20 Jun ESG and the Power of the State
The following commentary/analysis is one I wrote in my capacity as a senior fellow at “the nation’s oldest consumer protection agency,” Consumers Research, where, among other things, I compile a weekly letter for public pension-fund managers. I am sharing it here today because I thought it might be useful to some of you.
Who is Pushing and Who is Pulling?
For years, I have been engaged in a debate – both internally and with others in the post-ESG movement – about the political condition the ESG/stakeholder movement most closely resembles. Is the relationship between private and public spheres an example of corporatocracy, an anti-democratic, anti-capitalist, collusive arrangement in which industry takes the upper hand and leads government along by the nose? Is it more an instance of traditional corporatism, in which the collusive relationship is dominated and directed by government? Or is it some new hybrid, a unique and uniquely sinister combination of the two?
For most of those years, I have been on the fence in this debate, although I’ve leaned heavily, at times, toward the corporatocratic description. The power and prominence of private businesses in the relevant debates – BlackRock, Bank of America, etc. – in combination with private, NON-GOVERNMENTAL Organizations – Arabella Advisors, the World Economic Forum, and so on – has consistently given me pause and caused me to wonder how much power governmental actors actually have to affect the course of this market manipulation.
At the same time, however, the events of the last few years in particular – essentially coinciding with the ascension of the Biden administration in the United States and the post-COVID regimes in Europe – have caused me to reassess my original assumptions, and have clearly and inarguably demonstrated that government does possess significant power to drive these relationships and often does so, even in the face contrary private sector sentiment.
Recently, two very smart academics took a close look at the push-and-pull between the public and private spheres in the ESG/stakeholder effect on business and capital markets. In an article published by the Santa Clara Journal of International Law, Allen Mendenhall and Daniel Sutter (the Associate Dean and Grady Rosier Professor in the Sorrell College of Business at Troy University, and the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University, respectively) found that “the extensive breadth and depth of government laws and rules suggest that government push is perhaps the more likely driver of the boom.” In a brief follow-up piece for the American Institute of Economic Research, the two summarized their findings as follows:
Governments are unleashing an entire policy arsenal, including mandates, regulations, taxes, and subsidies.
Government emissions reduction commitments under the Paris climate treaty drive the renewable energy transition in the European Union, Australia, and the United States. The European Union and the US offer various tax credits and grants for clean-energy projects and energy-efficient improvements.
The Biden Administration is subsidizing wind, solar, electric vehicles, and charging stations and imposing more stringent emissions standards for new vehicles and power plants. An executive order from President Biden led to ESG actions by the Financial Stability Oversight Council, the Securities and Exchange Commission, and the Department of Labor.
Additionally, most states have renewable portfolio standards requiring utilities to obtain a substantial portion of their electricity from renewable sources like wind and solar, with some states targeting 100 percent renewable generation.
Conversely, governments also impose disincentives, like taxes or bans on petroleum, plastic packaging, and fertilizers.
The European Union leads on ESG with its Green New Deal, Climate Law, and new reporting standards mandating emissions reductions. The European Sustainability Reporting Standards mandate ESG disclosures and audits. Similar mandates to disclose climate data, diversity metrics, and sustainability practices were implemented or proposed in the United Kingdom, France, Canada, and Australia.
Governments increasingly mandate disclosure of ESG data like carbon emissions or board diversity. While private organizations like the Climate Disclosure Standards Board aim to voluntarily standardize ESG ratings, governments force disclosures. Over 60 jurisdictions, including all G20 members, mandate ESG disclosure, mainly through financial regulations or stock-exchange listing rules.
And the list goes on…and on…and on.
Mendenhall and Sutter are very careful not to claim that their research is the definitive, final word on the nature of the relationship between the public and private spheres in the ESG endeavor. “We do not attempt to resolve causality between investor sentiment and government action,” they note, even as they hope that their research can be used in the future to address that question.
Although they cannot establish causality, the researchers do remind us that government is, at the very least, a powerfully opportunistic force that can and will take advantage of whatever circumstances exist to extend its power and prerogatives. As the inimitable Russell Kirk reminds us, the State, “Hostile toward every institution which acts as a check upon its absolute power…has been engaged, ever since the decline of the medieval order, in stripping away one by one the functions and prerogatives of those ancient institutions which were the guardians of true community—aristocracy, church, guild, family, and local association.” Or to put it more simply, the State (i.e. government) is always and everywhere seeking to expand its reach and, concomitantly, to destroy any institutions that might, even only in theory, inhibit it. In the ESG framework, this means that while government may or may not be the dominant, causative player, that ambiguity will pertain only as long as the public and private spheres remain aligned on both tactics and ends.
On occasion, throughout history, private entities have gotten the better of the State and its interests. John Pierpont Morgan’s interactions with Teddy Roosevelt and his “trust-busting” administration come most readily to mind. Still, those occasions mostly predate the rise of the modern Leviathan and, in any event, benefited the State considerably in the long run as well. In this specific case, one suspects that the State and its massive administrative apparatus will ensure that ESG is an ongoing concern for business and markets long after investor interest has waned entirely. Whether or not it was the initial driver in the movement, the State will, almost certainly, prove to be the driver that perpetuates the effort long after it has lost all appeal.
That’s just what government does.
