Environmental, social, and governance (ESG) investing has become a flashpoint of political controversy. Once a niche segment of financial products, the sector’s assets under management—and, thus, its economic and political significance—have ballooned in recent years. ESG assets exceeded $30 trillion in 2020, and the figure is projected to rise considerably, reaching up to a third of global assets under management by 2025, according to a 2021 Bloomberg estimate. Conservatives, seemingly oblivious to these trends for years, have lately become vehement critics, seeing the growth of ESG as yet another encroachment by “woke capital.”
These critiques are hardly without merit. The most prominent ESG criteria have been narrowly tailored to reflect left-liberal goals like board and management “diversity.” In the United States, at least, typical ESG funds have also taken a maximalist approach to promoting renewable energy, while in some cases totally excluding fossil fuels or even nuclear power—and ignoring legitimate concerns about energy security and stability.
Beyond these politicized issues, ESG faces other problems. ESG ratings, which function like credit ratings for ESG issues, are often highly inconsistent across providers. Some companies ranking near the top in one rating system are near the bottom in others. Furthermore, ESG funds often fall far short of the promises made in their marketing materials, investing in companies with disastrous environmental and social records. The crypto exchange FTX, now bankrupt and known to have permitted massive governance failures, scored higher than ExxonMobil in ratings by Truvalue Labs, a division of Connecticut-based financial-data firm FactSet.
More fundamentally, the purpose of ESG itself isn’t entirely clear. Although it is often described in the media as a means to promote a political agenda or certain kinds of business behavior, ESG frameworks generally define their purpose as simply helping companies avoid various reputational, political, and indeed financial risks.
In sum, there are serious questions surrounding ESG, and conservatives are right to highlight them. Republicans should likewise be commended for looking at corporate governance issues more carefully than they have in the past, when they simply assumed markets would “self-regulate” toward efficient outcomes (usually presumed to be aligned, perhaps by an invisible hand, with traditional values). But conservatives’ purely negative approach to ESG, often coupled with a naïve desire to return to older forms of shareholder primacy, will prove counterproductive. In this respect, the campaign against ESG reflects the shortcomings of conservatism (which is to say, right liberalism): failure to address emerging challenges before they become established trends; reflexive retreat to liberal proceduralism; performative media opposition with little real accomplishment; considerable grifting and profiteering off the movement’s most loyal constituents; and the absence of any substantive alternative agenda.
Conservative opposition to ESG has both ideological and practical dimensions, ranging from cultural critiques of “wokeness” to concerns over underinvestment in hydrocarbon-producing states and regions. Generally, however, the thrust of conservative arguments is not that ESG represents wrong or misguided values; rather, the most prominent conservative critics typically reject the intrusion of any “nonpecuniary” questions whatsoever into the calculus of investors and firms. ESG critic Vivek Ramaswamy, for example, argues for “profits over politics”—in other words, a return to Milton Friedman’s dictum that “the social responsibility of business is to increase its profits.”
Such blurring of the lines between appeals to “conservative values,” on one hand, and appeals to liberal value-neutrality, on the other, is nothing new for the American right. On many issues, conservatives have tended to play down their own substantive arguments in favor of proceduralist claims—for example, complaints about executive or judicial “activism” being unconstitutional under certain interpretive methodologies.
Whatever their value in other contexts, these strategies won’t work when it comes to ESG. If conservatives want to defend capital allocation to certain sectors—and they should—then they will need to make a substantive argument for it. A retreat to older, “purer” notions of shareholder-return maximization will prove inadequate or even counterproductive.
At bottom, ESG isn’t the “opposite” of Friedman’s shareholder primacy; it is an outgrowth of it. ESG, after all, arose well after shareholder primacy became firmly established, and it takes this governance paradigm as its presupposition. That is why an asset manager like BlackRock has become the chief adversary of ESG critics, and why investment criteria and proxy votes are the primary battlegrounds.
