With the CEO of BlackRock, Larry Fink, saying that he will no longer be using the ESG (Environmental, Social, and Governance) label, we may ask whether we are about to see the investment community genuinely move away from the much touted ESG priorities or if this is something rather more like an exercise in rebranding and delimitation.
The European Commission, for its part, is not relying on UN SDG-related (Sustainable Development Goal) language and is pushing for entities seeking funding to refer to the ‘EU Taxonomy on sustainable activities’ instead.
I would argue that ESGs in the realm of private investment, SDGs in the case of the UN, and the EU Taxonomy in the case of the EU are just sectional manifestations of the same ideas. Specializing broad concepts to specific contexts is simply a matter of practicality, and name-changing is a necessity when those concepts you’re pushing are unpopular and tend to cause a negative reaction in a sizable part of the population.
In other words, switching ‘thematic’ areas for ESG or EU Taxonomy for UN SDGs does not necessarily represent a real change in direction.
Philip Pilkington writes :
Survey data from RBC Capital Markets finds that 56% of sustainable-fund debuts have re-labelled their products “thematic” rather than “ESG.” Sustainable funds have recognized the ESG branding is toxic and are jumping ship. Fink said he was abandoning the ESG terminology because it had become “politicized by both the left and right,” but there are reasons to think the recent turn on ESG may have deeper roots. When ESG started to get popular in the past decade, it was met with enthusiasm from the marketing departments of the big firms. … From the very beginning, ESG looked like a dubious prospect to most investment professionals. ESG works by assigning scores to companies based on their compliance with a range of environmental and social goals. Yet the first thing you notice when you investigate ESG is that none of these goals are well-defined.
The fact that ESGs have migrated from the realm of technical investor-speak and positive branding to the fraught arena of political discourse (initially largely because of Florida Governor Ron DeSantis’ drawing attention to them) and that they are too broad and so too open to different metrics, leading to bad investments, does not mean that the political motivation behind them has gone anywhere. It just means that the people who pushed for them need a new name and a more precise definition.
The EU’s focus on CO2 emission reduction as the fundamental criterion to which other elements of policy are subordinated (at least in terms of project funding), together with the Biden administration’s massive investment in this area under its recent Inflation Reduction Act in the U.S., may signal not so much that the public sector is out of step with BlackRock on this, but precisely that these issues will remain a priority.
What seems to have happened is that the ‘S’ (Social) and ‘G’ (Governance) of ESG have proven too cumbersome and open to interpretation, and so they are being de-emphasized. ‘E’ (Environment) can be understood as the most urgent, but it is also the case that renewable energy represents a specific industry in which winners and losers can be picked and sales made as infrastructure gets rolled out, so it makes sense that this would become the focus.
In addition, ‘renewable energy’ as such is a category apart and benefits from incentives other than the wider political motivation for ESGs in general. It’s difficult to ignore Chinese investments in renewables as an indication of their future relevance. Tesla’s choice to dedicate its third Master Plan document to renewables infrastructure is likewise significant.
Geopolitical (U.S. and China) and ideological (Musk and Soros) opponents seem to agree on pushing the ‘E’ part of ESG forward, at least.
ESGs, shareholder activism, and fund manager supremacy
Julius Krein makes the interesting argument that the rise of ESG was facilitated by a Reagan-era reform that was seen as advancing American ‘conservative’ economic liberal ideals (shareholder primacy and value neutrality). Led by Robert Monks, the then administrator of the Department of Labor’s Office of Pension and Welfare Benefit Programs, this change involved allowing “fund managers, instead of the underlying beneficial owners, to vote the shares they held on behalf of investors.”
Perhaps allowing shareholders to exert more influence over management by better coordinating and concentrating their agency through fund managers paved the way for the kind of ‘woke’ ideological capture of the corporate world we have seen. But this would not be the case if a given ideology had not already endeared itself to fund managers.
ESG funds and the Federal Reserve
A more proximate cause for BlackRock and its use of ESG becoming prominent involves the U.S. Federal Reserve coming to Larry Fink in 2020 to make him their proxy buyer of bonds (commercial mortgage-backed securities and corporate bonds). A rise in corporate bond rates threatened to limit businesses’ access to credit, so the Federal Reserve decided to buy bond ETFs, and it was apparently agreed that BlackRock should pick what to buy on account of its expertise in evaluating debt.
With the rise of BlackRock came a rise in its ESG fund, which was inserted into popular model portfolios. From a December 2021 Bloomberg article:
Almost two years have passed since Larry Fink, the chief executive officer of BlackRock Inc., declared that a fundamental reshaping of global capitalism was underway and that his firm would help lead it by making it easier to invest in companies with favorable environmental and social practices. Lately, he’s been taking a victory lap. “Our flows continue to grow and dominate,” Fink said Oct. 13 of so-called ESG, or environmental, social, and governance funds, and similar investments. On the same conference call with analysts, he added, “BlackRock is a leader in this.”
