Five tenets for conservatives to consider when thinking about ESG and socially responsible investing.
The senior editor of American Affairs, Julius Krein, was unsparing in his criticism of conservatives in his recent article, “Why the Right Can’t Beat ESG.” “Conservatives’ purely negative approach to ESG, coupled with a naïve desire to return to older forms of shareholder primacy will prove counterproductive,” he concludes, bemoaning “the absence of any substantive alternative agenda.”
Krein does a good job highlighting how and why persistent Republican potshots against ESG have failed to rein in a beast that has done more harm than good. ESG has become a religion for many. That it has morphed into a hotbed of political controversy rather than a constructive conversation about the pros and cons of sustainable investment says more about our tribal psychology than it does about ESG. Jonathan Haidt can explain the broader phenomenon behind this if you’re interested.
But conservatives mustn’t give up the fight. ESG remains a fatally flawed investment paradigm. It is premised upon unreliable data and the dangerous, highly misleading idea that tilting away from certain shares or bonds will fundamentally alter corporate behavior, improve risk-adjusted returns, and result in better social and environmental outcomes. None of these claims is true. Getting ESG right requires the identification of how and where mindful corporate practice and investment generate true, double bottom lines. All the rest is hokum. Discernment like this transcends politics, however. ESG strengths and weaknesses don’t change if your state is red, blue, or purple. Politicians of all colors should unite in deriding investment strategies that don’t help asset owners achieve their intended goals.
Conservatives mustn’t overreach, either. In a country where “best interest” regulation is the law of the land, investors are empowered to make their own investment decisions, however flimsy those decisions may be. Regulators should intervene if there is insufficient market competition or faulty disclosures. Beyond that, it’s caveat emptor. There is no law against foolish capital allocation, even though dumb financial decisions are common when politics are prioritized over value creation and risk mitigation.
Consider Democrat Brad Lander, New York City’s comptroller. He recently lambasted BlackRock for not forcing its clients to buy more of the ineffectual products he endorses, so-called temperature-aligned funds. Temperature-aligned funds exclude all non–Paris-agreement-compliant firms. They neither affect the globe’s temperature nor generate better risk-adjusted investment outcomes. Lander should know the earth would still be on course for a temperature increase well beyond the 2050 net-zero goal of the Paris accord even if every portfolio on the planet were temperature-aligned. To decarbonize industry, transportation, housing, agriculture, and the grid, we must invest in dirty industries, not divest. Lander has flipped the sustainable-investment challenge on its head.
But Democrats are not alone in being led astray by ESG. Republican Texas comptroller Glenn Hegar has also blundered. In defense of the Lone Star State’s economy, Hegar pledged to boycott financial firms that boycott energy, but then did the exact opposite. He blacklisted some of the most important investors in energy in Texas, increasing borrowing costs for Texan oil corporations and taxpayers in the process. Hegar and Lander don’t share political ideologies, but they have something else in common: Both let their political beliefs impede sound financial judgment. Politics and markets should be like church and state: as separate as possible.
Krein is not just calling for a conservative reckoning on ESG, though. He yearns for something broader, more comprehensive. Addressing ESG’s flaws “will require abandoning the silly pretense that ‘the market’ is a magical, perfect, self-regulating machine of 18th-century deism, operating independently of politics and society,” he insists. “It will require the intellectual awareness and discipline to pragmatically incorporate these goals into constructive policy and corporate governance frameworks.”
As a conservative, I must note Krein is already on heretical ground with his criticisms. Conservatives don’t defend markets because they are perfect: We do so because they are better at allocating capital and identifying growth opportunities than government agents who claim to know better. What Krein should have said is that conservatives recognize markets are essential, but they too often ignore their negative externalities. Conservatives must combine their valid defense of free markets with pragmatic, effective plans to countervail their failures. Today, those failures include environmental degradation and social contracts increasingly strained by widening wealth gaps. These are, after all, primarily what the “E” (environmental) and “S” (social) in ESG are all about.
Krein would be right to highlight market failures and the absence of comprehensive Republican plans to deal with them. Conservatives should respond thoughtfully to all valid environmental and social concerns. Modern capitalism taxes our air, water, and land in detrimental ways. Overwhelming evidence suggests current consumption and production patterns are contributing to the extinction of many insects and animals, while potentially rendering unlivable certain densely inhabited environs, including whole cities and several island nation-states. None of this is political; the evidence is there for all to see. On the other hand, anyone who claims to know what the temperature of the earth will be in 50–100 years and why we must spend $100 trillion to change it is deceiving himself. The same holds true for sea levels. Global temperatures could be higher or lower. Nonhuman influences caused the earth’s last mass-extinction event by making it much colder. Seas aren’t rising very fast and may not do so anytime soon. The future timing of non-anthropogenic events remains unknown and unknowable.
