Companies have long espoused organizational values to help differentiate themselves from others and to focus/ encourage internal conduct. This practice became more broadly adopted in the wake of corporate scandals in the 80’s and 90’s.
However, more recently these values have become increasingly focused on external corporate behavior, often in ways that are disconnected from a company’s core business. That is, they began to outline the behavior of the company within the world more than they defined employee behavior in the company. Over time, groups of behaviors were organized under the rubric of ESG.
Once seemingly a strategy to reward companies who set objectives related to their organizational values, now ESG is being used to force corporate behavior. The US government and large investment firms like BlackRock and even credit rating bodies like S&P are using ESG criteria of their own design to drive changes in the behavior of American companies in ways that do nothing to increase profits and often fall outside of the scope of the goods or services the company provides. In this way they are forcing companies to adopt a progressive agenda or risk losing access to capital.
The inflationary effects of ESG will increase the costs of raising a child. Environmental measures meant to bring about a transition to clean energy will inevitably raise the cost of gasoline, natural gas, and heating for decades to come. These same measures will also impact the food supply chain, increasing costs for farmers and ranchers that will inevitably be passed to consumers.
As ESG continues to puts politics over returns, investment vehicles will produce less than optimal returns. Retirement accounts and college savings accounts (509s) will accrue lesser amounts over time than they would have, had their management been based solely on considerations of the return on investment. That means less money for kids’ college, less money for parents’ retirement, and less to pass on to help the next generation build wealth.
ESG is already impacting farmers. A proposed rule from the Security and Exchange Commission (SEC) would require all publicly traded companies to report their direct, energy/electricity generation, and supply chain greenhouse gas emissions. Though the rule specifically addresses publicly traded companies, “all private farms, ranches and small businesses that provide goods to publicly traded retailers and processors will be required to disclose emissions data under the supply chain reporting requirements.” First this would impose onerous and costly reporting requirements on farmers. Perhaps worse is that they could incur legal liability from the companies they supply or those companies’ shareholders for inaccurate reports.
The situation facing European farmers should be a warning for America’s food producers. There, climate activist governments have imposed draconian measures. For example, Dutch lawmakers have introduced policies that would require 11,200 of the roughly 35,000 dairy and livestock farms to close in order to meet nitrogen reduction goals.
ESG uses the leverage of capital to force behavior. Activist investment firms evaluate companies on their adherence to various policies, many of them of a social nature on issues that are contentious within our society. Things like the incorporation of critical race theory, anti-racism, or gender identity “training” would be assessed under the S of ESG. Companies that don’t believe in the subjective criteria or simply don’t want their business to take a position on some of these issues will be obliged to do so in order to achieve or maintain a good ESG rating. That’s because the ESG rating will be a measuring stick, unrelated to company performance, that investment firms will use when deciding if or how much to invest in a company, and those investment dollars are what fuel a company’s growth and success. In this way, companies will become conduits for a politicized agenda rather than spending their time focused on their actual business.
Many state AGs and financial officers are pushing back against activist investors and federal government overreach in pursuit of so-called ESG objectives. These public servants see how ESG criteria have been used to cripple domestic energy production or drive investment away from other legacy industries, many of which play a key role in their state economies. In the Biden administration, agency efforts to implement subjective ESG criteria have exploded, with the SEC and EPA crafting new regulations that will essentially pick winners and losers in state economies, regardless of market principles. States see the push for ESG as a way for activists to push their progressive agenda outside of the democratic process. They argue that actions that have the impact of destroying whole sectors of the economy should be debated and decided upon by elected officials who are accountable to voters.
These requirements are an unprecedented escalation of federal regulation on business, adding reams of red tape for every company in America. As a general rule, red tape increases operational costs for businesses. They’ll have to hire personnel to collect data and teams of lawyers to ensure they are compliant with new federal regulations. Employee information will be part of the equation – whether you drive alone or in a carpool, gas or EV, or take public transportation, the federal government will pry ever further into your life.
Beyond simply adding costs for every company, which will have an inflationary effect, this reporting system by design will lend itself to a grading system whereby “good ESG” companies will be rewarded and supposedly bad ones will be punished. Investment dollars – capital – for businesses to grow will be the primary reward, and its absence, the punishment. Though undefined at present, government response is almost certain. Armed with this information, federal agencies will be obliged to set ESG standards, enforced by fines or other punitive measures.
The result is predictable: the innovation of American business will be stifled and some companies will suffer for reasons other than their ability to provide a product or service to customers. It could be the company where you work.
There’s nothing wrong with informed investors buying stock in companies that are aligned with their values. Historically that’s taken two different tracks. Socially responsible investing, where people chose NOT to invest money with companies they were fundamentally opposed to, has been used by various groups – by religious groups against alcohol or gambling or abortion providers, by public health advocates against tobacco firms, the list goes on and on. In activist investing, informed investors put their money behind enterprises that are of some intrinsic value to them, something often seen with emerging industries whose financials wouldn’t normally encourage investment but whose potential for future good is attractive–electric vehicles, for example.
The issue with ESG is that the criteria are subjective, and they are defined by largely unknown persons who are not accountable to the public. You don’t get to vote on the people who set the criteria or the criteria itself. Second, increasingly you don’t get to vote on where money goes. A great deal of capital today comes from passive investors – everyday people who don’t manage stock portfolios, but who contribute to their pension or retirement plan or who invest in index mutual funds. Those making the decisions about where capital goes are the fund managers, the large investment firms.