ESG’s Muffled Discourse

ESG’s Muffled Discourse

The following commentary/forecast 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.



One of the most frustrating aspects of the debate over ESG is one debater’s consistent unwillingness to embrace the case underlying his position fully and sincerely.  For example, opponents of ESG state that the tactic addresses largely extraneous business data that are, by definition, immaterial, thereby rendering their use in investment decisions highly suspect and questionable fiduciarily.  In response, the supporters of ESG have a tendency to offer schoolyard taunts and little more: “Nuh, uh!  You’re fiduciarily irresponsible!  Our variables are material, but you aren’t!  Stop trying to tell us how to invest!”  They don’t address the materiality issue.  They don’t address the fiduciary concerns in any meaningful sense.  They don’t address the fact that ESG is a top-down, elite-driven phenomenon that has almost nothing to do with average “investors.”  And they certainly don’t address the coercive engagement strategies that endeavor to alter corporate behavior without the consent of te true shareholders, much less that of the most relevant stakeholder groups (employees and customers).

There are two notable problems created by this discrepancy, by one side’s unwillingness to debate the issue earnestly and openly.  The first and most obvious of these is that it preempts candid and potentially beneficial dialogue.  It short-circuits a conversation that should be had, that must be had in pursuit of the preservation of free and fair capital markets.  The second and related problem is that such obfuscation and table-turning tactics are remarkably effective.  They muddy the water enough that those who have no expertise in ESG are often left wondering which side is right, whose contentions are accurate, and who has the right to claim the title of “free market advocate.”  Sometimes, these tactics muddy the water enough that they confuse even those who should know better.

This summer, the House Republicans dedicated the entire month of July to investigating, analyzing, publicizing, and legislating on ESG.  By most accounts, they didn’t exactly set the world on fire.  Part of the reason for this is that Congress’s most important role in addressing the issue – reining in the administrative state’s reinforcement of ESG – is not yet ripe.  A bigger part of the reason, though, was the fact the Democrats came prepared for the debate, which is to say that they came prepared to pre-empt the discussion of the substantive issues that underlie the legitimate and well-founded opposition to ESG:

When Republicans began trumpeting plans to crack down on green-minded investments following their House takeover, Democrats started preparing a counterattack.

The result was the mobilization of the Sustainable Investment Caucus….

“I think we beat the snot out of them, from a political perspective,” said co-chair Rep. Sean Casten (D-Ill.). “We made them answer to the truth.”

Casten and the caucus’ other chair, Rep. Juan Vargas (D-Calif.), deployed their strategy in July when the House Financial Services Committee convened six hearings and a markup over the course of two weeks during what was dubbed “ESG Month.”

Republicans see ESG investing as a progressive campaign to force corporate America to support left-leaning positions, including shunning fossil fuels and ultimately making retirement accounts less stable….

But throughout the sessions, Democrats characterized Republican opposition to ESG as anti-capitalist, discouraging market choice and investor freedom by suggesting ESG factors should not be taken into account.

They accused Republicans of endangering retirement accounts by denying financial managers access to critical data, and berated them for ignoring the realities of climate change as a serious financial risk….

As a result, many Republicans had to use their speaking allotments during the hearings and markup to defend themselves against comparisons to communist leaders or dispute characterizations that their party had abandoned President Ronald Reagan….

[B]eyond just understanding the dynamics…there was an urgency to teach colleagues how to speak coherently and persuasively on the subject.

For instance, they said it was important for members, at the hearings, to not just exclusively name-call Republicans as climate deniers for opposing ESG investing.

“Capitalism is about information and transparency, and investors wanting to know what’s material,” said Vargas. “We didn’t beat up on the Republicans too much about them being bought and sold by the oil companies.”

Had the Republicans been better prepared, they might have done two things.  First, they might simply have ignored the Democrats’ attacks on their capitalist bona fides.  Why would they even bother responding?  As George Bernard Shaw probably never said: “Never wrestle with a pig.  You both get dirty, and the pig likes it.”

Short of ignoring the attacks, Republicans might have responded by pointing out their fatuousness.  “Democrats characterized Republican opposition to ESG as anti-capitalist, discouraging market choice and investor freedom….”  This is patent nonsense.  No one is talking about “banning” ESG or denying investors the right to invest wherever and however they want.  What ESG opponents are talking about is prohibiting mandates on ESG consideration by public entities, creating transparency in the murkiest and most opaque parts of the proxy process, preventing the imposition of multi-trillion-dollar regulatory schemes that would bankrupt small businesses and family farms, and halting the unilateral and ideologically driven de facto redefinition of the term “materiality” to suit a political purpose.  ALL of that is anti-statist, not anti-capitalist, and it’s all obviously so.

“They accused Republicans of endangering retirement accounts by denying financial managers access to critical data.”  Again, this is flatly nonsensical.  The Trump Labor Department rule – which President Biden rescinded on his first day in office and which his Labor Department has replaced – openly and willingly accepted the use of ESG analysis by financial managers, on the condition that they could demonstrate that the ESG considerations were material matters.  That’s it.  It didn’t ban ESG.  It didn’t prevent pension plan managers from considering ESG ideas.  It merely said that pension investment decisions should be based solely on pecuniary factors, unless there was a good and DEMONSTRABLE reason why they shouldn’t be.  The rule that the Biden team put into place eliminates the necessity of demonstrating the materiality of ESG considerations in ERISA plan investment decisions.  And so, by defending the Biden rule, ESG-proponents not only tacitly concede the immateriality of most ESG considerations but also undermine their own case.  “‘Capitalism is about information and transparency, and investors wanting to know what’s material,’ said Vargas.”  Fine.  Prove it.  Show that “sustainability” criteria are material and we’ll be good.  How hard is that?

Additionally, yes, capitalism is, indeed, about information and transparency.  But not all information matters.  Not all information is relevant to the performance of a corporation.  It is the job of an analyst and an asset manager to determine what information is relevant and what isn’t.  And if they claim that some information is relevant but can’t demonstrate how or why, then they are not practicing sound analysis or their fiduciary duties.  They are practicing politics.

Finally, the claim that ESG is beneficial to investors is so flagrantly untrue, so repeatedly and thoroughly debunked, so DEMONSTRABLY inaccurate that it’s a bit shocking that anyone would dare to make that claim.

The only thing more shocking is that the Republicans were unable to rebut it.

The bad news is that “ESG July” was probably a bust – in large part because the Democrats were well prepared to avoid any discussion of ESG’s real and undeniable weaknesses while Republicans were UNprepared to push back.

The good news is that it doesn’t really matter all that much – not yet, at least.

But it will.

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.