Of all the conspiracy theories making the rounds today, this one could be the most bizarre.
ESG investors are wolves in sheep’s clothing— according to a handful of right-wing politicians and publishers—radicals who will stop at nothing to shackle corporate America with their “woke” agenda. Even regulators are in on the act, proposing new ESG disclosures that would provide the SEC with a blank check, “to regulate absolutely anything its most radical members want,” according to the National Review.
Among these strange, new accusations, the objections to additional ESG-related disclosure requirements could be the most telling. Cost isn’t the issue, since non-financial reporting barely makes a mark on the balance sheets of large, publicly traded corporations. So, what’s the real motive behind this ESG backlash?
“Leaders who attack ESG adoption and cling to business as usual are terrified because their old power playbook is under threat…” writes Halla Tómasdóttir, a guest author for Fortune magazine. “Business as usual is how they hold onto power. ESG done right is fundamentally about transparency, and transparency gives power back to people.” Tómasdóttir is a prominent academic and former presidential candidate in Iceland. She attributes recent
ESG bashing to, “…old-power capitalists [and] opportunistic politicians,” who want to turn back the hands of time.
Indeed, the most vocal critics of ESG in the US are in Texas, where fossil fuels are still the lifeblood of the state’s economy. In a grand gesture of political bravado, Texas Governor Greg Abbott and state legislators recently banned most state agencies and their pension funds from doing business with 11 prominent asset management firms, accusing these managers of boycotting the fossil fuel sector. One of those investment firms is BlackRock, the world’s largest asset manager. And the blacklisting left executives there scratching their heads.
“This is not a fact-based judgment,” a spokesperson for the company said in a written statement. “BlackRock does not boycott fossil fuels — investing over $100 billion in Texas energy companies on behalf of our clients proves that.”
Whatever their motives, critics in Texas and elsewhere seem to lack a clear understanding of how ESG investing actually works. For example, accusing BlackRock of boycotting fossil fuel companies suggests that they are confusing ESG with more aggressive strategies, such as impact investing and socially responsible investing strategies. But ESG doesn’t screen out or “screen in” companies or sectors based on investor values and preferences the way those strategies do. ESG ratings simply identify risks that could jeopardize a company’s profitability and highlight its competitive advantages, which is why companies with strong ESG ratings often trade at a premium.
So, it shouldn’t be surprising that more than 90% of S&P 500 companies now publish ESG reports and an estimated 82% of all asset managers in the US incorporate ESG factors into their broader investment process.
By applying the “woke” label, opportunists are also villainizing ESG by conflating it with some of today’s most contentious social issues (such as critical race theory, for example). This is the same crowd that puts quotation marks around “climate change” to deny environmental science.
Regardless of the inflammatory rhetoric, ESG is far from controversial. It’s not a fad, and it’s not going away. Despite its imperfections, the fact is that ESG investing has secured a permanent foothold across the US and Europe because it promotes corporate sustainability and success. It makes good business sense for investors and corporations alike. And there’s nothing “woke” about that.