The week of July 17, 2023 (belatedly): The ESG debate (continued), fiscal policy, electric vehicles, markets, and much, much more.
The week of July 17, 2023 (belatedly): The ESG debate (continued), fiscal policy, electric vehicles, markets, and much, much more.
Things seemed a touch downcast over at the FT’s Moral Money section, a generally reliable cheerleader for ESG (environmental, social, and governance investing) and its symbiont, stakeholder capitalism, on July 14.
Simon Mundy lamented the reversal in the upswing in hirings of chief diversity officers (CDOs, a sequence of initials once associated with a different type of value destruction):
CDO hiring [is] down by 4.5 per cent [over the last year]. Several high-profile diversity heads in the entertainment sector, including at Disney and Warner Bros Discovery, have left their roles in quick succession. Other such positions at companies including Twitter have been eliminated altogether. Meanwhile, there are increasingly conspicuous warnings that diversity heads are not getting the resources and support they need to do an effective job.
Does this reflect companies’ growing discomfort with the political backlash against “woke capitalism”? Are businesses simply tiring of a diversity agenda to which they were never truly committed in the first place? Or is real progress being made, despite these troubling signs?
Or could it be that, in today’s somewhat tougher times, senior executives are beginning to question the value that CDOs bring to shareholders? Or maybe a lot of the top jobs have now been filled. Who knows? It was interesting to read that there have been “increasingly conspicuous warnings that diversity heads are not getting the resources and support they need to do an effective job.” “Increasingly conspicuous,” eh? There are, clearly, empires still to be built. See HR for details.
Meanwhile, Patrick Temple-West notes that the House of Representatives held its first hearing about environmental, social, and governance investing (ESG) before the financial services committee. The committee was, Temple-West noted, “stocked with Republicans who have strong financial backgrounds rather than noisy Trump loyalists. So the conversation around ESG was more thoughtful than the House Republicans’ previous ESG scrutiny this year.”
But whether they were thoughtful or not, Temple-West still wondered whether the direction of their arguments might have been formed, at least in part, by donations:
It’s important to remember which companies fund the politicians responsible for calling this week’s hearing. Evidence suggests that the hearing was being pushed by companies opposed to ESG because it might hurt their businesses.
A new report found that the Republicans who held Wednesday’s hearing have taken a chunk of money from oil and gas companies as well as other business sectors that often fall foul of ESG filters.
There is nothing particularly shocking about companies lobbying to defend their interests (indeed, gazing across at the other side of the aisle, Temple-West notes that, “Democrats are not immune from pushing political agendas for the organizations that pay them — specifically labor unions”). In fact, there’s a good argument to be made that in spending time and money defending their shareholders’ interests, just as, equally legitimately, union leaders may do the same in the interests of their members, corporate managements are doing what they are meant to do. By contrast, devoting corporate time and money to the pursuit of an agenda unrelated to shareholder interests raises troubling issues about the exercise of C-suite power when, thanks to the inroads being made by stakeholder capitalism, it is no longer so constrained by the obligation to respect shareholder primacy.
To suggest, in Temple-West’s words, that “ESG investing is getting its turn in the barrel because campaign donors want it there” seems to me like a stretch. ESG has come into focus because of the influence of its ideas and the power of those who hold them, because of its association with various hot-button positions, and yes, because it has come to be seen as a threat by various corporations in various sectors, including oil and gas, a viewpoint that many congresspeople might well, of their own accord, already share. And it’s healthy that ESG is being taken with the seriousness it deserves at the elected level. If the SEC, a regulator, takes ESG seriously (and it does, if in a mistaken way), if the business and financial worlds take it seriously (and they do, also, generally, in a mistaken way), and if successive administrations have taken ESG sufficiently seriously to adopt sharply conflicting rules over a significant aspect of it, then surely ESG merits some time under the spotlight, even if the bright light does it no favors.
ESG is a profoundly political idea. Its E (environment) and its S (social) are, together with stakeholder capitalism, being used to advance a largely progressive political agenda through, directly or indirectly, corporate power, effectively bypassing much the of the normal democratic process. For ESG to be debated at the legislative level, both nationally and in the states, is a development to be welcomed. It is a sign of democracy at work, as is the increasingly critical focus on ESG in many (red) states.
