Should sustainability be our new standard for investing? According to Larry Fink of BlackRock (more than $7 trillion in assets) the answer is yes. The ESG movement is an investment trend focused on Environmental, Social, and Governance matters in assessing a company’s long-term value. American investors have put more than $20 billion into ESG funds in 2019. Will ESG save the world from climate change, increase social and racial justice, eliminate fossil fuels, etc.? This is a new variant of the prior ideas of Corporate Social Responsibility, Social Responsibility Investing, and the Stakeholder theory of corporations. Is ESG being used to alter the structure of the capital markets? Does it really offer superior returns? This is a complex issue and we can see it manifested in how corporate CEOs are more willing to be involved in politics.
Definitions
New York Times columnist Ross Douthat coined the term "woke capitalism" for companies signaling their support for progressive causes in order to maintain their influence in society.
Another definition of woke capitalism: A platform for political action, using power rather than money and entrepreneurship.
In The Dictatorship of Woke Capital, Stephen Soukup provides this definition: “Woke capitalism is the top-down, antidemocratic means by which some of the most powerful and best-known men and women in American business are endeavoring to change capitalism, the securities markets, and the fundamental relationship between the state and its citizens—and to save the world.”
Corporation, Latin corporare, meaning “to form one body”
SRI—Socially Responsible Investing dates back to the 1920s. ESG is the modern manifestation of SRI.
Stakeholder capitalism—A business should be operated for more than just shareholder value maximization—customers (who want lower prices), employees (who want higher salaries), suppliers (who want higher prices), community (who outnumber all others), etc. Good luck solving all these conflicting wants. We have a mechanism to do it—it’s called the price system.
The US Business Roundtable, issued “Purpose of a Corporation” on August 19, 2019:
A company’s management no longer owed an overriding duty to its shareholders. Instead, it must serve the interests of a number of stakeholders: customers, suppliers, employees, and communities, and to adopt sustainable practices across our businesses
Environment, Social responsibility, Governance (ESG): SEC Commissioner Hester Peirce said of ESG, “The first issue is we don’t even know what ESG means. Not only is it difficult to define what should be included in ESG, but, once you do, it is difficult to figure out how to measure success or failure.”
Warren Buffet has reservations regarding ESG standards; he opposes proposals for annual reports on climate change and diversity initiatives.
BlackRock, Larry Fink, CEO, $9 trillion, largest asset manager in world. On average, holds 22% of typical S&P 500: 18% Apple; 20% Citigroup, 18% BofA, 19% JPMorgan Chase, 19% Wells Fargo, one of largest investor in China (7% PetroChina, notoriously Ungreen!)
In Fink’s letter he wrote: “Sustainability should be our new standard for investing.” Apparently, only US companies.
Blackrock is an agent for its principals (investors), and has the same conflicts that corporations do. This allows Fink to impose his beliefs on capital markets with Other People’s Money.
Four Ways the Government Makes Corporations Woke
1. Govt as shareholder—CA Public Employees’ Retirement System (CalPers--$350B assets, CA constitution commits 40% of budget to education), FL and TX ($270B), NY, etc.
In 2018 CALPERS pressured retailers anywhere to stop selling guns banned in CA, even if not banned in other states.
2. Govt as customer—military and other govt contractors. Chick-fil-A can’t access airport space, San Antonio, Buffalo, San Jose
3. Govt as capital-market regulator—SEC, NYSE, NASDAQ, rating agencies, accounting firms all regulate and assist regulators. Even the Federal Reserve is now mandated to reversing climate change and promoting racial equity even though it has no expertise in these areas. Monetary policy can’t reverse weather or racism.
4. Govt workplace regulator—diversity, quotas, etc.
Woke CEOs
Trendy statements that are far from companies expertise (policies on guns, voting laws, abortion, climate change, etc.). It is easier for COKE’s CEO to speak on voting laws than obesity and diabetes.
But for whom are they speaking? Consent of the governed? Was this the agreed upon duty of the CEO when they were selected?
Milton Friedman argued: The CEO becomes a civil servant, even though an employee of a private enterprise. If they are a civil servant, they must be elected through a political process:
“This is the basic reason why the doctrine of social responsibility involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses…”
40% of Americans, on both sides, avoid companies for political reasons. Do we really want Red and Blue Corporations?
Political institutions are the least trusted, do we need more politics in our workplace? Whom do I call on Walgreen’s foreign-policy staff to ask about the Israeli-Palestinian conflict?
Shopify CEO: “Like any other for-profit company, we are not a family. Shopify is also not the government.” Mastercard and Citi are members of “plant a hundred million trees” collation: that’s great if they were logging companies.
Serve your customers, not politics and politicians.
Woke investors
They are diding behind the corporate veil, with limited liability, to effectuate a social agenda.
Pensions
ERISA—Employee Retirement Investment Security Act (ERISA) imposes one of the highest legal duties: that of fiduciary.
Yet annual expenses of sustainable exchange-traded funds are 7-10 times more than index funds.
Tariq Fancy, former chief investment officer for sustainable investing at BlackRock: “The financial services industry is duping the American public with pro-environment, sustainable investing practices…being presented as something it’s not. Boils down to little more than marketing hype.”
Who Pays for the Mistakes?
Shouldn’t social-justice crusaders be held to the same moral standard they apply to companies? Grant-making foundations, NGOs (helping the poor), Greenpeace (opposing nuclear energy), Anti-child labor organizations, union opposition to school choice, professions support licensing, all hurt the poorest. The same standard should apply to them: First, do no harm.
Accounting
The Global Reporting Initiative (GRI) is the world’s most widely used standards for sustainability reporting. The Sustainability Accounting Standards Board (SASB) also promulgates standards.
French company Danone introduced a new metric: carbon-adjusted earnings per share.
Other examples of these metrics: charging credit-card companies for medical costs of depression connected to indebtedness; airlines for human toll of flight cancellations; food producers for health issues related to obesity.
That such ideas are taken seriously shows the rot spreading within business schools, C-suites, etc.
Other Resources
A fascinating article by Theodore Levitt, “The Dangers of Social Responsibility,” from Harvard Business Review, September-October 1958. Here’s one of his arguments against corporate social responsibility:
“The belief that one institution should encompass the complete lives of its members is by no means new to American society. There is a name for this kind of encircling business ministry, and it pains me to use it. The name is fascism.”
Not all corporations see alike on all things. Do we want them to? Lose pluralism for a monolithic society? Do we really want, as Levitt says, “a commercial demichurch.” Levitt also writes:
“And there is nothing more dangerous than the sincere, self-righteous, dedicated proselyte sustained by the mighty machinery of a powerful institution. The reformer, to borrow from Nietzsche, thinks of himself as ‘God’s ventriloquist.”
“The fact is, no matter how much business serves, it will never be enough for its critics.”
ESG is a form a utopianism, and corporations will never measure up. As Lord Acton said of the past, people sacrificed freedom by grasping at impossible justice.
Further Resources
Milton Friedman, “The Social Responsibility Of Business Is to Increase Its Profits,” NY Times, September 13, 1970
Theodore Levitt, “The Dangers of Social Responsibility,” Harvard Business Review, September-October 1958
National Review, July 1, 2021 Issue dedicated to Woke Capitalism
TSOE Episode #10, “Corporate Social Responsibility: Progress or PR?”
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