But the temperature of the earth and sea levels decades from now are not our political problems at hand — or, at least, they shouldn’t be. As the global population will soon top out around 10 billion, Left and Right alike must think long and hard about how every human soul will be able to live sustainably and in a manner consistent with the inherent dignities bestowed by their divine maker. We must also ask why growing numbers of highly capable people are not reaching their full potential. In so doing, we must remain crystal-clear about the precise roles individuals, civil society, policy-makers, business, finance, regulators, and public policy can and cannot play in optimizing outcomes.
Individual behaviors are key. Business and finance have no special powers to turn the carbon clock backwards or reverse decades of racial and gender discrimination; consumer choices and public policies drive outcomes far more determinately. Financiers and corporate CEOs are not, nor should they ever be, social- or environmental-justice warriors, forever prioritizing stakeholders at the long-run expense of their shareholders. This is not their job, legally or ethically. If every corporate enterprise substituted a range of E and S goals for their growth opportunities, the global economy would experience a catastrophic growth shock, far worse than the Covid-19 shutdown. When per capita growth falters, human misery quickly mounts, especially for the poor. Lawlessness, mass migration, and unconstrained environmental desecration invariably multiply when economies fail. Calls for renewed economic growth would soon rise in a cacophonic frenzy. If we want to make the world more environmentally sustainable and socially inclusive, we will need to spend more money — perhaps as much as $275 trillion over the next 40 years by some estimates. Exactly where would these funds come from in a global economy experiencing free fall?
None of this means business and finance should remain oblivious to the changing priorities of our times — but neither can they do so and thrive. This may be what Krein meant when he wrote, “The business of business is never just business.” Business and finance exist in their primary incarnation to serve the broad interests of society. Their sine qua non is to generate economic growth. If business and finance do not generate economic growth, nothing else will. As it so happens, good business practice and many ESG priorities are increasingly, though not perfectly, aligning. Companies today fail their shareowners if they ignore the interests of their employees, suppliers, community, and the environment. This is not stakeholder capitalism, though; it’s just capitalism. Conservatives not only celebrate market-driven innovations that result in material, social, environmental, and spiritual progress; because we understand markets, we expect them.
Krein also deserves credit for highlighting the need for a comprehensive, conservative road map which could credibly solve the real problems of our day. Republicans need a road map that would enable society to get all the good out of ESG without the bad — and much else besides.
But progressives need a workable ESG road map, too. Blind acceptance of ESG precepts has resulted in trillions of dollars of misallocated capital and zero progress towards its principal target, climate change. Doubling down on failing ESG methods is nuts. Its merits and risks aren’t red, blue, or purple; they are black and white. When it comes to optimizing commercial and financial outcomes, color-tinted lenses impede clear thinking. If we prioritize principles over politics, all our road maps will align.
Promoting the broadest levels of human flourishing ethically, effectively, and for as long as humanly possible, requires these five, core tenets to serve as our pillars:
I. Let Markets WorkYears of naming and shaming public oil-and-gas companies while billions of consumers continued to rely upon their products ended predictably: massive energy shortages and dangerous dependence on Putin, who promptly pounced on Ukraine. Ignoring the laws of supply and demand encourages such tragedies. After natural-gas prices in Europe jumped tenfold versus 2018, clean-energy investments topped $1.4 trillion in 2022, a record. No surprise here, either. Wind and solar and geothermal and nuclear are now cheaper than fossil fuels, in Europe at least. As the need for more domestically sourced energy has simultaneously jumped, all energy sources are finally receiving the investments they need. Putin’s horrific crime accomplished precisely what the gilets jaunes in France democratically precluded: an effective carbon tax.
Similarly, if Citigroup CEO Jane Fraser has found that flexible work hours and locations provide her with a more committed workforce, while David Solomon at Goldman Sachs has found the exact opposite, both can be right. Price and non-price incentives are essential to sound decision-making and free-market solutions. The abandonment of market discipline delays, and ultimately compounds, human woes. Disallowing free-market competition stifles creativity, innovation, and entrepreneurship, each of which are essential for enduring prosperity.
Friedrich Hayek said it best: “I very seriously regard the preservation of what is known as the capitalist system, of the system of free markets and the private ownership of the means of production, as an essential condition for the very survival of mankind.” We must allow markets to be free to survive.
II. Recognize That Consumer, Worker, and Societal Attitudes ChangeOccidental Petroleum’s visionary CEO Vicki Hollub has discovered a growth market: carbon-neutral oil. Once the world’s largest carbon-capture facility is complete, Oxy Low Carbon Ventures will have virtually unlimited demand for its cleanest fossil fuel. Carbon-neutral oil can power private planes, generate electricity while wind and sun are missing, and enable companies who have committed to net-zero emissions to achieve their goals efficiently. But none of this is “woke.” It’s simply capitalism.
