A Milestone ‘Defense’ of ESG

A Milestone ‘Defense’ of ESG

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.


Beyond Capitalism

The other day, a left-leaning political magazine published what might be the most interesting and telling attack on the “anti-ESG” movement we’ve seen to date.  I can’t say that it necessarily hit its target – Red State financial officers and legislators – but it hit a few others rather solidly, making it a must-read for anyone interested in markets, government, and the intersection between the two.

The piece appeared in The New Republic under the headline “The Real Cause of ESG’s Big Crash” and was written by Timothy Noah, who argued as follows:

ESG stands for environmental, social, and governance, and investors who follow its do-gooder guidelines have become a culture-war target. “Elites are circumventing the ballot box to implement a radical ideological agenda,” Governor Ron DeSantis, the nation’s preeminent culture-war blowhard, complained in February when he introduced an anti-ESG bill in Florida. The measure, which barred the state and local governments from considering ESG when making investment decisions or choosing contractors, became law in May. Nationwide, similar bills were introduced this year in 37 states and became law in about 20.

But it would be a mistake to attribute ESG’s downfall to the MAGA right. The real culprit was the revival of Big Oil….

Red states that passed anti-ESG laws want you to believe that these laws ended the investor stampede away from oil stocks. “The banking community as a whole” is becoming friendlier to fossil fuel investment, Oklahoma Corporation Commissioner Kim David boasted in a press release from the Oklahoma Council of Public Affairs, a conservative nonprofit. Yes, Oklahoma last year barred state investment in ESG. But the banking community isn’t responding to such petty harassment. It’s responding to the profit motive.

You should, as they say, read the whole thing – especially if you happen to be in the business of managing assets based on environmental, social, and governance criteria.  Although couched as an attack on conservative state governments, Noah’s analysis is a shot across your bow as much as anything.

The most important thing to note about Noah’s supposed takedown of state government action is that it is remarkably weak.  There’s no serious analysis of the differing actions taken by various states.  There’s no account of which state policies have worked and which ones haven’t, much less any explanation as to why failures have occurred.  Indeed, there’s no analysis of state action at all.  The author notes that several states took legislative or executive action and then simply dismisses that action as irrelevant, preferring to focus on a different explanation for ESG’s failures.

Now, to be fair, there’s nothing wrong with focusing, as Noah does, on ESG’s market weaknesses.  Indeed, that’s very much the focus of the preponderance of my own work on ESG.  Still, in the context of an article purportedly about the weaknesses of federalism, the complete lack of documentation of those weaknesses is bizarre.

Or at least it seems bizarre until you understand what Noah is really after.

Fortunately, Noah does a pretty good job of explaining why ESG has failed in the marketplace of ideas – i.e., it is a luxury belief premised on false assumptions about the viability of large-scale economies using only non-carbon energy sources.  Even more fortunately, by the end of his piece, he tires of hinting around at his conclusion and just comes out says it: “it’s a cinch we should never trust investors, or corporations, or even nonprofits, to behave responsibly when it’s even the slightest bit inconvenient. It’s unrealistic, and perhaps unfair, to expect otherwise. Society has another tool—the power of the state—to compel business enterprises to behave, and ESG will always be a poor substitute.”

This, in turn, is fascinating for a few reasons.  First, it very much echoes the case made more than two-and-a-half years ago by Tariq Fancy, the former head of sustainability investing for BlackRock.  Back in March 2021, Fancy made quite a few waves, saying the same things Noah says here, only from an insider’s perspective:

The financial services industry is duping the American public with its pro-environment, sustainable investing practices. This multitrillion dollar arena of socially conscious investing is being presented as something it’s not. In essence, Wall Street is greenwashing the economic system and, in the process, creating a deadly distraction. I should know; I was at the heart of it….

Imagine the planet is a cancer patient, and climate change is the cancer. Wall Street is prescribing wheatgrass: A well-marketed, profitable idea that has no chance of curing or even slowing down the cancer. In this scenario, wheatgrass is the deadly distraction, misleading the public and delaying lifesaving measures like chemotherapy. But like giving false hope to unproven cures in the midst of a pandemic, the consequences of such irresponsibility are all too obvious. And motivation for why the industry continues to greenwash is all too obvious….

We’re running out of time and need to accept the truth: To fix our system and curb a growing disaster, we need government to fix the rules.

In other words, thanks for the update, Mr. Noah, but we’ve heard it all before.

