The notorious ESG

The senator first heard murmurs in early 2022 from concerned citizens and industry experts alike. By fall, the murmurs had become conversations with representatives of the banking industry, members of both houses of Utah’s legislature. These stakeholders formed a working group to tackle “ESG” standards that are turning corporate America “woke.” GOP state Sen. Chris Wilson, whose district includes parts of Cache and Rich counties in northern Utah, came out of the working group determined to act on ESG when the legislative session convened in 2023.

If you find yourself confused at this point about what ESG is, you’re not alone; most Americans aren’t familiar with the term — perhaps by design. Consider a rule taught in journalism schools called the “alphabet soup” principle: Unless an acronym is universally recognized, like FBI or NAFTA, avoid using it out of respect for your readers, many of whom won’t know what it means.

Politicians have, at almost every possible opportunity, ignored that wisdom when it comes to ESG, which stands for environmental, social and governance-conscious investing, but has become a largely meaningless buzzword for Democrats who’ve used it as a crutch after failing to address many ESG-adjacent issues through policy, as well as a bugaboo for conservatives. Even the people tasked with making laws regarding ESG often have a hard time defining what it is or what it does — a fact that does little to temper their enthusiasm either for or against it.

It’s become a particularly popular talking point on the right. Ben Lewis, a professor of strategy at Brigham Young University who has studied ESG for many years, first noticed its explosion into the mainstream political consciousness when brochures for a county-level candidate started showing up at his house with ramblings about how ESG was a Chinese Communist Party plot to infiltrate America. Republican presidential candidate Vivek Ramaswamy has also made criticism of ESG a cornerstone of his campaign (he’s currently polling at about 8.3 percent). But controversy over the concept is actually much older.

It arguably goes all the way back to a foundational economic principle introduced in the 1970s called the Friedman Doctrine. In simple terms, it argues that a company’s singular responsibility is to maximize value for its shareholders. That school of thinking inspired a school of pushback coined by World Economic Forum founder Klaus Schwab as “stakeholder capitalism,” which argues that companies have a responsibility to anyone their decisions impact; not just shareholders. The term ESG came around in 2004 in a United Nations report that recommended the integration of ESG issues in “asset management, securities brokerage services and associated research functions.”

“Part of ESG, in and of itself, is trying to make companies aware of those different stakeholders and pay attention to their issues, beyond just the financial stakeholders,” Lewis says.

The idea mostly simmered, unnoticed, until 2016. Then Donald Trump was elected president and addressing issues like climate change at a more individual, personalized level suddenly became appealing, argues former investment banker and well-documented ESG critic Tariq Fancy. “If you’re a progressive, and you want to do something about climate change, Trump gets elected and makes it fairly clear he doesn’t plan to do anything about it,” he explains. Four years, those progressives argued, was far too long to do nothing about climate change. So many of them started asking if they could invest their 401(k)s in more climate-conscious ways, or buy more climate-conscious products. “That’s what gave (ESG) its rise,” Fancy says.

It exploded even more late last year, after the Biden administration directed the Department of Labor to allow retirement plan fiduciaries to consider ESG factors when making investments. That rule went into effect in January and was challenged by the Republican-controlled House of Representatives, as well as Senate Republicans and two Democrats — Jon Tester of Montana and Joe Manchin of West Virginia — who in March sent a resolution to Joe Biden’s desk calling for a reversal of the rule. Biden vetoed it, with both sides accusing each other of the exact same financial crime, almost verbatim. “The Biden administration’s recent ESG rule would pose further risk to these retirement funds by forcing fiduciaries to use Americans’ hard-earned money to advance social causes rather than investing to get the best returns,” Sen. Mitt Romney said in February. “The legislation passed by the Congress would put at risk the retirement savings of individuals across the country,” Biden said about a month and a half later, following his veto.

