How do you solve a problem like environmental, social, and governance (ESG) investing, the progressive investing movement that has now become entrenched across Wall Street?
In recent years, as public awareness of ESG has grown, so too has the opposition, prompting many sustainable finance champions to adopt a lower public profile. Since 2021, the number of skirmishes with corporate executives and boards during the annual shareholder meeting season has declined. Financial firms have now started to quietly withdraw from net-zero alliances because of legal liability concerns.
Even Larry Fink, CEO of BlackRock and ESG standard-bearer, has been forced to duck and cover. At this year’s Aspen Ideas Festival, Fink announced that, henceforth, he would treat ESG like Lord Voldemort and no longer utter the acronym in public because of its politicized and controversial nature.
Striking ESG from the sustainability lexicon and lying low are just diversionary tactics. It doesn’t affect the spread of sustainability across Wall Street, where portfolio companies and bank lenders are still being harassed daily behind the scenes under the guise of ESG investor engagement.
The fact that the pressurized ESG system remains firmly in place can be gleaned from all of the U.S. corporations that continue to toe the woke line despite the resultant revenue and reputational damage. The latest example would be the iconic American beermaker, Anheuser-Busch, whose management has thus far refused to fully distance itself from the recent LGBT marketing fiasco that continues to destroy its core Bud Light brand.
Red state boycotts, legislative hearings, and anti-woke product alternatives aren’t working to dislodge ESG, and it’s only a matter of time before government regulation cements the entire system into place, so here’s a contrarian suggestion: Try more regulation.
Specifically, every fund manager and asset owner who practices the activist form of ESG built on moral duress and the implicit threat of disinvestment to compel investee companies and banks to comply with a pre-set U.N.-curated list of climate, diversity, and other progressive tenets should be designated as a systemically important financial institution (SIFI) by the Financial Stability Oversight Council (FSOC) of the U.S. Treasury.
Under Section 113 of the 2010 Dodd-Frank Act, nonbank financial firms can be classified as SIFIs not only if they’re too big to fail but also if they engage in activities that could potentially destabilize the U.S. financial system. Under the latest revised guidance out of the FSOC earlier this year, the regulatory body no longer needs to consider the likelihood of material financial duress or perform any cost-benefit analysis when assigning the SIFI label.
In the wake of the 2008 global financial crisis, only four nonbank institutions received SIFI designations, all of which have been rescinded at this point. All four designees had a viscerally negative reaction to the labeling and worked feverishly, like Lady Macbeth, to purge the mark from their firms.
GE Capital was dismantled and sold off in pieces by its parent company to moot the issue. MetLife successfully sued in federal court to challenge its SIFI status, thereby freeing itself and its fellow insurers American International Group and Prudential Financial.
Years of lobbying during the Obama administration helped BlackRock to avoid the dreaded designation, even though the firm was already the largest asset manager in the world and its Aladdin risk and portfolio management product had become ubiquitous on Wall Street.
Being designated a SIFI is anathema for any U.S. investment manager or insurance company because it subjects these firms to onerous examination, supervision, and regulation, including increased capital and liquidity requirements and prior government approval for any corporate dividend payments.
With the locus of financial power and influence on Wall Street now shifting to buy-side firms in the post-ESG world, it’s time to dust off this dormant post-crisis regulation. Such a move would likely find bipartisan support, although the motivations would be different on each side of the political aisle.
Investors and investment firms serve as both the vanguard and the Praetorian Guard for the extrusive ESG movement, enforcing its rules and ensuring compliance by every market participant, whether it be an issuer, underwriter, or third-party service provider.
Buy-side firms are the driving force behind the push to replace shareholder capitalism with stakeholder capitalism and create the sustainable global financial system envisioned by the U.N. for 2030.
Whether working in collaboration or acting sola voce, these activist investors are using their market power to change the purpose of business and the meaning of investing over an extremely rushed and completely arbitrary timeline. The probability that such activities will have unintended consequences that will destabilize the U.S. financial system would appear to be extremely high.
Moreover, through the micromanagement of their portfolio companies and financial counterparties, particularly regarding climate action and diversity and inclusion initiatives, these nonbank financial firms are effectively setting energy and broader economic and social policy for the country through the backdoor of capital controls. Increased scrutiny of these systematically important financial institutions would seem like the prudent regulatory thing to do.
Also, turnabout is fair play. All the nonfinancial sustainable reporting and goal setting being forced down the throats of corporations and banks by ESG investors isn’t a costless exercise. As seen in the Bud Light example, sometimes such ill-conceived “woke” policies can have catastrophic financial results.
So, it seems only fair that those buy-side accounts pushing ESG onto the financial markets should also be subjected to the same type of costly business micromanagement at the hands of U.S. regulators.
Lastly, designating as SIFIs all the progressively minded investment firms now itching to show that they’re saving the planet and society through ESG will provide a true test of their commitment to the sustainable finance agenda. It'll also establish a clearing price for virtue signaling on Wall Street.