As I’ve noted before, there has been an outraged response from some quarters to political criticism of ESG from the right. Suggesting that it has been driven by campaign donors is only the latest response, following on from, among other claims, arguments that ESG’s critics were in fact opposed to free markets and that ESG delivered (and would continue to deliver) superior performance. The latter is a questionable assertion that is one half of the much-used maxim that ESG is a way of doing well by doing good. Others tried to pigeonhole ESG as just another front in the culture wars. To be fair, overuse of the phrase “woke capital” by some of ESG’s critics, and, say, the prolonged Disney wars, have all helped that argument. However legitimate that tactic (and however useful in attracting attention to the dangers of ESG), it risks underplaying key elements in the underlying critique of ESG, such as on its assault on shareholder rights and on its subtle (and not so subtle) undermining of democracy.
And then are those who fret about what discouraging the E in ESG might mean for the environment. But, as I have noted before, they should perhaps have listened to these comments from last year:
The financial services industry is duping the American public with its pro-environment, sustainable investing practices. This multitrillion dollar arena of socially conscious investing is being presented as something it’s not. In essence, Wall Street is greenwashing the economic system and, in the process, creating a deadly distraction. I should know; I was at the heart of it.
And who said this?
As [Tariq Fancy], the former chief investment officer of Sustainable Investing at BlackRock, the largest asset manager in the world with $8.7 trillion in assets, I led the charge to incorporate environmental, social and governance (ESG) into our global investments. In fact, our messaging helped mainstream the concept that pursuing social good was also good for the bottom line. Sadly, that’s all it is, a hopeful idea. In truth, sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community.
Oh.
Some of the outrage has been driven, in part, by genuine surprise at the notion that there were people who disagreed with what appeared to be, in the West, at least, a cozy corporatist consensus. Groupthink comes with its disadvantages. There was also, I think, irritation that politicians were moving into territory that ESG’s promoters had made their own. And for some there was acute concern about the threat posed to an ecosystem that has been a rich source of profits, jobs and power for large numbers of people. Come to think of it, to understand ESG, following the money is not the worst way to start.
Some now believe that ESG has passed its peak, and here and there are signs that this is the case, from bankers downplaying it in their Pitch Books, to a decline in the extent that executives mention it in earnings calls, to Larry Fink (Blackstone’s chairman and CEO) declining to use the term. But there is also a very real possibility that it will live on, if less prominently advertised, or maybe even renamed. Writing in Capital Matters, Mike Viola noted that Fink had said that he continued to “believe in conscientious capitalism,” whatever that might be. Writing in March 2022, New York University finance professor Aswath Damodaran, a strong critic of ESG, argued that, based on the fact that its failings had become increasingly evident, a moment of reckoning was coming for it and wondered what “the next big thing” would be. He didn’t know, of course, but he was “willing to make a guess, since so many ESG experts and advocates are already using it as an alternative. It is ‘sustainability,’ a word that can mean whatever you want it to mean.”
That’s certainly plausible, and, as Damodaran implied, it would leave plenty of room for a repackaging of ESG under a new guise.
Writing shortly after Damodaran, I disagreed about the imminence of that moment of reckoning. I may have been wrong about that, but (like, I think Damodaran), I wasn’t convinced that it would mean very much. I’ll stick with that. As mentioned above, too many people are doing too well out of ESG, and it is now very well entrenched across a large swath of the financial, business, and activist worlds.
And so here’s Wharton, where students can study for “an MBA in sustainability at one of the world’s most sustainable universities”:
With growing demand for companies and organisations to play their part in tackling environmental and social issues, sustainable leadership is becoming a major element of the MBA experience. Business schools around the globe are enhancing their sustainable focus, offering elective modules, certificates and sustainability tracks that students can opt for.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 128th episode, David was joined by the GOP candidate who had the most money spent against him in a House race in history — by DOUBLE — Scott Baugh of CD-47. As Scott prepares for a 2024 campaign to win the seat he is called to, David and Scott walk through the economic challenges facing us right now, discuss what a reform-minded conservative looks like these days, consider how to think about legislation in an economic crisis, talk about first principles, and, oh yeah . . . take a look at the Fed!