Ironically, it was a Reagan-era regulatory change that empowered the likes of BlackRock, granting fund managers outsized influence over corporate governance. In the 1980s, a failed Republican Senate candidate named Robert Monks became administrator of the Office of Pension and Welfare Benefit Programs at the Department of Labor. Monks worked to change proxy-voting rules to allow fund managers, instead of the underlying beneficial owners, to vote the shares they held on behalf of investors. Notably, Monks then left the government to found Institutional Shareholder Services, or ISS, one of the leading proxy advisers making recommendations on how institutional managers should vote their shares.
At the time, this shift was consistent with ongoing efforts to give shareholders more power in corporate governance. Organizing a dispersed and often indifferent group of small shareholders is notoriously difficult, which makes it harder for activist investors to challenge incumbent management teams. Allowing fund managers to vote their shares on behalf of investors meant that activist shareholders would have more concentrated and more sophisticated constituencies to organize when challenging management, effectively increasing the power of activist shareholders vis-à-vis corporate executives. Over time, as activist investing became institutionalized, these investors often developed stronger relationships with index-fund providers like BlackRock and advisers like ISS than most management teams. Activist investors typically have regular interactions with these players in their various campaigns, whereas corporate management might only interact with them occasionally, such as when they are a target of such activism.
Shareholder-primacy advocates in the 1970s and ’80s often presented their model as a solution to the “agency problem.” Corporate executives of the postwar era were incentivized to augment their own power and prestige, but not necessarily to maximize shareholder returns or “capital efficiency.” Boosting the power of shareholders, it was argued, would reduce the power of unaccountable, undisciplined, empire-building managers (a view dramatized in Gordon Gekko’s “greed is good” speech from the 1987 movie Wall Street). But the reality was always more complex. Often, it wasn’t small-time investors who were empowered, but another set of managers: institutional investment managers.
This change had a major impact. Corporate management teams who failed to deliver financial returns attractive enough and quickly enough for institutional asset managers were now more likely to find themselves targets of shareholder activists. These activists were more likely to be successful in their bids to change management or sell the company to junk-bond-financed “corporate raiders” and private-equity funds that were beginning to make their mark around the same time.
The reforms of the ’80s didn’t fundamentally resolve the agency problem—the “separation of ownership and control”—which distinguished modern, large-scale corporate capitalism from the unified owner-operator model imagined in classical theory. It quickly became apparent that some financial speculators and short-term-oriented fund managers—unlike an old-fashioned family business owner or even a “company-man” executive—might have little interest in the long-term health of a firm. Asset stripping, overleveraging, underinvesting, or other methods of financial engineering might be more profitable for purely financial actors, who could cash out before having to face the adverse consequences. Managers of large portfolios also had different risk tolerances than managers, owners, or workers dependent on a single business.
Meanwhile, many of the institutional investment managers empowered and enfranchised by the shareholder-primacy revolution had little interest—and little reason to be interested—in business operations or corporate governance, arguably a novel development in commercial history. They prioritized pure financial analysis (e.g., quantitative strategies) or the development of passive products encompassing an industry or market sector (e.g., index funds). Hiring large numbers of analysts to keep track of portfolio companies’ proxy votes would only cut into their management fees without any clear benefit. As Robert Monks understood, such asset managers would prefer to outsource this function to third-party advisers, such as ISS, and ensure that it was done as systematically and cheaply as possible.
ESG arose in the early 2000s within this corporate-governance context. By this time, power had shifted away from imperious corporate executives presiding over dispersed and disengaged shareholders and toward the current paradigm: share-price-driven management teams disciplined by activist fund managers coordinating with passive institutional managers and their proxy advisers.
The business of business is never just business. Contra Milton Friedman, narrowing management’s job description didn’t make the commercial implications of political and social issues disappear. It only meant these issues now had to be apprehended and addressed entirely within the matrix of shareholder primacy. Of course, political, social (reputational), and other such factors can have a large impact on profits and shareholder returns, and corporate managers, investors, proxy advisers, and the like increasingly sought to formalize this aspect of “risk management.” Indeed, companies that failed to appropriately manage political, reputational, and “brand” risks might be deficient in meeting their duties to shareholders. Whereas midcentury managers could present themselves, for better and for worse, as quasi-political figures—stewards of companies and their communities—the new breed of corporate executives required systematic frameworks for managing all manner of financial risks and justifying their actions to increasingly vigilant shareholders.