Despite Fink now turning away from the ESG label because it has become politicized, there is no reason to suppose that its underlying ideas will be dispensed with.
But just as the mere fact that fund managers were able to better exert the power of shareholder activists after the Reagan era was not enough to explain their later wielding of this power in the service of wokeism, we still have to explain why BlackRock and others went down this route.
ESG as a means to invent new sources of perceived value for investment products
As a benefit for shareholders, ESG works to produce new products whose supposed ‘ethical’ value can be publicized in order to pump them up until returns can be extracted. Ideology and propaganda can make a financially dubious investment attractive. Such propaganda may originate in academia or party-political think tanks, but the financial sector can use it for marketing purposes.
Again, however, this is only begging the question: The fact that today certain ethical causes and not others function in this way, is the result of propaganda, social engineering, and enforced ‘official’ discourse.
Even if ESG is useful to investors in certain ways, its specific content could have been other than it is, and the fact that it has the ideological character it does cannot be accounted for simply by pointing out that using non-profit based metrics is a useful way to prop up the value of a stock. That would be true of other ideologically aligned investment products, too.
Wokeness cannot be explained away as an investment strategy.
The utility of wokeism in social control
I would argue that part of why the specific ideas at play in ESG and related frameworks are popular with a part of the political and financial elite is that they reduce the prominence of inherited identities and traditional institutions as drivers of human behavior, removing them as potential rivals and impediments for a new, global, lucrative set of initiatives.
The canonical example of this is the U.S. company Whole Foods’ identification of the increase in workforce diversity as a way to reduce unionization and thus maintain management’s control over labor (on the principle that the more diverse a social body becomes, the less cohesive and self-organizing it will be).
The economic cost
We turn to Sven Larson for an understanding of the economic cost involved. “Ironically,” writes Larson, “once the ESG criteria are put to work, they will lead to yet more, yet deeper, economic stagnation.” He outlines the sequence in which this is likely to occur: Socialist welfare weakens the economy and erodes the tax base, leading governments to cut down on welfare and ESG compliance in general, entering a period of stagnation that pushes investors to go looking for profit in increasingly speculative markets. Such an economy would then get a low ESG rating, galvanizing its government to try harder to comply with ESG in order to signal to the markets, starting the cycle over.
In the case of the EU, this final point is exacerbated by the fact that member states find it hard to inject liquidity into their economies by any means other than complying with the Commission’s policy programs (specifically, the ‘EU Taxonomy for sustainable activities’ will probably become increasingly important).
Becoming aware of this dynamic might cause supporters of ESG or post-ESG metrics to think twice. The hit to national economies and, in particular, to the purchasing power of citizens, however, is not necessarily at odds with the returns sought by the political class from their initial opting for ESGs. A growing gap between rich and poor means the poor can afford less; it doesn’t mean the rich can extract less from the poor; the poor are all the more desperate to work in whatever sector is available.
Nonetheless, in January 2023, Krein observed that,
In response to recent controversies, BlackRock and other major asset managers have begun devolving voting power back to the investors in their funds. Should this change become widespread, it would mean that public-company shareholders would become more dispersed and harder to organize, as they were in the pre-Reagan era.
This may be a merely strategic retreat or indication that some of those near the helm of large investment funds are throwing in the towel and wanting to take the pressure from investors off themselves. Indeed, the benefits of ESG-enabled social engineering are long-term and not always quantifiable, making them likely to clash with investors wanting a financial return in the present decade.
‘Green’ as permanent driver
In rejecting ESGs, however, it is not the case that an alternative socio-economic criterion for guiding investment in alignment with human flourishing would need to be at odds with the search for renewable energy.
These technologies are rising. Whether one believes in impending catastrophic human-caused climate change or not, the replacement of infrastructure and reduction of pollution will continue to be compelling reasons for mobilizing investment in this sector.
This is not to say that current promises regarding CO2 reduction will be met anymore than the Kyoto Protocol was lived up to. Only continued investment in new green products and infrastructure and their eventual roll-out are likely.
Need for alternative thematic investment criteria
It would be beneficial to develop and deploy these technologies in ways that benefit communities, are consistent with traditional principles, and promote ownership and management among community stewards. This would include shifting towards renewable energy in such a way as to decrease energy costs and increase people’s purchasing power, as Tesla’s Master Mind Part 3 report claims to show is possible.
Apart from this, as Krein suggests, an alternative to ESG criteria could consist of “energy security, national security, supply-chain resiliency, productivity and innovation, family-friendliness, geographic diversity, enhancing a non-college workforce, and so on.”
In the same vein, Sven Larson writes: “The socio-economic ranking criteria [that] are part of the ESG agenda” are “openly ideological in nature.” However, “that does not mean the socio-economic moniker cannot be used in relation to non-socialist analysis—on the contrary, it is aptly applied to the analysis of a conservative welfare state, such as the Hungarian one.” In fact, it would make sense to adopt socio-economic metrics derived from the Hungarian experience, given that this country has been “leading Europe in economic growth, jobs creation, and capital formation for almost a decade now.”
