The Right Can Beat ESG

L ast month, a disagreement emerged on the right about conservatives’ ability to combat ESG. Writing for National Review, former Blackrock executive Terrence Keeley wrote that “Conservatives mustn’t give up the fight” against ESG. Meanwhile, in Compact Magazine Julius Krein argued that “the Right Can’t Beat ESG.” Both can’t be right.

And in our opinion, Keeley, who understands ESG from an insider’s perspective, is right, while Krein, whose knowledge of the investment phenomenon is somewhat imperfect, is wrong. The right can, and must, defeat the ESG agenda.

Let’s start by acknowledging that Krein is correct on this point: The right waited far too long to enter the fray. The ESG movement captured the largest public pensions, asset managers, and proxy advisers before most conservatives had even heard of the term. As a result, the left had at least a 15-year head start before the right even got serious. Further, Krein is correct to note the rise of institutional investors and index funds, and to point out how they have led to changing power dynamics and incentives from prior eras of corporate governance and investing. But Krein gets much else wrong.

First, Krein misrepresents ESG’s origins. In his telling, ESG began as a spontaneous market phenomenon: “ESG arose in the early 2000s” in “a working group composed of the world’s leading financial institutions, including Goldman Sachs, Morgan Stanley, Deutsche Bank, and HSBC.” These private actors then “grounded ESG within the principles of shareholder primacy.” As such, “their goal wasn’t to impose a conspiratorial political project, but to improve transparency and disclosure.”

But this is a misleading portrait of ESG’s origins, and a self-serving, truncated version of the history of “social investing” that relies wholly and uncritically on ESG practitioners’ own accounts of their motivations. It’s self-serving because Krein has long been working with progressive activists in a campaign to ban shareholder primacy since before ESG became a hot topic on the right. The only way he can keep his anti-shareholder message appealing to conservatives is to assert that shareholder primacy is the cause, not the solution, to ESG.

First, Krein ignores the fact that prior to the turn of the century — and what he denotes as the “start” of the ESG project — those who wished to invest with an eye toward advancing social and political causes had a perfectly serviceable vehicle by which to do so. What was then called “socially responsible investing” (SRI) allowed investors — large, small, and in between — to participate voluntarily and passively in efforts to de-capitalize companies and industries whose values clashed with their own. This was not enough for those who saw the capital markets as the means to achieve broader societal goals, however. And the evolution of voluntary and passive SRI to mandatory and coercive ESG was driven explicitly by the desire to harness investment capital to political ends.

More to the point, Krein’s own source demonstrates that “The U.N. Global Compact oversaw the collaborative effort that led to this report and the Swiss Government provided the necessary funding.” Krein neglects to mention the role of governmental, or intergovernmental, bodies in the creation of ESG. Nor does he acknowledge that it has always been a political project. But page nine of the original ESG paper illustrates the plan for each stakeholder: “Governments” are to “proactively consider (ESG) in PF (pension fund) management.” Meanwhile, “regulators” and “governments” are to “implement (ESG) reporting standards.” This doesn’t sound much like the spontaneous order that people like Michael Bloomberg and Krein have described. Indeed, their attempts to portray ESG as merely the result of free markets are disingenuous.

Nineteen years later, much of the UN ESG agenda either has been, or is being, enacted. For example, the Biden Administration has instituted a “whole-of-government” approach to environmental issues, including “climate-related financial risk.” At a glance, this includes “climate risk” and “human capital management” disclosure mandates at the SEC, blue-state public pensions leveraging their trillions worth of assets under management to apply ESG pressure on corporations, changes to the Department of Labor’s standards for private pensions, and the Federal Reserve imposing “Climate Scenario Analysis” on the largest American banks. All of this adds up to one of the most egregious abuses of government authority since Woodrow Wilson. A single one of these regulations, the SEC climate risk disclosure rule, is conservatively estimated to more than double the compliance costs for publicly traded companies, from $3.9 to $10.2 billion yearly.