ESG began as one such framework.
In fact, when the original developers of ESG outlined the concept in a white paper in the early 2000s, they expressed the same enthusiasm for “profits over politics” voiced by today’s ESG critics. The authors—a working group composed of the world’s leading financial institutions, including Goldman Sachs, Morgan Stanley, Deutsche Bank, and HSBC—explicitly differentiated ESG from corporate philanthropy or political activity and grounded ESG within the principles of shareholder primacy. “Throughout this report,” they wrote, “we have refrained from using terms such as sustainability, corporate citizenship, etc., in order to avoid misunderstandings deriving from different interpretations of these terms…. This report focuses on issues which have or could have a material impact on investment value.” Their goal wasn’t to impose a conspiratorial political project, but to improve transparency and disclosure, “linking executive compensation to longer-term drivers of shareholder value and improving accountability”—a statement that could have been copied and pasted from the typical shareholder activist letter. The report continued:
Several recent studies of companies and industries have contributed to better understanding the value drivers through which good management of ESG issues contributes to shareholder value creation. Furthermore, many studies confirm that the way a company manages ESG issues is often a good indicator of overall risk levels and general management quality—which are both strong determinants of companies’ long-term success. Companies with better ESG performance can increase shareholder value by better managing risks related to emerging ESG issues, by anticipating regulatory changes or consumer trends, and by accessing new markets or reducing costs. Instead of focusing on single issues, successful companies have learned to manage the entire range of ESG issues relevant to their business, thereby achieving the best results in terms of value creation.
In a word, the core of ESG isn’t—and never was—in conflict with an emphasis on shareholder value. If anything, an emphasis on shareholder value implies and inevitably leads to the development of frameworks like ESG.
Moreover, it is no surprise that the rise of ESG parallels the rise of index funds. Passive investors like index funds care little about individual firm performance or governance, despite the power they exercise via shareholder votes. But they do care about “beta,” or overall market risk, which is driven by macroeconomic—and thus political—factors. It was therefore inevitable that large passive fund managers would seek out and promote frameworks to incorporate various macro considerations into firm governance and decision-making, such as ESG. Some conservative critics have alleged that Larry Fink, the head of BlackRock, is a moral and political zealot. Perhaps he is. But even the iciest-veined bean-counter would have the same incentives when operating a large provider of passive funds.
ESG is also bound up with many other trends that libertarians and conservatives have championed as benefits of “global markets,” such as globalization and the shift toward intangible assets and away from manufacturing and physical production. Again, to quote the previously cited report: “In a more globalized, interconnected, and competitive world, the way that environmental, social, and corporate governance issues are managed is part of companies’ overall management quality needed to compete successfully. Companies that perform better with regard to these issues can increase shareholder value. . . .” In particular,
ESG issues can have a strong impact on reputation and brands, an increasingly important part of company value. It is not uncommon that intangible assets, including reputation and brands, represent over two-thirds of total market value of a listed company. It is likely that ESG issues will have an even greater impact on companies’ competitiveness and financial performance in the future.
Finally, ESG is in many ways a product of financialization itself. Financial managers have one overriding incentive: increasing their fees, which is generally a function of their assets under management. One way to attract more capital and increase assets under management is to deliver a record of exceptional performance. But not every fund can outperform, and many never do. Instead, they claim to offer specialized products that meet the particular needs and profiles of various investors. ESG offers almost infinite possibilities for such “bespoke” investment products, and even if it didn’t exist for other reasons, fund marketers almost certainly would have invented it.
None of this is to suggest that ESG isn’t politicized, or that it is harmless. But the above history shows why opposition based on shareholder primacy and raw financial performance faces severe limitations. Hence current Republican efforts to ban ESG by reiterating the pecuniary or value-maximization elements of fiduciary duties have largely proved ineffective and will continue to disappoint.
It may be possible to find fringe cases in which fund managers, corporate managers, or state pension administrators have acted entirely outside the bounds of their fiduciary duties with respect to value maximization. But ESG in its essential respects is a product of shareholder primacy, and at its core is a risk-management framework intentionally aligned with shareholder value.