Similarly, high-quality synthetic leather will be a $65 billion market by 2030, up more than 1,000 percent from 2022. High-end, faux-leather goods made from mycelium — a natural product derived from mushroom roots — verifiably claim to be carbon-negative, the opposite of methane-rich, bovine-derived traditional leather products. Gen Z shoppers are leading the way in increased spending on these types of “sustainable” products. On balance, their wallets are driving up demand while the consumption of traditional apparel, footwear, and accessories has fallen 20 percent since 2019.
Of course, many Boomers, Gen X, and Millennials are conditioned towards less mindful consumption patterns, and their demands must be met, too. Younger consumers and workers coupled with a growing number of well-heeled older folk have evolving expectations, hopes, and dreams. A growing number realize the earth has never had to support 8–10 billion human inhabitants before. Before too long, everyone will. Emerging preferences for circular production and sustainable products are natural, market-driven phenomena. They will intensify over time.
III. Double Down on Shareowner Primacy“In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business.” So wrote Nobel laureate Milton Friedman in his sensational 1970 essay “The Social Responsibility of Business Is to Increase Its Profits.” I don’t know many conservatives who would debate Friedman on this, and none that should. Anyone who believes a business should be run for the benefit of someone other than its owners must read the 1919 Michigan Supreme Court opinion by Russell Ostrander, Dodge v. Ford Motor Company. There, he or she will learn shareowner primacy isn’t just sound practice: It’s also the law of the land. Protesters campaigning outside corporate offices should be respectfully told that their concerns are laudable, but their energies would be better spent buying shares and waging proxy fights. Those same protesters should be graciously asked how they’d feel if some stranger came into their home and told them to change their appliances, drapes, and furniture. After all, that is effectively what they are demanding of the corporations they are protesting.
Businesses are run by and for the benefit of their owners, subject to local and international law. Those owners also bear risks and responsibilities, neither of which are negligible. There are ways to change corporate behaviors legally and responsibly. There is just no way to reassign those controls to some newly empowered, nondemocratic agent and still be a conservative.
IV. Recognize Shareowners’ Priorities Are Changing TooFriedman never claimed that corporations should merely prioritize short-term profitability. In the same 1970 article, he wrote that companies should “make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” Over the past half-century, shareowners have repeatedly rejected the short-term preferences of management when their long-term welfare has been imperiled. Increasingly, long-term shareholder welfare is becoming embodied in our laws and ethical customs.
In the 1980s, shareowners instituted executive-pay guidelines and poison-pill-takeover protections. In the early 1990s, they voted to remove the CEOs at Westinghouse, American Express, IBM, Kodak, and General Motors. More recently, shareowners forced Wendy’s to join the fair-food program and DuPont to account for the long-term disposal of the 10 trillion plastic pellets they manufacture annually. All these measures have the same cause and effect: Shareowners are instructing managers of the companies they own to incur short-term costs in exchange for what they believe will lead to long-term gains.
This trend now appears to be accelerating, with more environmental and social concerns rising. Why? Because the demographics of shareowners are shifting to pensioners who want the value of their investments to be maximized over 25–30 years, not 25–30 days. Growing numbers of shareowner resolutions seeking lower carbon emissions or increased workforce diversity make sense in this context. What retiree wants to live in a world with unbreathable air, undrinkable water, and whole segments of society underemployed? If most shareowners say they want every employee of Walmart to have access to GED certification, free college tuition and books — which they now do — what non-shareowner has the right to stop them?
Krein says, “Conservatives should develop their own investment frameworks.” Conservatives already have an investment framework: whatever a majority of shareowners of a specific company decides. Study the history of corporate governance closely. You’ll see shareowners have repeatedly asserted their rights in important, evolving ways. There is no practical alternative to shareowner primacy. Neither progressives nor conservatives have the right to cry foul when they feel that primacy is abused. Today, virtually anyone can buy a few shares of a company and fight openly for more sensible strategies. Competition in corporate governance is partly what led Vivek Ramaswamy to start Strive Asset Management. In time, this debate will sort itself out. Nothing would be more unconservative than claiming that there should be one, new, transfixed investment framework. There should be multiple competing ones, so asset owners can exercise informed choice.
V. Prioritize Efficient Remediation Policies That WorkAnd now we come to the “remediate negative externalities” part, the part where conservatives have been weakest. Fortunately, our tools and opportunities here are multitudinous.