No Free Lunch
Earlier this year, David Bahnsen launched a new six-part digital video series, No Free Lunch, here online at National Review. In it, we bring the debate over free markets back to “first things” — emphatically arguing that only by beginning our study of economics with the human person can we obtain a properly ordered vision for a market economy…
The series began with a discussion with Fr. Robert Sirico of the Acton Institute. Later guests include Larry Kudlow, Dennis Prager, Dr. Hunter Baker, Ryan Anderson, Pastor Doug Wilson, and Senator Ted Cruz.
Yes, the six-part series now has seven parts.
Enjoy.
The Capital Matters week that was . . .
Fiscal
Electric-Vehicles startup Lordstown Motors has filed for bankruptcy protection, becoming the latest cautionary tale for states’ efforts to conquer the economic realities of global marketplaces through the use of economic-development subsidies.
Federal spending skyrocketed as a result of the Covid pandemic, but the growth of the federal government had been occurring long before America went into lockdown. Since the beginning of the 21st century, national budget outlays have zoomed up 107 percent, after adjusting for inflation. Both political parties can share the blame for this out-of-control spending. The escalating debt is a serious issue that will not just impact our national security and economy, but also the states. Federal aid programs will begin to dry up, while tax burdens from Washington, D.C., could soak state residents even more than they do now. This is why states need to take the lead in restoring federalism.
Many states are demonstrating that they can govern effectively through policy competition…
The Great Plains region was the center of action during the recently concluded third year of the state-tax revolution, propelling the ongoing drive toward competitive state tax systems, and Nebraska was the primary actor in this year’s efforts. In a year when tax reform was already the norm, the Cornhusker State raised the bar for the region and the country by simultaneously accomplishing major income- and property-tax reforms.
Electric Vehicles
Nevertheless, the threat from Chinese imports to car manufacturers based in the U.S. should not be underestimated. If the government is set on forcing through the switch to EVs (which it should not be, not least due to the comparatively trivial difference it will make to global greenhouse-gas emissions), it should at least do so at a pace that does not hand the U.S. auto market over to Chinese manufacturers.
One other point to make on this (for now). Automakers are partly funding their massive investment in EV production out of the profits they make from the sale of conventional cars. Shrinking those profits by government edict seems . . . unwise.
In his new report on electric vehicles (EVs), the Manhattan Institute’s Mark Mills notes that nearly one-third of the electric vehicles sold globally in 2022 were hybrids. But hybrids, writes Mills, “by definition, use combustion engines that policymakers are eager to ban.”
Writing in the latest Capital Letter, I argued that their opposition to hybrids was telling…
It’s no secret that the West’s increasingly coercive switch to electric vehicles (EVs) has been a gift to China. This “transition” may do relatively little to reduce global greenhouse-gas emissions, but by forcing the abandonment of a technology in which Western automakers enjoy an enormous incumbency advantage, it is offering an opportunity for Chinese automakers to break into European car markets (which they show every sign of trying to take) that have hitherto largely eluded them. U.S. automakers ought to be protected, for now, by relatively high (27.5 percent) domestic-tariff barriers, but their international sales are likely to take a hit. Moreover, because of China’s current grip on the global EV supply chain, an EV-dominated U.S. auto sector will be far more dependent on China, a hostile nation, for an unhealthily prolonged period despite its efforts to build heavily subsidized (and incomplete) substitutes at home and increased reliance on suppliers in friendlier countries.
That this will have unfavorable economic and geopolitical effects isn’t hard to see, but so far as the latter is concerned, here’s a new twist…
Markets
China’s empty buildings, unused airports, and barren highways are what central planning looks like in practice.
One of the key problems with central planning is that government planners don’t know how much to produce. In the absence of price signals that communicate the need for goods and services, they just have to guess. The guesses aren’t guided purely by practical analysis, of course. Political considerations often play a large role, as do the desire to “uplift” less developed areas…
After a tour-less pandemic, Swifties’ pent-up demand for the singer-songwriter’s live performances has resulted in a controversy over ticket prices on the secondary market, accusations of price-gouging, and congressional inquiry. Variety reports that, as early as November 2022, senators Richard Blumenthal (D., Conn.) and Marsha Blackburn (R., Tenn.) coauthored a letter to Lina Khan, chairwoman of the Federal Trade Commission, expressing the concern that, “while some consumers opt to purchase tickets on the secondary market, most fans cannot afford to pay thousands of dollars for a single concert ticket.” More recently, “The Ethicist” in the New York Times Magazine responded to concerns about reselling extra tickets.