As such, strengthening the regulatory emphasis on “profits over politics” has little impact on ESG, since ESG, by its own terms, already interprets politics through the lens of profits and the attendant risks to shareholders. One can debate the science of climate change, for example, all day, but ultimately that doesn’t change the fact that major environmental catastrophes are generally bad for business and represent a risk to shareholders. (It is also possible to argue, at this point, that “clean energy” is the future, and missing out would represent a major business risk.) As long as ESG articulates environmental concerns in this way—and as a rule it does—then strengthening fiduciary duties might only serve to strengthen ESG.
The same is true for other polarizing issues like “diversity.” It may be the case that a rocket company should only hire the best rocket scientists, to the exclusion of all other considerations. But an entertainment company like Disney or, say, a consumer-facing internet company can easily make a prima facie case that its management should reflect the demographics of its target audience, to better understand and serve its customers. (Some extreme instances of “promoting diversity” may run afoul of the Civil Rights Act and other nondiscrimination laws, but, again, appeals to shareholder returns are irrelevant in these cases.) Furthermore, insofar as “brand value” has indeed become increasingly important for many companies in our “intangible economy,” then managing reputational risks—under ESG or any other name—takes on greater financial significance.
What conservative regulators have slowly discovered—despite their typically “small-government” orientations—is that “banning ESG” would actually require the government to more aggressively and specifically dictate to firms and investors what environmental and other risk factors they can and cannot consider. Such a move would be within the legitimate power of government, but it is hardly justifiable under the libertarian rubric of “putting profits over politics.” It would, in fact, do the opposite, and make government more involved in how firms are run and investment funds are managed. Michael Bloomberg has already highlighted this irony, suggesting that Republican “defenders of the free market” who interfere in private firms’ decision-making need a “crash course in capitalism.” The more likely outcome, though, is that most Republicans officeholders will stop far short of specifically determining substantive investment and corporate risk-management criteria. Instead, they will content themselves with redefining fiduciary duties to reemphasize shareholder value, only to puzzle over why they continue to miss their target on ESG.
So far, that is exactly how Republican anti-ESG regulatory efforts have played out. Despite all the conservative concern regarding ESG, finance-industry lawyers anticipate more shareholder litigation over companies failing to address environmental risks than from Republican anti-ESG agitation. BlackRock outpaced rivals in retail inflows in 2022, despite being at the center of ESG controversies.
Somewhat more serious efforts to counter ESG involve Republican states using their power as investors. There have now been a number of highly publicized cases of red-state pension funds pulling capital from BlackRock over its ESG programs. Unfortunately, the dollar amounts involved are relatively small, and these efforts are severely hampered by the lack of any constructive alternative.
As of December 2022, Republican states have withdrawn approximately $3 billion from BlackRock. It isn’t a trivial figure, but at less than half a percent of BlackRock’s $8 trillion assets under management, it is still largely symbolic. (As another indication of scale, oil and gas companies issued about $30 billion in ESG bonds last year.) There is also the question of where else to go. South Carolina’s state treasurer, for instance, chose Federated Hermes over BlackRock in managing state funds because of ESG concerns. Yet Federated, while certainly a competent fund manager, is also committed to ESG investing and explicitly incorporates climate-change risk factors into its investment criteria. Indeed, Federated recently withdrew its sponsorship of the State Financial Officers Foundation after several Federated investors objected to the group’s opposition to climate-change mitigation efforts. Of course, at this point, virtually every serious asset manager has an ESG program, and pension funds’ own fiduciary obligations will make it difficult for them to move significant amounts of capital to the smaller, less proven ones that don’t. If withdrawals from one ESG manager are to amount to more than a performative game of musical chairs, however, then Republican capital allocators will need a real alternative.
Regrettably, the most visible alternatives created thus far go in the opposite direction. So-called anti-ESG funds, the most prominent of which is Ramaswamy’s Strive Asset Management, do nothing but double down on counterproductive notions of shareholder-value maximization. They claim they will encourage their portfolio companies to refocus on profits independent of politics, apparently oblivious to how ESG actually functions. Yet these anti-ESG funds increasingly look misguided.
