As the culture war wages on in American politics, conservatives have found a new target in the field of economics. Socially-responsible investing, calculated through the use of Environmental, Social, and Corporate Governance (ESG) scores, has become the subject of increasing scrutiny by conservative figureheads.
While conservatives like Florida Governor Ron DeSantis dismiss ESGs as “woke capitalism,” these scores actually provide investors with valuable insight into companies’ risk management. In addition to the economic benefits of ESG factors, these scores reflect companies’ commitment to social issues and labor policies, while also evaluating the degree to which they prioritize diversity and transparency in their hiring processes.
ESG scores are calculated either by companies themselves or independent firms. For example, firms like MSCI rate companies’ commitment to environmental concerns on a scale of AAA (the least risky) to CCC (the most risky). Other firms use a zero to 100 scale, with anything over 70 being considered excellent and anything less than 50 being seen as poor.
Conservatives have labeled ESG scores as the latest example of woke capitalism, adding fuel to the rapidly heightening culture war between Democrats and Republicans. One of their main arguments against ESG scores is that they tie people’s money up in “liberal causes” without their permission. Instead, fiscal conservatives believe that investments should be solely focused on maximizing returns. They argue that ESG factors unjustly involve investors in extraneous concerns which detract from the central goal of profit generation.
In addition, conservatives condemn ESG scores’ emphasis on diversity and inclusion. They claim that asset managers should not be able to leverage citizens’ retirement funds for social causes like racially equitable hiring. Herein lies the central problem with the conservative push against ESG scores: They have entirely misconstrued the point of ESGs.
Spearheading the public face of the campaign against ESG scores is Ron DeSantis. DeSantis has been a long-term fighter in the ongoing culture war. ESG scores are only his latest example of what he sees as the pervasiveness of woke culture in American society—funnily enough, his new book uses the word “woke” almost four dozen times in reference to ESG scores.
Lurking behind the scenes is Leonard Leo, a former leader of the Federalist Society who now oversees the Marble Freedom Trust. Leo has vast connections across the legal world and is somewhat responsible for the Supreme Court’s conservative supermajority. He played a crucial role in providing the shortlist that resulted in the nominations of Supreme Court Justices Neil Gorsuch, Brett Kavanaugh, and Amy Coney Barrett to the bench. Recently, Leo has picked up the culture war as his next lobbying project, fighting against Critical Race Theory and ESG investing in particular.
Leo’s lobbying efforts have seemingly paid off, as House Republicans voted on February 28, 2023 to overturn a previous Department of Labor law that gave companies investing retirement funds the choice of using ESG scores to pick which companies to invest in. President Joe Biden stated that he will most likely block this resolution because ESG scores create value for investors by helping companies garner greater social credibility and, in turn, attract better talent. In addition, using ESG scores allows companies to account for social and environmental factors in their decision-making, which is an important indicator of a firm’s long-term viability.
Biden’s reasoning gets to the heart of why ESG scores should be considered in investments, particularly long term investments such as retirement funds: As the climate crisis continues to intensify, environmental policies will indubitably affect long-term investments. Thus, not accounting for environmental concerns in long-term investing is nonsensical. Industries within or that rely on the energy industry will have to adjust to a world that needs more renewables. For example, energy companies that do not make this adjustment will suffer as the climate crisis worsens and the supply of fossil fuels shrinks.
In addition to the Department of Labor law, BlackRock, an investment management and financial services firm, has been a target of conservative backlash against ESG scores. BlackRock CEO Larry Fink is a proponent of using ESG scores in the firm’s investment management branch, claiming that they more accurately portray investment risk and provide better investment returns in the long-term. A subsidiary of Leo’s Marble Freedom Trust, Consumers’ Research, has started a lobbying campaign against ESG scores, specifically targeting BlackRock. This campaign has sent letters to the governors of inflation-ridden states, requesting that they reassess their connections with BlackRock.Just because more companies have adopted ESG evaluations to either support their investors or measure long-term risk does not mean that they are participating in ‘woke’ capitalism. In fact, firms are simply responding to market forces asking for clarity on their long-term position.
In many ways, conservatives have mixed up the chicken and the egg in their critiques of ESG scores. Ultimately, ESG scores developed as a result of a UN initiative that sought to increase financial transparency, providing consumers with more information so that they are not blindly trusting CEOs to perform their fiduciary duty. Thus, these scores are not the product of woke capitalism forcing firms to provide this information but a concerted effort by the UN to improve the financial sector’s processes.
People have the right to decide how they want to invest and what factors they want to consider in their decision-making process. If Republicans take issue with ESG scores, they do not have to factor them into their investments. However, eliminating ESG requirements entirely only hurts consumers, providing them with less information. Taking away an investor’s choice to use this information is more of an issue than ESGs’ supposed regulatory overreach.
Just because more companies have adopted ESG evaluations to either support their investors or measure long-term risk does not mean that they are participating in “woke” capitalism. In fact, firms are simply responding to market forces asking for clarity on their long-term position.
Companies like BlackRock have every right to share with investors their level of commitment to social and environmental factors. Doing so does not directly involve the consumer in the company’s decisions, contrary to what some Republicans may argue. In other words, ESG scores are an improved way for firms to complete their fiduciary duty to investors by considering long-term returns.
Conservatives like DeSantis and Leo miss this point in their critique of ESG scores. Their targeting of corporate America in the culture war is simply a logical extension of the war on the classroom. In their effort to stop overregulation, they instead seek to control markets or speech even more. ESG requirements are crucial to making sure firms are well-suited to adapt to an ever-changing political and social environment. Without these scores, consumers would be far more exposed to internal politics of companies and have less visibility on long-term stances. The conservative push against ESGs is toothless when examined against actual economic principles; instead, it is part of their loud crusade against “woke” America.