05 Jan ESG 2023: The Empire Strikes Back
We have not been shy about our belief – which is buttressed by the facts on the ground – that ESG as an intellectual concept is dead. As we’ve noted repeatedly, the core promise of the movement – that investors can “do well by doing good” – is a lie on both ends. Over the long run, ESG investments do not do particularly well, especially when measured on ESG characteristics alone, while highly rated ESG companies do not generally do much good.
The intellectual collapse of ESG, coupled with the market collapse – in which ESG funds trailed the broader markets badly this year – should, by all rights, mean that 2023 is the year that ESG dies and we are freed from its ideologically animated clutches. By our timeline, 2019 was the year that Big Business let the mask slip and showed its political face to the masses; 2020 was the year that the lonely fight against ESG and shareholder activism was joined by many longtime market observers (ourselves included); 2021 was that the details of the fight were brought to the masses by assorted observers (ourselves included); 2022 was the year that the widespread pushback began in earnest and ESG “fell to earth;” and 2023 should be the year it all ends.
But it won’t be.
As we begin the year and plot our forecasts for the next several months, we’ve concluded that 2023 will be the year of ESG institutionalization, that is to say that this is the year that institutions mostly external to the capital markets will keep the ESG dream/nightmare alive.
The first and most obvious institutional culprit will, of course, be “government,” specifically the federal government. As you likely know, the Labor Department recently released its final rule on what it calls removing “Barriers to Environmental, Social, Governance Factors in Plan Investments.” What this means is that ERISA plan fiduciaries can now consider ESG factors/investments in their management of retirement accounts. The final rule is, fortunately, considerably less radical than was the initial proposed rule – in that it dropped wording that made it appear that ESG consideration was, more or less, mandatory – but it will still likely be a boon to ESG providers.
As you also likely know, the world still awaits the Securities and Exchange Commission’s final rule on mandatory climate risk disclosures. Many analysts have assumed that the Supreme Court ruling in West Virginia v EPA would dissuade the SEC from being too aggressive in its final rule, but we remain guarded. For one thing, SEC Chairman Gary Gensler wants desperately to be the next Treasury Secretary and may be tempted to do whatever it takes to burnish his liberal/environmental bona fides.
And speaking of the Treasury Secretary, in addition to Gensler, a name that is frequently mentioned as wanting the position post-Yellen is that of Larry Fink, who, as you know, is the king of ESG.
Additionally, the Federal Reserve poses risks to free markets with its own brand of ESG enforcement. Opponents of ESG scored a HUGE victory when they helped defeat the nomination of Sarah Bloom Raskin to be Vice Chairman of Supervision, but that doesn’t mean that the environmental risks emanating from the Fed have been eliminated. Quite the opposite, in fact:
The U.S. Federal Reserve Board on Friday joined other key banking regulators in proposing a plan for how large banks should manage climate-related financial risks, drawing immediate dissent from one member and reservations from another.
The proposed principles detailed expectations for banks with more than $100 billion in assets to incorporate financial risks related to climate into their strategic planning. Issuance of the proposal for public comment was approved in a 6-1 vote of the Fed Board of Governors.
The proposal marks the latest effort by U.S. policymakers to gird for potential financial risks from climate change, bringing the Fed into alignment with the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC), which have separately proposed their own plans.
A second source of institutional support for the otherwise obsolete ESG rubric will be the nation’s institutions of higher education and especially its business schools. This should come as a surprise to no one, of course, as higher education has long been the incubator of many of society’s pathogens. Even so, the fervor with which some of the best-known and most important business schools have committed themselves to perpetuating the failure of ESG is discomfiting.
For example, over at RealClear Investigations today, Ben Weingarten has an excellent account of the ESG/woke-ification of the Wharton School and the impact it may have on business education broadly. Both Wharton’s denial of reality and Weingarten’s takedown of its plans and schemes are brutal. You should, as they say, read the whole thing, but pay special attention to the ESG “expert” cited in the report’s conclusion:
Stephen Soukup, author of “The Dictatorship of Woke Capital” says that “B-schools have now positioned themselves in opposition to the actual marketplace of ideas,” citing the work of like-minded scholars such as RealClearFoundation’s Rupert Darwall, the Competitive Enterprise Institute’s Richard Morrison, and Ramaswamy, as having “pretty thoroughly discredited the intellectual underpinnings of the ESG/stakeholder movements.”
But by the same token, he warns, “We’ve lost the institutional fight. The pro-ESG forces control the federal bureaucracy, the universities and B-Schools, and other institutions. … They can keep this clearly destructive, clearly disproven scheme going indefinitely, which will result in serious damage to capital markets and the economy more broadly.”
The “other” institutions that this expert has in mind and that will aid in enabling the ongoing practice of ESG include the CFA Institute, which, among other things, now offers a specialized “Certificate in ESG Investing.” Two years ago, in The Dictatorship of Woke Capital, we argued that “it’s clear that the CFA Institute is dedicated to ensuring that no one slips through the cracks of [ESG/Stakeholder] indoctrination and winds up supporting free and fair capital markets.” The Institute has only grown worse in the intervening years.
In our conversation with Ben Weingarten about Wharton and “institutions” more generally, we concluded that said institutions will almost certainly “keep this clearly destructive, clearly disproven scheme going indefinitely, which will result in serious damage to capital markets and the economy….”
Buckle up. This will be a major theme in 2023.