About the author: David H. Webber is a professor of law at Boston University and author of The Rise of the Working-Class Shareholder: Labor’s Last Best Weapon.
ESG refers to the use of environmental, social, and governance factors in investing. The idea has been around for years, but opposition to it exploded on the national scene this summer in a mix of coordinated action and fortuitous timing, arriving in the middle of the energy crisis triggered by Russia’s invasion of Ukraine. This movement included the launch of a new anti-ESG investment fund, state-level anti-ESG model bills from the American Legislative Exchange Council, anti-ESG pronouncements from Florida and Texas, and an anti-ESG open letter to
Blackrock
CEO Larry Fink from 15 Republican state attorneys general. Most consequentially, Texas, Louisiana and now Missouri have all announced plans to divest their public pension funds from financial institutions, including the behemoth Blackrock, for allegedly violating a state law banning boycotts of the energy industry. And now 19 Republican-led states have announced an investigation of major financial institutions that pursue ESG investment policies.
But despite the momentum, the anti-ESG crowd has handed a gift to ESG proponents, crossing a line free-market purists had not previously stepped over. Anti-ESG activists have legitimated consideration of values, not just value, in making investment choices. Unfortunately, ESG champions are squandering this gift, sticking to a risk-based financial argument and not embracing the more values-based line of attack that will resonate with more Americans.
In announcing their intent to ban finance firms they believe are boycotting the energy industry, most of these states proclaimed that they were acting to maximize returns. No one believes it. Admirably, Texas and Louisiana have also said the quiet part out loud: They are acting to save jobs, to protect the domestic oil and gas industry, even to promote national security. A dozen years ago, Democrats made similar arguments for protecting the automobile industry, while Republicans such as Mitt Romney waved the free-market flag in arguing to let Detroit collapse.
This argument represents an important concession by the conservatives who make it. They are saying that it’s valid for pensions to include considerations like jobs in their investment decisions. But rather than embrace this new tact, the pro-ESG crowd has clumsily counterattacked, adopting a version of the Romney line. They parrot the Wall Street talking point that by injecting its “drill-baby-drill” values into the investment arena, the anti-ESG movement is increasing risk, increasing fees, and failing to maximize returns. In other words, the main pro-ESG rejoinder to anti-ESG is, as argued in this op-ed by Michael Bloomberg: We’re better investors than you are.
This approach converts the two existential crises of our day, economic inequality and climate change, into a skirmish over investment theses. This is a strategic, tactical, legal, and ethical mistake. The ESG movement should instead fight values with values. It should pass its own state-level statutes like Texas’s, to instead pursue its own investment-based mechanisms for improving the lives of workers and protecting the environment. It should embrace the clash of values inside markets and fight to win.
ESG supporters should pick these fights because they can win them. In the investment arena, blue states have structural advantages over red states that are as decisive as red state advantages in the political arena. While Texas and Florida are important investment powers, via their pension funds, there is no conceivable alignment of purple and red states that can match the pension fund power of the blue states. California’s pensions alone are comparable to those of Texas, Florida, and all the states whose Republican attorney generals signed the Blackrock letter, combined. Add New York, New Jersey, Illinois, Washington, Oregon, and Massachusetts, not to mention New York City, Los Angeles, and Chicago, and the structural advantages of blue states and cities is decisive. That advantage is the natural product of investing in a robust public sector. Democratic states have more public employees—teachers, cops, firefighters—and pay them more, which means they have vastly larger pension funds and therefore greater market power. The other side will never catch up. Thus, every red anti-ESG move like Texas’s can be more than countered by blue pro-ESG forces.
Second, the ESG argument that anti-ESG increases portfolio risk and undermines returns lacks rhetorical firepower and is hypocritical. There is evidence that ESG funds are more expensive than old-fashioned index funds, at least in the short run, because they must obtain the same returns without investing in, say, oil and gas companies. (Or guns. Or tobacco.) Rather than criticize these states for doing their own version of the same thing, ESG advocates might point to the obvious: These facts are direct evidence that even shareholders care about more than just returns, as Nobel-winning economist Oliver Hart and co-author Luigi Zingales, of Harvard and The University of Chicago, recently argued here. Moreover, the generally left-of-center ESG movement and its sympathizers have rarely hesitated to do what Texas and other states did in pursuing what are admittedly quite different political aims. That was true for divestment from South Africa over Apartheid in the 1980s and 1990s. It was true for the MacBride Principles countering anti-Catholic discrimination in the struggle over Northern Ireland. It’s true today in divestments from firearms and tobacco. It’s true for both red and blue states that favor in-state investments, or divest from Russia, Iran or Sudan, or counterboycott Israel boycotts. Everywhere we look we see evidence that when the political issue is important enough, shareholders want something other than maximizing returns.
This narrow focus on returns, a once right-of-center and now apparently left-of-center doctrine, is often justified with the argument that it’s necessary to fund worker retirements. That’s true to a point but oversimplified. At the most general level, with some exceptions, maximizing returns squeezes labor to increase profits. And the argument fails to acknowledge that almost all retirement plans are funded not just from returns alone but from the contributions of employers and employees as well. This disregard for employment has led to the widespread, appalling, and underreported Wall Street practice of using public employees’ own retirement money to privatize their jobs. A doctrine that supposedly prioritizes worker economic well-being is, absurdly, being used to directly undermine it. More importantly, maximizing returns can never substitute for strong statutes prioritizing worker well-being in investments. Swedish, Danish, and Dutch funds—all amply funded—have prioritized investing in accord with international labor standards for years, leading to their divestment from Wal-Mart.
If the ESG movement counters these anti-ESG moves, it will increase polarization inside markets, making life more difficult for the likes of Blackrock that have to contend with ESG and anti-ESG clients. Too bad. Let it split itself into Bluerock and Redrock. Its clients will be happier, investing in ways that cohere with their values and views of the future. In a world in which it is increasingly difficult to disentangle investment and politics, in which no political project is possible without operating in some way through markets and corporate boardrooms, ESG supporters should break out of the intellectual trap that its social goals are just the most enlightened form of enhancing returns. Yes, they may be profitable. What about when they’re not? The reason to treat workers better and save the environment is to treat workers better and save the environment. This is the way to push back against anti-ESG.
Texas, Louisiana, and others have opened the door. ESG should walk through it.
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