The backlash against ESG

The impact of economic policies reaches far beyond economics. Consider this: The Wall Street Journal recently ran a story about a letter addressed to the money management giant BlackRock by the attorney general of Arizona and 18 of his counterparts in other states. This comes after a series of actions by state-level financial officers questioning BlackRock and other asset managers and rating agencies for their heavy-handed imposition of ESG (environmental, social, governance investing) on state investment assets and even on the states themselves.

It's not a coincidence that the world’s richest man and former ESG darling, Elon Musk, called the whole thing a scam. Add pushback from Republican senators, governors, and other hopefuls against the politicization of the world of finance, and these developments amount to a powerful pushback to a movement that had been seen as the inevitable future of investing.

Here’s why that is extremely important. That sense of ESG inevitability was a key source of the movement’s power. The message was, fall in line with the inevitable march of history or get left behind.

When investors questioned the prudence of imposing political criteria on financial decisions, they were assured that it was prudent because this was where the world was going. They were assured that the world’s governments would eventually wake up to the reality of climate change and outlaw fossil fuels, leaving them as “stranded assets” sitting on company balance sheets. As social consciousness inevitably rose, anti-social behavior would be punished in the form of “reputational risk” and eventually the loss of the company’s “social license” to do business. So don’t take a risk, do the safe thing, and fall into line now.

But somehow, political reality didn’t get the historical inevitability memo. A populist revolt stubbornly held on, not just to God and guns, but also to fossil fuels, color-blindness, viewpoint diversity, parental rights in education, and the sanctity of life. Facts are stubborn things, but our ruling class now has to learn that stubborn people are also a fact.

Those who stubbornly hold fast to things that the anointed can’t believe are still around are aware, angry, and registered to vote (and have the IDs to prove it). Dozens of attorneys general, treasurers, senators, and governors know it. This means that risk management’s chief selling point has suddenly become the chief objection. ESG is now a focus of controversy and a political risk.

That controversy is now so undeniable that the ESG industry is lashing back at the backlash. As You Sow, one of the non-profit clearinghouses for the industry, posted a quote on social media acknowledging that “the acronym ESG as a construct may have lost some of its luster” and has been explaining to the shrinking faithful that the reason “why there’s been such a backlash against ESG” is that it is “extremely effective.” So, the new party line is basically this: “We’re losing so much because we win so much.” The unspun version is that ideology pushed the movement beyond the investing public’s toleration point, and the shareholders and the voters are correcting the imbalance.

Things have gotten so bad that it’s not just the populist right who are alienated. They’ve alienated some pretty close former allies, such as Tesla Inc. The green giant of industry had been an ESG colossus until founder Elon Musk failed to keep pace with the inevitable march of history and came out of the closet as a “free speech absolutist” and defender of the underdog.

At the recent Tesla Annual meeting, the shareholder base of an electric car and solar panel company jeered as activists presented ideologically charged public statements, cheered when the moderator stepped in to cut the speeches short, and then went on to vote down the slate of ideological ballot proposals. Did I mention that this was Tesla? If they’ve lost Tesla, they’ve lost.

The job isn’t over, of course. Humanistic philosophy can deny, but not ignore, the reality of human sin. This means the movement needs to find other ways to purge subjective feelings of guilt. Social justice investing steps in as a form of atonement for the sin of being a capitalist, except the atonement is never complete because the demands for purity keep escalating. Americans should revolt against this new form of authoritarianism, but only a Christian understanding of human nature, and human dignity, can truly replace it.