Is the ESG Colossus Stumbling?

Yesterday, the leaders of the Florida House and Senate celebrated legislation which would “protect Florida’s retirement accounts and state investments from financial discrimination by eliminating consideration of environmental, social and government investment strategies” and “protect Floridians from being denied loans based on their political or social beliefs.” Florida Governor Ron DeSantis said this with perhaps a peculiar irony he announcedthe day before Valentine’s Day, his latest legislative proposals against the ESG movement that has dominated the investment strategies of the largest corporations in the West for the past few years.

The proposals will prohibit state and local government fund managers in the state from considering ESG factors in any investment decisions. State administration entities will not be able to request ESG information from suppliers in the public procurement process. The governor was among leading anti-ESG advocates, which last year prevented state pension fund managers from including ESG factors in the investment process. The state recently pulled $2 billion from BlackRock
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, the world’s largest asset manager with more than $8.5 trillion under management, due to the use of ESG factors. It’s a pittance for BlackRock, but in the scheme of things, it’s the demonstration effect that often matters.

Is the ESG colossus – straddling the world of business and political mandates for the past two decades in the Western world – stumbling?

Origin of ESG

The roots of the ESG movement can be traced to concerns about “corporate social responsibility” (CSR), a term coined in 1953 by an American economist and author of the book “Social Responsibilities of the Businessman” Howard Bowen. He used the phrase to refer to “the duty of businessmen to promote those policies, make those decisions, or pursue those courses of action that are desirable in terms of the goals and values ​​of our society.” In the 1970s, CSR became popular among corporate circles and became part of the mainstream management culture in the business world of developed countries. In 1973, the World Economic Forum “The Davos Manifesto” he stated that management must serve both employees and society as “stewards of the material universe for future generations”.

The transformation of CSR into ESG and “stakeholder capitalism” can be traced back to the then Secretary-General of the United Nations, Kofi Annan, who he said the meeting of trade and finance leaders at the WEF forum in Davos in 1999 to initiate, together with the UN, “a global compact of shared values ​​and principles to put a human face on the global market”. With Annan’s speech, ESG merged with the concept of “sustainable development” under the auspices of annual meetings in Davos and the United Nations.

The concepts of sustainable development and ESG as the central organizing principle of everything economic, social and environmental have become part of the existential problems of the “climate crisis” and have become a central theme in the last two decades in public policy and social discourse across the country. Western world.

ESG’s attack on fossil fuels

A group of leading actors in Western governments, multilateral agencies and business corporations – from financial regulators to development agency bureaucrats and from CEOs to investment advisers – promoting “stakeholder capitalism” have one target in mind above all else: the fossil fuel industry, namely coal, oil and natural gas. gas. The popularized logic used is deceptively simple and extremely simplified. Burning fossil fuels is the main source of greenhouse gas emissions that lead to global warming. Carbon dioxide, a greenhouse gas, represents the so-calledcontrol knob“climate change. Hence the urgency to “save the planet” by rapidly shutting down the fossil fuel industry (“net zero by 2050”) with ESG and stakeholder capitalism at the forefront.

BP was among the first major international oil and gas companies declare in 2002 that “We need to reinvent the energy business. We must go beyond oil.” No more the British oil of yesteryear, but “beyond oil” – bp in lower case — a new one. In 2020, the company’s CEO, va shock announcement, has promised to cut oil and gas production by 40% and increase capital spending on low-carbon energy tenfold to $5 billion a year—a plan that “even Greenpeace cautiously praises.” The company, along with other major European oil and gas companies Shell and TotalEnergies, has committed to achieving “net zero by 2050” goals under the Paris Agreement, a non-binding international agreement signed in 2015. Its announcement merely marked another milestone in the pursuit of corporate green redemption .

The ESG movement that has gained momentum over the past two decades is not without consequences. Oil and gas capital expenditure dropped by nearly 60% from their peak of $780 billion in 2014 to $328 billion in 2020. While this was partly due to the collapse of oil prices in 2014-2016 and during the covid year of 2020, it was clearly accentuated by the hostility of the ESG-saturated environment on West. According to a recent studies by Goldman Sachs, delays in investment in oil and gas projects from 2014 will result in a loss of 10 million barrels per day (or other Saudi Arabia) and 3 million barrels per day of liquefied natural gas (LNG) oil equivalent (or other Qatar) to of the year 2024-25. The bank warned: “We have exhausted all spare capacity in the system and are no longer able to cope with supply disruptions such as the one we are currently witnessing due to the Russia-Ukraine conflict.

