ESG investing may sound exotic, but it’s really just common sense, long-term thinking. The concept emerged around 2004, became widespread after the 2008 financial crisis, and grew even more in response to the 2020 murder of George Floyd and the ongoing Movement for Black Lives.
It’s an investing strategy that specifically accounts for how much a company’s practices counter climate change, how it treats its employees, its efforts toward improving diversity, equity, and inclusion within the organization as well as society, and the soundness of its own internal governance structures. “At its core, ESG investing is about influencing positive changes in society by being a better investor,” as Hank Smith, who runs investment strategy for the Haverford Trust Company, told Forbes.
ESG investing differs in an important way from Socially Responsible Investing (SRI), although they sound similar. As Forbes explained: “Whereas ESG investing takes into account how a company’s practices and policies impact profitability and future returns, SRI is more tightly focused on whether an investment is more precisely in line with an individual investor’s values. ESG factors in corporate performance while SRI solely focuses on the investor’s values.” In other words, ESG weighs investment performance in a way SRI does not.
Independent ESG rating agencies (reputable ones include S&P Dow Jones Indices, JUST Capital, Refinitiv, MSCI, and Bloomberg, among others) assess companies’ success in this area. Their work allows people to invest their money in ways that align with their views on these issues while still making comparable returns. Investors who prioritize ESG goals are looking for companies that consider the interest of multiple stakeholders—including workers, customers, the communities where they are located, and the environment—in addition to solely focusing on quarterly profits.
Crunching the numbers shows that ESG investing has been overall a pretty smart move, or at least one that doesn’t hurt investment returns, although there is certainly some debate on this. The chart below, from one analysis, shows that investing in companies with positive ESG ratings produced better gains than an otherwise similar investment that didn’t account for ESG criteria (to clarify, if the result below had been zero, that would mean there was no difference in gains, and any positive number reflects the higher percentage—meaning more money for investors—that the ESG portfolio gained vs. the comparable non-ESG portfolio). The difference was stronger for companies based in Europe and Asia than in North America, but nonetheless was positive in all the largest investing regions, as well as globally.
It certainly makes sense that, in the long run, companies that make sure to recruit and retain talent from diverse backgrounds and enhance the sustainability of our planet are going to do better than those that don’t. The aforementioned Mr. Smith noted “there’s a misconception out there that you need to be willing to give up returns in order to invest responsibly but a growing body of research shows that ESG actually helps mitigate risk.”
Larry Fink is the CEO of BlackRock, the biggest manager of investments in the world, and he believes strongly in the value of ESG investing. In his 2022 letter to CEOs of companies in which BlackRock invests, he wrote that this approach to investing “is not about politics. It is not a social or ideological agenda. It is not ‘woke.’ It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper. This is the power of capitalism.”
In case you were wondering, ESG investing is anything but niche. One analysis from 2020 found that $35.5 trillion (with a “t”) are invested according to ESG standards, while other sources have put the figure at $8.4 trillion or $18 trillion, so it likely depends on how the term is defined. But whatever the definition, we’re talking about some serious coin, indicating that there’s a real market out there among investors—especially among younger investors who might feel more able to risk taking losses in the short-term (because they are confident that running a company along ESG principles pays off for investors in the long run) than older generations who would have less time before retirement to recover any short-term loss.
There’s that word again: market. Republicans are supposed to worship at the altar of market forces. The last thing the Party of The Man Who Lost An Election And Tried To Steal It—going back to Reagan or even Goldwater—should want is the big, bad government telling people how to invest their money. However, by attacking ESG investing, they are revealing their true status as nothing but a bunch of hypocrites when it comes to free market principles. This op-ed from Democratic Sens. Whitehouse, Schatz, and Heinrich beautifully summed up what’s going on:
There is a cohort of elected officials in the United States presently engaged in an anti-capitalist crusade against free-market principles. No, they are not socialists. They are congressional Republicans, and they are attempting to prevent financial institutions from allocating capital in accordance with investor preferences and risk management principles. This attempted crackdown is purely ideological in nature — it is an exercise in political pressure to force a gross government overreach into U.S. capital markets.
This campaign, which should offend anyone with even a modicum of pro-market sensibilities, is being championed from within the Republican Party. Republican state lawmakers and members of Congress are attempting to stifle the growth of sustainable investing and to punish corporate efforts at climate-related financial risk management.
The underlying problem is that the fossil fuel industry is running up against a “risk wall,” where long-established economic risks associated with climate change are now sufficiently clear and present to trigger ordinary risk-reporting requirements in financial markets. Rather than reduce their emissions, or face up to the risks that they cause, the fossil fuel industry is trying to break and remake traditional risk reporting to selectively remove reporting of climate-related risks.
Although we’ve been talking about ESG broadly, and Republicans from Mike Pence to Ron DeSantis and more have bleated on about social issues (DeSantis mentioned “Second Amendment Rights” specifically as one social issue motivating his anti-ESG stance) and so-called “woke capitalism,” the part that most offends the GQP is the E—namely environmental sustainability. Because when the fossil fuel industry tells its toadies in the Republican Party (not to mention a couple of Democrats as well) to jump, they don’t even bother asking how high.
