From Palladium Magazine, May 5:
In the past four years, there has been a sudden adoption of the Environmental, Social, and Governance (ESG) framework in financial analysis, corporate reporting, and investment firms. Its presence has increased several times over in almost every metric, from the number of ESG funds and the assets that are in them, to the ubiquitous job postings that reference it.
For liberal reformers, this is the latest attempt to affix a human face to capitalism; for financial market purists, it is a serious breach of fiduciary duty. This combination of sudden adoption and partisan ideological interpretations has led to ESG becoming a serious political issue. Both these narratives fundamentally misunderstand the role of the finance industry in production, and what little power it actually has to direct such goals at all.
For decades, the question of externalities plagued institutional investors and threatened the ideological line that maximizing value for shareholders produces the greatest social good. For years, the intellectual and legal networks around academia, supranational working groups, state regulators, and the investors themselves struggled to reconcile fiduciary responsibility with other ideological commitments like environmentalism and funding “civil society” groups. It was in 2004 that the UN and major global financial institutions first created the ESG framework to serve this purpose.
Implicit in the ESG framework is the idea that investors can discipline firms and whole economies to be more aligned with social and political goals. But the finance industry does not possess the ability to discipline firms in this way. In practice, ESG funds do not move financial capital towards different goals: not only do these funds underperform on the market, but the amount of capital they are able to raise already appears to be slowing after the initial period of excitement.
Theoretically, the primary mechanism to discipline business decisions would be the voting power of shareholders, especially in replacing board members and executives. But shareholders rarely exercise such disciplining power: in the most recent voting data, Blackrock supported 90 percent of directors standing for election, and Vanguard supported 91 percent. In other words, institutional investors tend to go with the flow of company leadership decisions.
Even in high-profile exceptions, such as the time Exxon lost three of its board members to shareholder activism in 2021 due to environmental concerns, the actual impact is muted. Despite long-term pledges to get to net zero greenhouse gas emissions by 2050, Exxon plans to continue expanding oil production for the next decade and has been rewarded by stock price growth that’s beaten the market and the oil industry as a whole since 2021.
Despite this ineffectiveness in reaching its stated goals, the world’s largest investors continue to institutionalize ESG in both business practice and ideological marketing. Its rise does not mark a departure from the finance industry’s interest in the maximization of value extraction, nor does it represent a serious attempt to deal with any of society’s supposed ills. ESG should instead be understood as a pure and simple luxury commodity for those who need ownership of financial assets to maintain their position in society, with a new language of justification for the same decisions. Central to it is the conspicuous consumption of the bourgeoisie—owners, investors, and shareholders—as well as high-earning professionals.
This means that ESG is neither an improved concept of fiduciary duty nor a veiled attempt to impose a planned economy. Rather, it is yet another symptom of an ossified society that is primarily centered around conspicuous consumption.
Capitalism may still be dominant, but the individual capitalists have become averse to direct action. In reality, desirable social outcomes are achieved by taking on risks to build organizations and mobilize people and resources toward them. ESG is the perfect luxury financial good for those who fear taking on the challenge of acting on the world directly....
....MUCH MORE, he's just getting warmed up.
