On Feb. 28, Sen. Chuck Schumer (D-N.Y.) wrote an impassioned appeal in The Wall Street Journal for Republicans to support environmental, social, and governance (ESG) scores because ESG ostensibly represents the free market at work, by offering investors more “choices.”
Schumer appears to be deeply confused about how ESG operates. Or, more likely, he’s pandering to his powerful donors; pro-ESG asset management titan BlackRock reportedly donated more than $100,000 to Schumer’s reelection campaign in 2022.
Whatever the case may be, in reality, ESG results in the complete opposite of what Schumer claims. Putting aside the highly problematic “woke” metrics ensconced in all ESG frameworks, ESG at its core is designed to centralize decision-making power among an enormously powerful public-private cartel of elites and international organizations. It blatantly attempts to fundamentally transform the economy by severely altering traditional methods of assessing risk and allocating capital and credit. Rather than being judged solely based upon material factors such as revenue and the quality of goods and services, entities under ESG are judged based upon their commitments to arbitrary, subjective, political goals such as mitigating climate change and advancing social justice causes.
Businesses deemed by this elite cabal to be sufficiently committed to said goals are given a “high” ESG social credit score, and are rewarded with substantial capital in-flows, tax breaks, grants, access to special financial vehicles, preferential contracting, and other advantages. Businesses assigned “low” ESG scores suffer from reduced or eliminated access to capital, credit, and even insurance.
Just listen to Bank of America CEO and Chairman Brian Moynihan, who also runs the World Economic Forum’s International Business Council. At the WEF’s 2022 Annual Meeting in Davos, Moynihan committed to using the financial clout of his entire institution, including the funds of individual investment account holders. As Moynihan put it, “200,000 people, a three trillion-dollar balance sheet, 60 billion in expenses; you start aiming that gun, and you take that across all these companies, it is huge. ... [The companies] delivering on the metrics will get more capital, the ones that won’t will get less.”
With so much wealth in the hands of a relatively small group of players who are committed to using their capital for ESG objectives, companies have little choice but to comply and pursue those objectives, lest they risk dying on the vine. There’s little to no actual choice involved, for the business or the investor.
For instance, entire industries such as oil and natural gas extraction, tobacco sales, and firearm manufacturing are often designed to be screened out from investment funds, loan offerings, and insurance underwriting, with many large asset management firms like BlackRock divesting heavily from critical economic sectors. These fund managers even target much of the agriculture sector due to its supposedly high carbon dioxide emissions, further exacerbating negative food supply shocks. This occurs, regardless of whether investing in such industries would result in financial gains for the investors who have entrusted asset managers with their hard-earned money.
Asset managers—including the fund fiduciaries charged with safeguarding and growing retirement accounts and pension funds—have a legal responsibility to their investors. And, investors often don’t even know that these fiduciaries are using their funds to pursue political objectives at the expense of financial returns.
The result is that investor choices are limited by the fund managers to those companies that produce less greenhouse gas emissions, have the “right” ratio of white, black, Asian, and Latino employees, and donate to the “proper” political causes such as Black Lives Matter and Planned Parenthood.
I would bet that if these investors’ wealth had been allocated based purely upon financial metrics, and diversified to include companies involved with fossil fuels, firearms, or agriculture, they would have seen substantially higher returns on their investment in recent years. In fact, many studies have shown ESG-centric funds significantly underperform compared to traditional funds.
Using a natural experiment, University of Chicago researchers found that none of the highest-rated sustainability funds they studied outperformed any of the lowest-rated sustainability funds—though the former received more capital than the latter.
In December 2022, Bloomberg analyzed the 10 largest ESG funds by assets as compared to the S&P 500 index. Eight of the 10 funds performed worse, many substantially so. For instance, Vanguard’s FTSE Social and its ESG U.S. Stock both suffered year-to-date losses of minus-20.6 percent, compared to S&P’s minus-14.8 percent. The Brown Advisory Sustainable Growth Fund suffered a staggering minus-28.1 percent loss, nearly double that of the S&P index fund.
Regardless of the financial performance aspect of ESG investing, intentionally screening out companies involved with certain industries distorts the marketplace and the macroeconomy, and limits choice. Moreover, decreasing investment flows to vital industries such as energy—which is the lifeblood of any economy—results in reduced research and development that drives economic growth, and less prosperity for everyone.
Ultimately, rather than letting the invisible hand of the free market decide where investment should flow, the intervention of ESG factors into investment decisions fundamentally changes our entire financial and economic systems. Controlled investment is the antithesis of a free market, and is very similar to a socialist or fascistic command-and-control economic model. And, unsurprisingly, those advocating for this new economic model stand to gain the most.
To be clear, if an individual wants to invest funds in companies that are more “socially responsible,” that individual can do so of his or her own volition. But, ESG takes that choice away from those who value financial returns more than sociopolitical objectives.
Don’t be deceived. ESG systems are designed to subjugate free markets by relying upon coercion, pressure, and control—not to “provide more information” to socially conscious investors. Nothing about ESG belongs in a free marketplace in which businesses supply goods and services based upon societal demand for those goods and services. It’s past time to snuff out ESG before it grows unstoppable.