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At the federal level, the ridiculousness began, unsurprisingly, with a galactically stupid move during the administration of President Porn Star Hush Money. His Department of Labor, led by none other than Eugene Scalia (yes, that Scalia), essentially sought to stop ESG investing altogether.
In the twice-impeached-now-indicted former guy’s final months in office, Scalia and his minions put out a new rule relating to the Employee Retirement Income Security Act of 1974 (ERISA) that would have imposed significant barriers on firms looking to create ESG investment vehicles. Time ran out, thankfully, before the rule could go into effect.
President Biden withdrew the Trump/Scalia proposal, which it condemned because it “unnecessarily restrained plan fiduciaries’ ability to weigh environmental, social and governance factors when choosing investments, even when those factors would benefit plan participants financially.” Last November, Biden’s Department of Labor issued a new rule which states directly that ESG investing is, in fact, permitted by the ERISA law, as long as such investment decisions reflect the financial interests of investors.
To be clear, as Daily Kos’s Joan McCarter emphasized, no one is “mandating” that firms invest this way. To paraphrase a classic pro-choice line: if you don’t like ESG investing, don’t do it. Biden just wants to make sure that investors, many of whom are people putting their money away in retirement plans, have the freedom to invest in companies that share their values and make money doing so.
Remember also that what Biden did changed absolutely nothing about investing—he merely maintained the status quo at which Fuck a l’Orange had aimed a monkey wrench. Majority Leader Sen. Chuck Schumer pointed out that 92% of S&P 500 companies have been putting out ESG reports on themselves. Praising Biden’s new rule, Schumer declared that it would “allow the free market to do its work.”
Happy ending, right? For now, yes, but not one without a couple of bumps in the road. Once Barely Speaker Kevin McCarthy got his grubby hands on the gavel over in the House of Representatives in January, his party voted (along with one Democrat, Maine’s Jared Golden) to employ the Congressional Review Act of 1996 to revoke the Biden ESG rule. This law allows new regulatory rules to be overturned by a simple majority vote in both houses of Congress (which means no filibuster is possible), subject to a presidential signature. In the Senate, Democratic Sens. Manchin and Tester—both up for reelection next year in fossil-fuel-dependent red states—voted with the Republicans, and the bill passed 50-46. Thankfully, however, the Democrat in the White House had something to say on the matter.
We do need to keep an eye on the course of events going forward. In a move that should shock no one, Republican state attorneys general filed a lawsuit in federal court seeking to block implementation of Biden’s ESG rule. Equally shockingly, they engaged in their usual judge shopping, ensuring that the case would be heard in Texas, in the court of Judge Matthew Kacsmaryk—you know, the mifepristone guy.
Meanwhile, in various states across our country (including, most recently, New Hampshire, where the supposedly moderate Republican governor looks like he’ll be making a White House bid), the GQP is engaged in even more aggressive anti-ESG efforts. The most egregious case is that selfsame Texas—where I guess they do everything bigger. That state passed a law in 2021 that “bars local authorities from doing business with banks that have adopted ESG policies and divested from Texas fossil fuel-based energy companies.” Texas is essentially boycotting such banks. The fear is that the mere existence of an ESG option hurts the state’s oil and gas interests—which are clearly much more important than economic liberty and capitalist principles.
It’s worth noting that a study from the Wharton School of Business projected that the state’s anti-ESG boycott would cost its coffers more than half a billion dollars over just eight months. Other research found similar results, leading to at least a few states to back off, at least for now, on following Texas’s lead here.
Former Texas House member Jason Isaac—no word on whether he was actually wearing a ten-gallon hat when he said this—uttered the quiet part out loud. Isaac now works for the Texas Public Policy Foundation (TPPF), a right-wing outfit that proclaims its mission is to “promote and defend liberty, personal responsibility, and free enterprise.” But apparently that’s only true when the fossil fuel industry that provides a big chunk of its funding says it’s okay.
Isaac made clear the limitations of TPPF’s commitment to free enterprise when it comes to ESG, telling Marketplace that it “discourages investments in the oil and gas industry—the state’s lifeblood.” He also characterized the banks in question as “the enemy,” and argued that Texas government authorities should avoid sending funds to them.
Republicans profess that the government shouldn’t pick winners and losers—that’s not what capitalism is about, according to them—but here they seem to think it’s okay to pick friends and enemies.
Biden and the Democratic Party are the ones more committed to the supposedly Republican value of economic freedom as well as protecting the choices and interests of investors—not to mention the environment. On the other hand, as Sens. Whitehouse, Schatz, and Heinrich so aptly put it, the Republicans are “attempting to bully financial institutions and regulators into ignoring market demand and market risk.” They are “anti-capitalist.”
If anything, that’s too kind. What they are, in fact, are the tools of the same Texas Oil Men they have been going back to Dubya Bush and beyond. Fossils indeed.
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Ian Reifowitz is the author of The Tribalization of Politics: How Rush Limbaugh’s Race-Baiting Rhetoric on the Obama Presidency Paved the Way for Trump (Foreword by Markos Moulitsas)