One can resell Taylor Swift’s Eras tickets for thousands of dollars. That’s simply a recognition of reality. What The Ethicist fails to note is that one should resell tickets for the market-clearing price.
Manufacturing
“The world is in the grip of a manufacturing delusion,” says the Economist. If you’ve ever listened to an American politician talk about the economy for longer than 30 seconds, you’re likely to hear romantic talk of “good-paying manufacturing jobs” or “reshoring manufacturing.” The Biden administration has made it a priority of its economic agenda, and red states have gotten in on the action as well. For Capital Matters today, John Mozena wrote about Ohio’s failed efforts from Republicans and Democrats to support manufacturing in Lordstown…
Banking
In his weekly Newsweek column, the economist Henry Hazlitt once observed that “the government is not a canny lender.” As the recent collapse of Silicon Valley Bank (SVB) so painfully illustrates, the government isn’t much better as an insurer, either. Unfortunately, officials have not learned this lesson…
Regulation
The proposal to inflict heavy price controls on the U.S. market would devastate an industry where the U.S. leads the world and would represent probably the biggest gift to the Chinese economy in all of history. The Vital Transformation report predicts that the net earnings of the 44 biopharmaceutical companies they studied would decline by 37 percent. The Chinese life-sciences industry would quickly match, and then surpass, that of the U.S.
When considering the proposed policies in Europe and the U.S., one can only ask: Why do Western policy-makers propose ideas that would collapse their scientific and commercial advantage in the life sciences?
Inflation
Corporations have been greedy for as long as there have been corporations. If their greed caused inflation, it would probably be unstoppable. Their greed didn’t suddenly start in 2021, when inflation began to spike, and then gradually lessen over the last year, as inflation receded…
New York City:
Nobody likes paying more for anything, but New Yorkers have been paying less in real terms for the subway for eight years.
In spring 2015, the MTA increased the subway fare from $2.50 to $2.75. New Yorkers complained then and they’re going to complain now, but a fare increase is, well, fair and necessary. There has been no price increase since 2015 despite an average annual compounded inflation rate of 2.63 percent, according to the personal consumption expenditures index from the St. Louis Federal Reserve. In total, the price level increased 23.12% from May 2015 (PCE of 103.156) to May 2023 (PCE of 127.007). This means that, although New Yorkers have been paying the same nominal price for the past eight years, we have been paying less than we should have…
Industrial Policy
Writing in the Financial Times, Janan Ganesh correctly describes the inherent contradictions of New Right populists who, though boasting of draining the swamp and elevating a little guy, push policies that further empower the elites…
ESG
The House of Representatives resumed its session on July 11, and some congressional Republicans are calling July “ESG month.”
It’s not hard to see why: After a year of setbacks, environmental, social, and governance (ESG) investing is under fire, with a new report by the Republican ESG Working Group highlighting how ESG has been letting investors down with unclear goals, politicized portfolios, and disappointing returns…
The Economy
The Biden administration, now touting the alleged success of Bidenomics, is trotting out statistics, such as spending on construction in manufacturing, that zoom in on narrow slices of the economy. According to the latest releases of data, however, touted by Biden, spending on construction in manufacturing amounts to only 4.1 percent of overall U.S. private-investment spending. It’s easy, though, to see why the Biden administration is choosing to zoom in. If you zoom out and look at the statistics on real wages, such as those in the chart, the jurors on Bidenomics would quickly reach a verdict…
Antitrust
In The Morning newsletter, German Lopez discusses the Federal Trade Commission’s (FTC) concerns about Microsoft’s acquisition of Activision-Blizzard. Despite what FTC chairwoman Lina Khan and the Neo-Brandeisian Federal Trade Commission (FTC) argue, the possibility of bundling presented by this merger is in no way new to the video- game industry, nor is it worrisome…
Climate
Those pushing the Green New Deal like to talk of a glorious, clean future, filled with “good-paying jobs,” happy public-transport users, sleek electric vehicles, and all the rest. I remain unconvinced, shall we say, that this is how this latest centrally planned “great leap forward” will turn out, and so this story from Bloomberg came as no great surprise when it appeared last week…
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