (either their own or those of companies in their portfolios), for example. According to the same article, ESG is mentioned an average of nine times a quarter by S&P500 honchos during earnings calls. In 2017, it was just once or not at all.

 (https://www.economist.com/leaders/2022/09/29/the-fundamental-contradiction-of-esg-is-being-laid-bare)

Using ESG factors to make investment decisions grew among the business and financial community but remained largely unmentioned by policy makers or government officials until Republican politicians and candidates for office seized it as another cudgel in the culture wars. Governor Rick DeSantis is the most notable figure to open another wedge by using government’s oversight of business to admonish and threaten businesses that practice or advocate policy with which he, and most importantly, voters, see as “woke.” A financial investment firm handling, say, a state pension, by deciding to not invest in a fossil fuel company, is practicing “woke” capitalism. This is of a kind with Gov. DeSantis’s regulatory assault on Disney for that company making public its position on LGBTQ+ issues, which stand in contrast to that of the Republican-held statehouse and legislature. Nineteen attorneys-general from GOP-held states have issued a letter to investment firm BlackRock that they believe ESG policies are being followed to the detriment of their pensions. Even Marjorie Taylor Greene has mentioned the investment philosophy in campaign speeches to rally an anti-woke, climate-change-denying base.

There’s not a lot of concern that these efforts are anything more than electioneering and will likely die on the vine. But the growing movement to pursue the private sector to shape the public sphere has significant ramifications to consider. 

Certainly, government and its policy makers have shaped the public sphere by influencing the private sector before. Everything from usury laws to consumer protection efforts to the Civil Rights Act to the Americans with Disabilities Act are examples of government actions and regulations putting strictures on how business operates. But whereas most of government’s intercession with how business operates is to preserve fairness, safety, and standards that promote a harmonious social market, the campaign against ESG as “woke” capitalism is based on a distaste for an operating philosophy that requires state control of the market to prevent the operating philosophy from being put into practice. It’s like forcing vegetarians to buy beef because the state’s decided it’s denigrating to beef-loving folks to NOT eat beef.

Politically motivated regulation or sanctioning of operators in the economy at the state level, aside from being a questionable use of the cold, labyrinthine and inflexible machinery of legislation to score political points that largely achieve only transient political ends (namely, riling up the base to come out and vote) rather than logical policy ends, will permanently reshape a state’s business ecosystem, driving businesses that DO want to operate the way they are under ESG principles to states friendlier to them. We’ll get ESG-friendly blue states and fossil-fuel friendly red states. 

But few red states can accommodate actual fossil-fuel businesses in so far as there are only so many places for fracking or drilling or coal mining. Yes, there’s always the possibility of office locations moving, but, in the post-Covid world, the notion of aggregated workforces is being completely reframed. And besides, HQ locations invariably depend on tax breaks or where the boss lives.

Rich states will get richer, poor states get poorer, all so that a Ron DeSantis or an MTG can fundraise for more of their electioneering and get voted into power without ever actually governing or delivering anything for their constituents aside from making them feel better about sticking it to the libs.

This isn’t to say the ESG framework and its use as an imprimatur of corporate virtue with which companies mark themselves doesn’t have problems. There’s a whole cadre of those on the left who rail against investment firms using ESG because it so often is more talk and less walk. Like greenwashing or questionable “gluten-free” labeling. But the continued cleaving of culture, now using economics, is another bad sign of a bad evolution. 

The either/or, right/left construct brought to institutional investing and corporate categorization is another step in the direction of not only two cultures — already well-established and ossifying — but two separate economies. At that point, the union may finally be no more.