For instance, Strive’s first and largest fund offering, an exchange-traded energy fund called DRLL, has essentially the same holdings as a similar Vanguard energy fund called VDE. The most notable difference is that DRLL has an expense ratio of 0.41 percent, while VDE’s is 0.10 percent. In other words, investors pay Ramaswamy four times as much for the same product as Vanguard’s. Perhaps politically motivated investors might be willing to pay more to send a message or incorporate concerns beyond the purely financial, but investing in DRLL makes little sense if the message is “profits over politics.” In truth, any portfolio manager who fully accepts Ramaswamy’s stated approach to investing would have a difficult time justifying an investment in Strive’s products.
Strive vows not to “exclude ‘bad-acting’ companies.” This language presumably means that Strive doesn’t penalize firms for straying from the progressive party line on issues like climate change. But because of Strive’s pretense of putting “excellence over politics,” it can’t simply say that. Instead, the fund must describe its project in terms that suggest an eagerness to invest in bad companies.
Of course, institutional investors who wish to “engage” with portfolio companies can write their own shareholder letters without paying Strive a fee, and such initiatives would almost certainly carry more weight than the interventions of a small fund. In fact, for investors who wish to influence corporate behavior, it makes almost no sense to invest in a passive exchange-traded fund with assets under management in the hundreds of millions. Why not launch a genuine activist campaign?
One of the early backers of Strive was Bill Ackman, a highly successful activist investor who leads a fund with nearly $20 billion in assets under management. If companies were destroying shareholder value because of ESG, then surely Ackman could profit by launching shareholder activist campaigns against them with his real fund. The fact that he doesn’t, and that there is no wave of activist investors successfully opposing ESG, though there are several cases of shareholder activism in support of ESG issues, is perhaps the strongest indication that shareholder primacy offers little basis for opposition to the ESG framework.
Conservative objections to ESG are fundamentally substantive and political in nature. The issue isn’t that ESG violates the tenets of shareholder-value maximization or accountability, but that it ignores several legitimate concerns—such as energy security—that should be reflected in risk-management frameworks, investment criteria, and firm behavior. Rather than continue with hopeless efforts to “ban” ESG under the pretense of value-neutral shareholder primacy, conservatives should develop their own investment frameworks.
States like West Virginia and Texas offer somewhat more constructive examples. West Virginia State Treasurer Riley Moore has consistently justified his efforts against ESG in terms of defending the people and economy of his state, rather than correcting imaginary infringements of shareholder prerogatives. Texas, meanwhile, has barred financial institutions that divest from firearms and fossil fuels from certain state business. These actions have raised municipal borrowing costs in Texas, but accepting the costs of achieving a larger policy goal is a perfectly valid political decision. It only becomes untenable if pursued on the specious grounds of “putting profits over politics.”
Nevertheless, even these efforts are entirely reactive and defensive. The goals for conservatives—or any serious political movement—should go beyond responding to perceived threats and involve the active mobilization of capital behind their own values and constituencies. This could include increasing old-fashioned “local-impact” investing, using state assets to support state businesses and other economic activities aligned with the growth of the regional economy. It could also include the development of alternative thematic investment criteria that address the financial and commercial aspects of conservative political concerns: for example, energy security, national security, supply-chain resiliency, productivity and innovation, family-friendliness, geographic diversity, enhancing a non-college workforce, and so on. Ramaswamy himself has recently become something of a China hawk, but an approach that strictly puts “profits over politics” offers little ground to resist offshoring every strategic sector if it saves a penny on the bottom line. It would be better to develop investment criteria that take into account these material political risks and promote capital allocation to secure supply chains.
There are in fact a number of funds that have begun to develop such criteria. Many asset managers would likely be pleased to offer products that incorporate concerns beyond the current ESG regime, if conservatives could be bothered to develop them. Moreover, the content of ESG frameworks has never been set in stone. Since the Russian invasion of Ukraine, in particular, a more realistic approach to fossil fuels has become a common topic of discussion among existing ESG providers, and some European ESG funds have added defense companies. A more constructive approach along these lines would give Republican states and others dissatisfied with today’s version of ESG an actual alternative to invest in, rather than simply shifting to another fund with a similar ESG program.
