ESG, DEI, and Smart Bets

ESG, DEI, and Smart Bets

I haven’t used this space very often lately to offer market forecasts, but when I have, they’ve been exceptional – by which I mean that they were forecasts readers were unlikely to see anywhere else.  Two forecasts in particular have stood out, mostly for their uniqueness but also for their prescience.  Interestingly, both have seen substantial confirmation in just the last 48 hours or so.

One of these was the forecast I made last summer, after Robby Starbuck started to get companies with conservative-leaning customer bases to renounce their previous DEI promises, to promise not to employ DEI going forward, and most notably, to end their participation in the Human Rights Campaign’s Corporate Equality Index.  Using the framework established over the last four decades by the economist Timur Kuran, I predicted that the corporate world was on the verge of experiencing a “preference cascade” on DEI.  Specifically, I wrote:

For decades, the people of Eastern Europe falsified their public preferences about their governments, largely because they rightly feared the potential repercussions of doing otherwise.  They put on brave, regime-supporting faces when around others, while privately detesting the regime.  The “distortion” created was the ensuing perception that the Communist governments were stable and popular, that everyone loved them – because that’s what everyone said in public.  The regime did part of the work of maintaining public order and obedience, but the people themselves did the lion’s share, convincing one another that they supported the regime, even as they secretly loathed it and even as it enjoyed practically no legitimacy at all.

Eventually, however, preference falsification gives way to reality.  Something unexpected happens that shatters the false public façade.  Something sparks the recognition among the general population that they are not alone, that others feel the same way they do, and that the consequences for acknowledging their feelings and preferences are nowhere near as severe as they had previously thought.  This is the “preference cascade.”  Once the spark signals to the masses that the false social support is teetering; once one person, then two people, then three people express publicly what they have long felt privately, the entire social structure collapses upon itself.  One leads to two, which leads to three, which leads to a “cascade” of thousands upon thousands….

ALL of the companies challenged by Starbuck have agreed to comply with all his demands, including discontinuing their participation with the Human Rights Campaign and its onerous Corporate Equality Index.  ALL of them – including, most recently, the Ford Motor Company – have come to the conclusion that the HRC is nowhere near as powerful as it would have them believe, making compliance with its demands entirely unnecessary.  It started with Tractor Supply Co.  It moved from there to John Deere and then to Harley.  Now Lowe’s and Ford are cutting ties with HRC.  And all of this has taken place over the course of just a couple of weeks.  As I say, we are on the verge of a preference cascade that may well depose the despotic current arbiters of corporate social behavior.

That preference cascade occurred, helped elect President Trump, and is still very much in progress.  Moreover, yesterday, I saw the following posted on Twitter:  “Support for DEI is collapsing through a preference cascade. Growing numbers are now saying publicly what previously they would say only privately, to close friends. The cascade is by no means over, though. Most academics are still afraid to speak about DEI honestly and openly.”

The author of that tweet/post?  None other than Timur Kuran himself.  The preference cascade is real.

The other forecast of note was my expectation that the schism between the United States and the European Union over their approaches to regulation and legislation on ESG would be great for American corporations and, by extension, absolutely dreadful for European corporations.  In short, ESG and the European Union’s obsessive pursuit of it would create a “competitive advantage” for American business.  I wrote:

American asset managers are retreating from ESG, [while] European asset managers are not.  They are, in fact, moving in the other direction.  Likewise, as the Biden Administration’s “whole of government” approach to climate, sustainability, and Net Zero is hampered by divided government, constitutional restraints, and pending litigation, the European Union’s much more aggressive approach to these matters is not.  The EU is, indeed, moving more slowly today than it was last summer, but it is still scooting down the road to economic oblivion at comparatively breakneck speed.

In practice, what this means is that ESG could place American companies at a competitive ADVANTAGE, relative to their European and even many Asian counterparts.  Simply by being empowered to ditch ESG and to let go of the unnecessary, costly, and time-consuming step of ESG-related engagement and compliance, American companies could thrive comparatively.  In a world of uncertainty and presumably, tighter money for a longer time, this could be of enormous significance.

I have reiterated this forecast several times since first making it almost exactly a year ago, and now, even the socialist French agree that I might have had a point:

The European Union is facing mounting pressure to scale back its highly contested ESG reporting requirements, as France prepares to unveil a formal proposal seeking to limit the scope of the regulatory framework.

The French government is working on a set of recommendations intended to rein in the Corporate Sustainability Reporting Directive. The proposal will likely include limiting the number of companies in scope for the full requirements, according to a person familiar with the matter who asked not to be identified discussing private talks….

The development means the EU’s two biggest economies are now publicly pressuring the European Commission to make cuts to CSRD, after Germany’s government last month urged the bloc’s executive arm to scale back the directive. That’s as fresh data show Europe’s largest economy shrank for a second consecutive year in 2024, with many business leaders and lawmakers blaming regulations for a loss of competitiveness.

You don’t say?  Funny how that works.

As if the European Union didn’t already need further confirmation that its ESG policies are business- and economy-killing, President Trump decided yesterday that he will drive the point home in dramatic fashion:

President Donald Trump has chosen Andrew Puzder to serve as ambassador to the European Union — a comeback for someone whose previous nomination to lead the Labor Department in 2017 was derailed by allegations of spousal abuse.

Trump praised Puzder as a “successful attorney, businessman, economic commentator, and author,” in announcing the nomination Wednesday in a Truth Social post.

Puzder is also one of this country’s top ESG experts and opponents.  He refers to it as “socialism in sheep’s clothing,” which is an excellent metaphor.  Above, Trump calls Puzder a “successful…author.”  Indeed.  Just last week, Encounter Books released Puzder’s A Tyranny for the Good of Its Victims: the Ugly Truth about Stakeholder Capitalism.  I don’t want to step on my own toes, since I will soon have a review of that book published elsewhere, but Puzder does a very nice job therein of explaining ESG, its flaws, its contradictions, and especially its intrinsic hostility to capitalism and “the profit motive.”

What this means, in turn, is that the EU is about to be challenged at a high, official level on the very premises of its 21st-century economic model.  Andy Puzder will, all but certainly, make it clear that the Trump administration intends to intensify the differences between the United States and Europe on economic matters – ESG, business, and capital markets in particular.  Calling for a delay in regulation or a minor rollback in the number of companies forced to endure the Union’s onerous regulatory regime is not going to eliminate the ESG-driven American competitive advantage.  By naming Puzder as his ambassador to the EU, Trump made this abundantly clear.

Going forward, all of this suggests that the trends identified earlier will remain intact and may even accelerate.  American corporations should be favored over EU-based (or UK-based) companies, especially energy companies or those in energy-intensive sectors.  Likewise, companies that go out of their way to publicly affirm their DEI support or their opposition even to consider assessing their DEI policies should be assumed to be serving two masters – politics in addition to business.

ESG is not dead – not even close.  But betting on its ongoing demise in the United States is smart.

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.