This month, conservative critics of environmental, social and governance (ESG) investing had something of a surprise – an almost-simultaneous attack on their views from both Left and Right mounting remarkably similar arguments. Writing for CNBC last week, Democratic Senator Sheldon Whitehouse, the Senate’s climate-denier-witch-finder-in-chief, together with Senators Brian Schatz and Martin Heinrich, denounced state Republican officials for their stand against financial institutions whose anti-fossil-fuel policies damage their states’ economies. These elected officials, the senators wrote, are engaged in a purely ideological, anti-capitalist crusade against free-market principles.
Ten days earlier, from the Right, American Affairs senior editor Julius Krein launched a 4,800-word broadside on ESG’s conservative critics. They don’t understand, Krein suggested, that ESG is an outgrowth of shareholder primacy, the very thing they believe in.
Thus, both ends of the political spectrum end up on the same page, accusing pro-market, anti-ESG critics of subverting free-market principles.
The Old Left and New Right are converging in other areas. The trio of Democratic senators write of the “significant economic risks” of not transitioning to a low-carbon economy. Krein agrees. Major environmental catastrophes are generally bad for business, he writes. Clean energy also gets the nod. It’s the future, Klein avers, and missing out on it represents “a major business risk.” Krein even supports some aspects of the corrosive Diversity, Equity and Inclusivity (DEI) component of ESG. Disney, he suggests, “can easily make a prima facie case that its management should reflect the demographics of its target audience.”
In getting to this point, Krein does not disclose the role of the United Nations in the origins of ESG, a detail that might spoil his narrative of ESG as an efflorescence of shareholder supremacy. Krein’s essay links to a 2004 report, “Who Cares Wins,” its first page carrying the logos of the UN and the Swiss Federal Department of Foreign Affairs. The report had been produced under the auspices of the financial sector of the UN Global Compact. Neither does Krein mention that the Global Compact had been launched five years earlier at Davos by Kofi Annan when he was UN secretary general.
Sure, ESG is hard to pin down. It’s not a coherent investment strategy and means different things to different people. As Krein puts it, its purpose “isn’t entirely clear,” a factor explaining much of its appeal. Nonetheless, he prefers to view ESG as a passive risk-disclosure matrix, downplaying ESG as a vehicle for promoting a political agenda – surely the reason why Senators Whitehouse, Schatz and Heinrich are such ardent advocates of ESG and why the UN birthed ESG in the first place.
In this telling, index investment-product providers such as BlackRock, the world’s largest asset manager, are relatively indifferent to the performance of individual stocks, something that happens to be broadly true. Then follows confusion. Index product providers do care about beta or overall market risk, Krein says. However, beta isn’t a measure of market risk – or, as the finance jargon has it, non-diversifiable risk. Beta is a measure of the riskiness of individual securities or groups of securities compared to the market as a whole. Because macro-economic factors, such as the Fed’s monetary policy, drive overall market risk, asset managers like BlackRock use ESG to disclose such macro risks, Krein claims, even though, as its initials imply, ESG has nothing to say about interest rates, inflation, and GDP growth. It’s all nonsense on stilts.
In fact, BlackRock’s conversion to climate activism and demanding that the companies it invests in should produce net-zero transition plans followed an intervention by the Sisters of Mercy, who had filed a motion ahead of BlackRock’s 2020 annual meeting accusing it of neglecting climate issues in its stewardship program. Whatever the motives of the sisters, it is highly improbable that they included maximizing the value of BlackRock stock.
Krein derides conservatives for hiding behind what he calls “liberal proceduralism” to content themselves with “redefining” directors’ fiduciary duties to “reemphasize” shareholder interests. This, too, is incorrect. It is not a matter of redefining, but restating – and that’s a big difference. As former BlackRock senior executive Terrence Keeley points out in his new book “Sustainable,” shareholder primacy long predates Milton Friedman. In a 1919 suit brought by the Dodge brothers against the Ford Motor Company, Justice Russell Ostrander wrote for the Michigan Supreme Court that “a business corporation is organized and carried on primarily for the profit of the stockholders.”
Krein argues that conservatives should drop their “silly pretence” in the efficacy of markets and promote a conservative version of ESG, incorporating “their own substantive goals” – an implicit admission that ESG is indeed a vehicle for promoting a political agenda. This is asking conservatives to accept two counterintuitive propositions: first, that Congress and the administrative state have the potential to be more efficient capital allocators than markets; second, that conservatives can impose their cultural values and political preferences on Wall Street and blue-state pension funds such as CalPERS, CalSTRS, and the New York State Common Retirement Fund.
Entirely missing from Krein’s account of ESG is any notion of beneficiaries. Trust law, statutes such as Employee Retirement Income Security Act of 1974 (ERISA), and the courts require fiduciaries to act in the sole financial interests of beneficiaries. This mandate is anathema to collectivists of all stripes who want access to trillions of dollars of retirees’ capital to pursue public-policy objectives purportedly necessary for societal improvement and bringing harmony between people and planet. This effort to socialize savings is already underway in Europe. By joining with the Left, the New Right would help bring about the very thing it deplores: the Europeanization of America. Is this what national conservatism is going to be about?
Rupert Darwall is a senior fellow of the RealClear Foundation and author of Capitalism, Socialism and ESG.