A group of 25 states, including Utah, have since signed onto a lawsuit challenging the rule in court. “Permitting asset managers to direct hard-working Americans’ money to ESG investments puts trillions of dollars of retirement savings at risk in exchange for someone else’s political agenda,” Utah Attorney General Sean Reyes said in a press release announcing the lawsuit. The effort is being spearheaded by Florida Gov. Ron DeSantis, whose press release announcing his opposition calls ESG a “direct threat to the American economy, individual economic freedom, and our way of life.” And Wilson, during Utah’s 2023 legislative session, sponsored two bills (both became law) targeting ESG investing in the state — a common refrain in Republican-controlled legislatures across the country. In March, he took to the pages of Cache Valley’s Herald Journal to defend that legislation, arguing that “the Biden administration issued a rule that would place millions of Americans’ retirement funds at risk by allowing retirement plan fiduciaries to consider ESG factors when selecting investments and exercising shareholder rights.” But he also quoted Romney, who said the rule would be “forcing” them to do so. “I don’t have a problem if people are allowed the freedom to invest in ESG funds. But I do have a problem when … ESG has to be used in all investments,” Wilson says. “Biden’s (rule), from what I understand, was that they needed to use ESG standards.”

That understanding, it turns out, is not entirely correct. Allowed is a better word than forced. “As much as I admire Senator Romney,” says Lewis, who has voted for Romney three times, “I believe he is mischaracterizing the intent of the ruling when he states that the (Department of Labor) ruling would ‘force’ fiduciaries to take ESG factors into account.” All the rule did was clarify that fiduciaries were allowed to consider ESG factors as part of their investing strategies, ensuring that doing so would not result in lawsuits alleging that the investors had failed to seek maximum returns. Lynn Rees, a professor of accountancy at Utah State, argues that despite having no personal affinity for ESG as an investment strategy, the DeSantis-led effort to overturn the Biden administration’s rule is ironic in that it claims to be pro-freedom while really accomplishing the opposite. “I do make my own investing decisions, and at no time have I really considered ESG factors,” he says. But nevertheless, he adds, “I don’t think it’s the government’s place to tell capital managers what they should and should not consider (investing in).” At the very least, he says, you could make a reasonable argument that considering ESG is good for profits (research on this has resulted in mixed findings), and fiduciaries should be allowed that option. And if investors are unhappy with those decisions, they’re welcome to invest elsewhere.

Fancy, who worked at investing giant BlackRock before quitting to become something of an anti-ESG whistleblower, has a different take on the recent political blame-slinging. He left BlackRock because he came to believe that ESG standards were, essentially, nonsense. They accomplished absolutely nothing for climate (and other) goals, ultimately allowing companies to use faulty, nonstandardized metrics and subversive investing strategies to portray themselves as committed to social responsibility while still doing exactly what they’ve always done and will continue to do: Maximize profits. “The political right is beating (Democrats) up,” he says, “by pretending the greenwashing is real.”

Democrats, he says, are passing the buck to private companies to make a difference on climate change and other progressive causes when their policies aimed at doing so haven’t become law. They’re looking for help wherever they can get it, he contends, but investors just aren’t wired to prioritize causes in the way a government can. Maybe they can move some money around to more ESG-aligned investments, but ultimately, they will never do so unless they think such a decision will maximize profits. Insofar as investors use ESG, it’s already in the service of maximizing financial return.

Fancy also argues that Romney and Wilson aren’t 100 percent wrong about Biden’s rule “forcing” companies to consider ESG. Investment firms like BlackRock can indeed exert a huge amount of pressure on companies in which they own many shares of stock by pressuring them into making certain social decisions, like increasing diversity and inclusion. The rule still does not make them do so, but it does allow investment firms to do so more freely. Which is why Wilson argues such policies are still bad for Utah. “To try and force companies to avoid or boycott a company, just because they’re in timber or mining or agriculture or firearms, to me is discrimination,” he says, “and it’s wrong.”

But at a time when most Americans still don’t even know what ESG is, and their political leaders are often further obfuscating their understanding, Fancy has a name for the current debate over ESG. “I call this the stupid debate,” he says. “There’s no other word for it.”

This story appears in the October issue of Deseret Magazine. Learn more about how to subscribe.