A second reason that Noah’s concessions are fascinating, even if not especially novel, is that they are made in the pages of The New Republic.  We doubt Noah or anyone else at TNR cares too terribly much about the history of the magazine they work for, but it was founded in 1914, principally by Herbert Croly, one of the Four Horsemen of Progressivism.  In my book on ESG, The Dictatorship of Woke Capital, I note that the spirit of American Progressivism is an integral part of the ESG/woke capital mindset.  Focusing on Woodrow Wilson and Richard Eli (two others of the Four Horsemen), I explain how the urge to God’s work on earth (the Social Gospel) and the inclination to believe that “average” people are too ignorant and selfish to make “proper” decisions for society (public administration) are key components both of Progressivism and of the ESG movement.

I don’t discuss Croly in The Dictatorship, but I do in the follow-up book (now due out, hopefully, sometime in 2024), noting that his contributions to Progressivism were both more bizarre than anyone else’s and more aggressive.

Unlike his fellow Progressive forefathers, Ely and Wilson, Croly’s profound and abiding faith was not pietist.  Indeed, it was not Christian at all.  Herbert Croly inherited from his father David a devotion to what was called the “Religion of Humanity,” which was merely the polite name for the bizarre “positivist” philosophy expounded by the French utopian Aguste Comte.  Comte worked fervently to articulate a purely secular view of the world and to fashion a secular religion derived from it.  Yet his positivism was, in form and substance, very reminiscent of Medieval Europe’s first great millenarian heresy – Joachim of Fiore’s 12th century teaching on the “eternal Gospel,” in which all of history was divided into three epochs, those of the Father, the Son, and the Spirit, the last of which would bring about man’s salvation.  Comte too saw three epochs, the “age of religion,” which was dominated by superstition; “the age metaphysics;” which was more rational but was still superstition-based; and the “age of science,” in which man’s eternal happiness would be guaranteed by science (of course), the only “authentic” form of knowledge.

For his part, young Croly shared Comte’s “faith” in science and also shared Marx’s belief that history was propelled by scientific principles that were inevitable and unwavering.  Unlike Marx, however, who saw the “government” as an enemy to be overthrown and replaced by the people, Croly saw the government as an ally, the supreme tool to advance civilization’s progress through science.

Croly produced two great and indispensable contributions to the Progressive movement – and thus to the march toward centralization.  The first of these was the case that the age of science was man’s end stage (his eschatological “millennium”) and that to achieve it and to reap its rewards, society must first throw off the chains of the previous ages, the age of religion and superstition and the age of metaphysics.  To this end, the most important thing political and social leaders could do was abandon the stultifying ideas of the past – especially the ideas of the Founders and their hokey obsession with virtue.  “At the present time there is a strong, almost a dominant, tendency to regard the existing Constitution with superstitious awe,” Croly wrote in his book The Promise of American Life, “and to shrink with horror from modifying it even in the smallest detail; and it is this superstitious fear of changing the most trivial parts of the funda­mental legal fabric which brings to pass the great bondage of the American spirit.”

Croly believed that only a strong and powerfully led central government could accomplish any of this, and thus he argued in favor of an all-powerful national state.

Again, I would suppose that Noah’s embrace of Croly-ite veneration of the all-powerful state in Croly’s own magazine is coincidental, but it should, nevertheless, be sobering.  This is especially true, as I suggested above, for those who believe that their practice of ESG – i.e. the accomplishment of state goals by private means – makes them allies of the state and, as such, immune to its wrath.  You are not immune.  Indeed, for all your efforts to serve as a “Third Way” between a laissez-faire market economy and the total state, you will receive no more forbearance from the Leviathan than will full-fledged social/economic Darwinists (or than they would, if they existed).  Recall that Noah states this clearly: ”we should never trust investors, or corporations, or even nonprofits, to behave responsibly….”

In the end, Timothy Noah’s article on ESG may well be a milestone – albeit for different reasons than he might suppose.  It reflects the frustration of the true Progressives with the ESG-Progressives’ lack of actual progress.  And this should give the ESG-Progressives – as well as the rest of us – pause.

Stephen Soukup
Stephen Soukup
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Steve Soukup is the Vice President and Publisher of The Political Forum, an “independent research provider” that delivers research and consulting services to the institutional investment community, with an emphasis on economic, social, political, and geopolitical events that are likely to have an impact on the financial markets in the United States and abroad.