Consider the Lab for Economic Opportunities at the University of Notre Dame. This group of nonpartisan academics are on a mission: to outsmart poverty. Rigorous data analysis has led them to many counterintuitive conclusions. To lower adolescent-recidivism rates, teach Aristotelian ethics to high-school dropouts. To multiply accreditation rates in community colleges, provide enrolled, unwed mothers free caseworker counseling. And to match education with employment opportunities more optimally, stop telling everyone to go to college. There are tens of thousands of reliable career pathways in the information-technology industry. Most can be accessed through tuition-free certification programs.
Similarly, the Environmental Defense Fund has helped dozens of U.S. corporations save more than $1.6 billion in energy costs while boosting their operational efficiency. For example, EDF showed McDonald’s how to reduce its packaging and waste by 30 percent while saving millions of dollars annually. EDF is changing industrial-scale farming and fishing in ways that will enable growing populations to feed themselves forever, even as climate changes.
What do these two sets of powerful, remediating policies illustrate — the first social, the second environmental? First, that sensible solutions are neither red nor blue: They are simply sensible. Second, that many of our best policy solutions have not been discovered or mandated by Julius Krein’s new government. Rather, they have come out of private industry and America’s vibrant, globe-leading NGO ecosystem.
LEO and EDF are what I call “Exemplars of Hope.” Exemplars of Hope are NGOs or other civic service organizations that have scalable programs and methodologies that verifiably promote more inclusive, sustainable economic growth. The world we all hope to inhabit would be advanced by their successful propagation. Evidence-based programs which promote more inclusive, more sustainable economic growth are highly effective ways of countervailing two of the most pernicious negative externalities of modern capitalism: environmental degradation and strained social contracts. They can and should be complemented with a broad expansion of public–private partnerships and private impact investments — i.e., capital commitments that generate superior returns and verifiable social and environmental advances. My research shows the “do well–do good” private investment market may be as large as $6 trillion per year. Private impact investments on this scale would be more than enough to achieve all the United Nations Sustainable Development Goals by 2035, should that be the direction voters insist we go.
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Of course, none of the five principles above are meant to preclude fulsome debates about broader public-policy changes. Adherence to these five principles would forge more optimal economic, environmental, and societal outcomes. This said, more work is needed to discern optimal corporate-tax rates, sensible worker-apprenticeship programs, and the lasting benefits of charter-school choice, among other policies. Krein’s challenge was specific to ESG, however. He said the right can’t “beat” ESG.
If you’ve gotten this far, you probably also believe ESG is a thing worth beating, or at least dealing with sternly. I do as well. ESG has done more harm than good. It has misled millions of investors into thinking that the way to transform our industries, live more sustainably, and still enjoy abundance is to tilt and time shareownership. They are wrong. The world would be far better without these misconceptions. In the interests of ESG’s speedy demise and my conservative beliefs, however, allow me to suggest another course of action.
Remember the BRIC phenomenon that began in 2001? We were all repeatedly told to prioritize Brazil, Russia, India, and China in our portfolios. By the time the Global Financial Crisis rolled around a few years later, these four countries had become irreconcilable bedfellows. Who wants to invest in Russia now? Similarly, FANG became FAANG before markets broke up the band. Today, no one believes Facebook (Meta), Apple, Amazon, Netflix, and Google are essential building blocks of a sound portfolio.
Acronym-based investment fads invariably burn themselves out. The same is already happening with ESG. Its persistent underperformance and fading credibility as an investment paradigm has shown all who can see that ESG is failing on its own terms. Professional calls for ESG advocates to produce more compelling evidence about the longer-run resilience of their products have gone unanswered for a reason: There is no such evidence. At a minimum, ESG as an investment paradigm needs a divorce. E, S, and G became conjoined because the original United Nations Principles for Responsible Investing proposed that they should. No rigorous analysis was ever conducted about their combined salience. The case for their immediate disaggregation is irrefutable. I believe ESG will soon go the same way as BRIC and FAANG. We are witnessing an investment fad in terminal decline.
But what’s the real lesson in this, most especially for conservatives? It’s not just that all acronym-based investment strategies are specious. Rather, it’s that sticking to our principles over the long run works. It also lets a lot of Sturm und Drang simply blow over. Conservatives and progressives should both point out ESG’s inconsistencies and failures, but neither should be goaded into more time-consuming fights, especially when our energies are so badly needed elsewhere.
Which brings me to the far more important topic of energy reliability and independence. Instead of debating whether ESG was good yesterday, today, or tomorrow, can we please finish building critical oil-and-gas pipelines in California and West Virginia so that their residents get the power they need to thrive? The private capital is ready: As you’d expect, they are only waiting for government permits.
And remember, solving real human problems efficiently is what true conservatism is all about.