With that in mind, it should be inarguable that government mandates and political coercion are integral parts of ESG. The logic behind such a proposition is obvious enough: Withholding capital from politically unfavored investments and directing it toward less profitable ones is not a sustainable strategy, absent significant government pressure and significant leveraging of pooled capital by those holding politically favored views.

But Krein does not acknowledge these basic facts, insisting instead that “ESG isn’t — and never was — in conflict with an emphasis on shareholder value.” Were Krein’s claim true, ESG advocates wouldn’t be lobbying governments around the world to institute ESG mandates and incentives, and they wouldn’t be reliant on the efforts of those whose use of managed capital often conflicts directly with the beliefs and values of the owners of that capital. But they are. ESG is not the product of shareholder primacy, but a fundamental rejection of it.

Krein’s blindness to this may be ideological. Those who believe the myth that the past 50 years have been dominated by “neoliberalism” and “market fundamentalism” often overlook all the ways that government has continued to expand and the ways in which some public-private partnerships bleed slowly but surely into corporatism. Krein’s forward-looking recommendations — which are as flawed as his history — certainly suggest that he is one of these people. Instead of defending shareholder primacy, Krein recommends that conservatives pursue “constructive policy and corporate governance frameworks.” He doesn’t elaborate much here, but it’s clear in context, and it’s clear that what he’s supporting is based on a fundamental misunderstanding (or purposeful misrepresentation) of the shareholder model of capitalism and its moral foundations.

But this shouldn’t be a surprise. Over the past several years many influential progressive organizations have advocated for government to mandate that all corporations transition “From Shareholder Primacy to Stakeholder Capitalism.” Krein has long been an enthusiastic participant in this effort, attempting to build a bipartisan coalition in favor of mandatory stakeholder capitalism, never understanding, or at least never acknowledging, that the normative model of stakeholder capitalism is explicitly and intentionally based on moral principles that conflict with those of some 4,000 years of market and capital evolution.

In other words, increasing conservative opposition to ESG, stakeholder capitalism, and their largely post-capitalist moral priorities has become a serious inconvenience for Krein and his compatriots. And despite the “inattentiveness” that Krein is correct to blame conservatives for, today the situation has evolved to such a degree that economic and political trends have now turned against ESG. Axios recently reported, for example, that “companies that were once very vocal” on social issues unrelated to their business have become quieter following events after which they may have previously commented publicly. And energy producers like BP are returning to investing in traditional energy, which is not surprising given the superior returns investments that ESG typically frowns upon have achieved over the last twelve months. As for the ESG policy agenda, it is profoundly vulnerable to legal challenge, especially in the wake of the West Virginia v. EPA decision, as Jim Copland and Bernard Sharfman explained last year in the Wall Street Journal. A Republican-controlled Congress could further rein in the administrative state and thereby prevent the Biden administration’s “whole-of-government” ESG agenda from fully going into effect and keep it from recurring in future administrations.

This is not to say that victory is around the corner. As long as most voters and consumers reject the far left’s agenda, the temptation to impose it from the top down will remain. This has been the case both inside and outside of government for 150 years. And in this very limited sense, Krein is correct: The right will not extirpate ESG entirely from the marketplace.

But he is wrong in a broader sense. First, he is wrong that that ESG is an array of private efforts. It is quite the opposite. In fact, it is an entire global policy agenda. And more importantly, he is wrong that the right cannot both roll back ESG policies and provide alternatives in the marketplace. We can. America’s diverse and pluralistic system of political economy can accommodate all sorts of investment options from conservative ESG alternatives — such as those provided by Amberwave Partners — to traditional investment approaches strictly focused on risk and return. Indeed, the financial and political histories of Western Civilization suggest that decentralization and the embrace of practical diversity are among the keys to economic flourishing.

Russ Greene is a senior fellow for economic progress at Stand Together. Stephen R. Soukup is the senior commentator, vice president, and publisher of The Political Forum, an economics research provider that delivers research and consulting services to the institutional investment community, with an emphasis on economic, social, political, and geopolitical events. He is the author of The Dictatorship of Woke Capital.