ESG: The Invisible Fist Of The Economy

Historically, many investors have added a “values” overlay to their investment preferences. The two primary values-based approaches are Socially Responsible Investing (SRI) and Impact Investing (IR). To these has been added a new acronym, ESG (Environmental, Social, and Governance). While these terms are frequently used interchangeably, it is important to understand some critical differences to see why ESG is so problematic.

In this country, churches were the earliest adopters of SRI. Through SRI’s “negative screening” approach, investments are identified and avoided in objectionable industries such as tobacco, firearms, and gambling.

Rather than avoiding certain investments, IR’s strategy is to invest in companies with potential solutions to problems important to an investor. For example, an impact investor interested in fighting cancer would invest in companies working on cancer therapies or cures. 

Both SRI and IR are legitimate values-based investment strategies that operate within the parameters of free-market capitalism. They represent constructive ways for investors to express their views, find solutions to significant problems, and participate in the capital markets without compromising their values.

ESG, on the other hand, seeks to drive an outcome through coercion. ESG engages with companies to change them, not because there is shareholder value to unlock, but because companies, acting as intermediaries, can drive ESG goals. Today, intermediaries like asset managers, banks, and now insurance companies are being weaponized against traditional energy, in particular, cutting off investment to the industry. 

ESG is the politicization of capital, or, as I prefer to call it, the Invisible Fist. It is not so much a method of employing personal preferences as a blunt tool meant to impose the values of one set of people on the entire marketplace.

BlackRock, the world’s largest money manager and a huge ESG proponent, uses the $10 trillion it manages to push an agenda that would make most conservatives blanche. As Larry Fink, BlackRock’s CEO, put it back in 2017, “You have to force behaviors, and at BlackRock, we’re forcing behaviors.”

The problem is, they’re doing all that “forcing” with other people’s money, principally pension funds, where the money is at least two times removed from its owners. But an even more powerful weapon is their voice in corporate America. When the largest shareholder in the market calls, companies listen. BlackRock’s outsized influence does indeed drive corporate behavior. Pleasing them can mean not only a boost in share price but also a seal of approval to other investors. 

Unlike SRI and IR, both of which respect other investors’ choices, ESG uses economic force, shareholder activism, and other forms of coercion to achieve its goals. The Net Zero Asset Management Initiative is a perfect example. Climate activists have convinced some of the largest investment firms to push companies toward net-zero emissions by 2050. The so-called transition to net-zero emissions requires coercion because it makes no sense to stop extracting and producing traditional energy before we have adequate alternatives.

Markets function effectively because of differing points of view about the future. ESG activists have now cowed so many investment managers that their activities now move in lockstep. ESG proponents, with cover from the Biden administration, have determined it is no longer acceptable to provide capital for oil and gas projects. Some insurance companies are pushing toward no longer underwriting insurance for fossil fuel users, like utility companies that utilize coal-based power. As a result, the very people managing our money and operating in the free markets are destroying those markets with our own money.

ESG is widely adopted by the ratings agencies, accountants, and even the federal government has adopted a similar progressive philosophical framework in various agencies. As this happens, it becomes the so-called “best practices” to which everyone must adhere. This has the effect of creating law while bypassing the legislative process entirely. The fundamental mission of companies has always been to build shareholder value. ESG transforms this mission into something else entirely, one that bends the knee to modern progressivism.

ESG often dictates that corporate boards meet diversity quotas, whether that is race-based, gender-based, or sexual orientation-based. Curiously, it is not ideological-based, the one form of diversity that has value and merit. What if, in making your board look like what ESG demands, you are forced to pick poorly qualified members? How does this serve shareholders, or for that matter, society? 

Note that SRI and IR investors don’t seek to transform a company’s internal operations. They respect the function of the market and recognize that other investors may see the world differently. 

ESG, by contrast, is fundamentally destructive. While the intention may be similar to the impact investor—that society will benefit from their engagement—the methods used are not consistent with free-market principles. And, ESG proponents believe only one opinion matters, the one they promote. That’s why you may hear that ESG is already a foregone conclusion, that it is too late to turn it away.

We must reject this idea.

You may be wondering how any of this applies to you. Perhaps it all sounds like someone else’s problem. It isn’t. ESG is forcing a massive misallocation of capital, which will lead to detrimental outcomes that are society-wide. Think bubbles and scarcity. Favored industries will get too much capital, resulting in collapses. The 2008-2009 financial crisis resulted from strong-arming banks to provide loans in the name of social justice to almost any borrower, because owning a home was thought to be a human right. The housing bubble nearly brought down our entire financial system. This was nothing more than an early iteration of ESG.

Conversely, disfavored industries, like fossil fuels, are being starved for capital because of ESG. Regardless of your views on the subject, we are far from being able to achieve an economy free from fossil fuels, and starving the industry means we will have to get energy from places like Venezuela. Eviscerating our domestic energy companies is also a national security risk, not to mention one of the leading causes of today’s high inflation. Unhappy with what you pay at the pump? Thank ESG.

Another issue with ESG is that investment returns will suffer. If you permanently exclude companies and sectors from your portfolio, over the full investment cycle, you will either have lower returns, higher volatility, or both. This is Investments 101. If you want to do that with your own portfolio, you have every right. Just don’t force it on the rest of us.

While ESG embraces a progressive agenda, that’s not what this should be about. One can easily imagine in a different political environment conservative values being forced on the marketplace through means like requiring companies to donate to pro-life causes. I would oppose this on the same grounds. 

Political issues should be kept in the realm of the legislature and the public square, not the capital markets.

Rather than being a traditional values-based investment strategy, ESG is the use of economic force in the pursuit of a political agenda. ESG proponents have determined certain outcomes must be achieved at any cost, including the destruction of legitimate companies and industries. ESG also leads to the demise of our economic freedoms and our constitutional form of government. Sadly, we are witnessing the destruction of both without even realizing it. Here in Utah, we reject the practice, and every other state should as well.

Marlo Oaks is Treasurer for the state of Utah.

The views expressed in this opinion piece are the author’s own and do not necessarily represent those of The Daily Wire.

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