Issues beyond the content of ESG investment criteria could also be better addressed outside of a shareholder-primacy framework. In many cases, ESG has become both burdensome and a box-checking exercise. The proliferation of ESG ratings and providers has increased reporting costs and the resources devoted to tracking various metrics, even if voluntarily undertaken. At the same time, ESG reporting often reduces to simplistic binaries (e.g., does the company use coal energy or not?) that offer little real insight into firm behavior or investment risk factors. Yet despite such superficial metrics, there is still little standardization across ratings providers. Yet such serious questions get pushed to the wayside amid the hopeless quest to “ban” ESG.
A final possibility to consider is the gradual unraveling of shareholder primacy. Insofar as ESG is a product of shareholder primacy, a shift away from that corporate-governance paradigm would also entail a decline in the importance of ESG investing (though it wouldn’t eliminate political issues from the calculus of business and finance, just as the move toward shareholder primacy only altered how these issues were articulated). In response to recent controversies, BlackRock and other major asset managers have begun devolving voting power back to the investors in their funds. Should this change become widespread, it would mean that public-company shareholders would become more dispersed and harder to organize, as they were in the pre-Reagan era. It is hard to predict the ramifications of such a shift today, but it would likely strengthen the power and independence of corporate management. Ironically, a move to counter ESG by reasserting shareholder primacy may end up making management teams less accountable to shareholders.
Whatever the fate of ESG, the direction of the debates around it will reveal a great deal about whether the American right can still offer a positive vision or policy agenda. Republicans have now gone two election cycles without a party platform. The economic policies of the George W. Bush administration—unfunded tax cuts and slashing entitlements, which remain the priorities of think tanks like the American Enterprise Institute—are now so embarrassing that even Mitch McConnell doesn’t want to run on them.
Indeed, conservatives inattentiveness to ESG before it became a $30 trillion asset class demonstrates the profound rot within the right’s economic-policy apparatus. Today’s ESG was developed in the early 2000s—and hardly in secret. At that time, it would have been much easier to influence, or even kill, the current version of ESG before it became deeply entrenched across virtually every major asset manager and public corporation. But right-liberal donors and policy apparatchiks were evidently too busy cheerleading the housing bubble, celebrating the offshoring of strategic industries to geopolitical rivals, and building virtual shrines to Adam Smith to notice important developments in actually existing financial markets. If conservatives and libertarians are unhappy with what ESG has become, they should begin by addressing their own blind spots. Not only is ESG bound up with many of their preferred policies, like shareholder primacy, globalization, and financialization. But another reason why ESG became so narrowly tailored around left-liberal causes is that conservatives and libertarians were simply too incompetent to notice or alter its formation.
Only around 2020, when it became fashionable to criticize “woke capital,” did legacy right-liberal organizations begin to pay attention to ESG. The effect of their involvement has, not surprisingly, been to redirect substantive criticism of corporate and investor behavior back toward affirmations of 1980s neoliberal paradigms like financialization and shareholder primacy, developments that lie at the root of the problem in the first place. Rather than harnessing populist energy to rethink old failures and develop new agendas, establishment conservatism has, on this and other issues, preferred feckless complaining, media posturing, and shameless grifting.
Conservative critics are nevertheless correct that ESG as currently constructed is deeply flawed and in some ways harmful to American economic and national interests. To effectively address these issues, however, will require more than what movement conservatism has ever been able to offer: It will require abandoning the silly pretense that “the market” is a magical, perfect, self-regulating machine of 18th-century deism, operating independently of politics and society. It will require a willingness on the part of conservatives to articulate and promote their own substantive goals, rather than hide behind liberal proceduralism and neoliberal economics. And, finally, it will require the intellectual awareness and discipline to pragmatically incorporate these goals into constructive policy and corporate governance frameworks.
Or the right can simply continue being shocked—shocked!—to discover that liberal means, such as shareholder primacy, market fundamentalism, and the maximization of individual liberty, fail to produce conservative ends.