Don’t mess with Texas

The epicenter of the counterattack on the ESG movement is undoubtedly in the state of Texas, which is responsible for the largest production of oil and gas in the USA. In August 2022 state published a list of financial firms that could be banned from doing business with Texas, its state pension funds and local governments. Texas congressional leaders say the ESG investment trend is an attack on fossil fuels, essentially a boycott of the production of conventional fuels that make up a large portion of the state budget.

Texas has blacklisted several financial firms including ESG funds managed by top investment banks Goldman Sachs and JP Morgan, saying they would be banned from doing business with the state. The world’s largest asset manager BlackRock is blacklisted along with BNP Paribas, Credit Suisse Group.
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Danske Bank, Jupiter Fund Management, Nordea Bank, Schroders PLC, Svenska Handelsbanken, Swedbank and UBS Group.

Texas Comptroller Glenn Hegar he said that “the ESG movement has created an opaque and perverse system in which some financial companies no longer make decisions in the best interest of their shareholders or their clients, but instead use their financial influence to advance a social and political agenda shrouded in secrecy.”

In January this year, 21 prosecutors dismissed a letter the two largest proxy advisory firms, Institutional Shareholder Services (ISS) and Glass, Lewis & Company, which control almost the entire U.S. proxy advisory market in the U.S., have enormous influence over how institutional shareholders vote on company decisions across the country. . In the letter, the attorney general warned, “Your actions may threaten the value of our states’ and citizens’ investments and incomes — interests that may not be subordinated to your social and environmental beliefs or those of your other clients.”

The Attorney General objected to the use of social and climate criteria in advising on sovereign wealth funds and provided evidence of a possible breach of fiduciary duty, arguing that mandated advisers potentially breached their statutory and contractual obligations to their clients by “promising[ing] recommend … against” proposals that failed to adequately implement ESG objectives.

The social responsibility of business is to increase profit

The question of the ethically appropriate role of business firms in the societies in which they operate is as old as the business firm itself. Adam Smith, the sage of classical political economy, was as keen an observer of business as anyone. He is the author An Inquiry into the Nature and Causes of the Wealth of Nations after all. He was not at all uncertain in his answer to the question of ethical business in 1776: we expect dinner from an appeal to the self-interests of the butcher, the brewer, and the baker, not from their benevolence. He also “never knew much good done by those who touched commerce for the public good.”

Nearly two centuries later, Milton Friedman—among Smith’s most famous acolytes—was equally clear in his Response: “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits, as long as it stays within the rules of the game, that is, it engages in open and free competition without fraud or deceit.” I he was distrustful of businessmen who talk about promoting desirable social goals because they are “unwitting puppets of the intellectual forces that have been undermining the foundations of free society in recent decades.” His words ring just as true today, perhaps with even greater urgency.

The ESG business is not just a colossus standing astride the world of modern business. It occupies a dominant position in the politics and administrative bureaucracy of the ever-expanding regulatory state in the Western world. She brazenly entered the boardrooms of financial regulators, the seminars of economic planners and the town halls of politicians. The great essayist HL Mencken’s statement about “practical politics” aptly captures the role of ESG in contemporary Western politics: “The whole purpose of practical politics is to keep the populace anxious (and therefore clamorous to be led to safety) by threatening them. with an endless array of goblins, all imaginary.” Practical politics in the West today is no less plagued by goblins, “the fight against climate change” and, above all, demands for “social justice”.

Today, Milton Friedman is passé, shunned by people like the US Business Roundtable and its powerful CEO members like BlackRock’s Larry Fink. The widespread aversion to shareholder capitalism and profits in popular culture and the business world, inculcated by ESG and “stakeholder” advocates in political parties, business corporations and NGOs, is bad for capitalism.

However, we are now seeing the emergence of a counter-revolution – in law, legislation and culture – against mandates and corporate behavior favoring ESG and “stakeholder capitalism”. There is hope in the opposition to the corrosive intrusions into capital and financial markets by critics of Friedman’s shareholder capitalism.