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ESG guidelines seem innocuous enough, so why the backlash?

Published 20 June 2022 in Magazine • 7 min read • Audio availableAudio available

Environmental, social and governance measures have become a central battleground over the purpose of a corporation and who gets to exercise control. 

Over the past three decades, socially responsible investing has shifted from the periphery to the very center of the capital markets under the banner of ESG. “Environmental, Social and Governance” describes a set of measures used to evaluate company commitments as well as a philosophy of investing. Trillions of dollars have been invested in ESG mutual funds and ETFs (exchange-traded funds) in recent years. ESG funds often implement a screen such that they only invest in corporations that exceed some threshold on ESG metrics. They may also use ESG criteria in how they vote their shares. 

ESG is big business: according to Bloomberg, “one in four of every professionally invested US dollars is tied to environmental, social and governance criteria.” There are many alternative ESG evaluators and hundreds of competing fund products, and almost all US and European corporations listed on a major stock market are obliged to disclose ESG data. Boards are incorporating ESG incentives into executive compensation packages. Being ESG savvy also turns out to be a valuable job skill for MBAs. 

Yet just as ESG seemed ready to declare victory, it is facing a significant backlash from the political Right. Elon Musk tweets, “I am increasingly convinced that corporate ESG is the Devil Incarnate.” Peter Thiel, the billionaire entrepreneur and co-founder of PayPal, states: “ESG is just a hate factory. It’s a factory for naming enemies, and we should not be allowing them to do that. When you think ESG, you should be thinking Chinese Communist Party.” And Republican state officials are lashing out at both rating agencies wielding ESG metrics and investment funds that apply standards excluding fossil fuel companies. 

Almost overnight, ESG has been transformed into a catch-all term used by its opponents to discredit efforts at corporate accountability, much like Critical Race Theory became a lightning rod for discussions around racism. Now ESG is becoming a central battleground over the purpose of the corporation and who gets to exercise corporate control. As corporate ownership becomes increasingly concentrated and potentially influential, this battle is not likely to be settled any time soon. 

“Now ESG is becoming a central battleground over the purpose of the corporation and who gets to exercise corporate control”

The power issue

From CXOs to Gen Z activists, our experts examine where the real sway lies. In Issue VII of I by IMD, we explore the shifting centers of command and how leaders can inspire, empower and wield influence for good.

What is ESG anyway?

“Socially responsible investing” in its current incarnation, selecting or deleting portfolio companies based on ethical criteria, dates back decades. Pension investors and others seeking to avoid industries regarded as morally questionable, such as gun or tobacco manufacturers, constituted a distinct market niche both for asset managers and data providers who compiled information to assess potential investments. In 1991 Kinder, Lydenberg, Domini Inc. (KLD) began publishing systematic annual data on roughly 650 listed corporations across several dimensions of social responsibility. Amy Domini, a principal in KLD, launched an associated index fund, the Domini 400, consisting of corporations meeting high standards for social and environmental responsibility according to KLD data. This might be seen as the birth of the contemporary ESG industry. 

As responsible investing gained traction in the market, a gaggle of competing vendors arose to provide ESG metrics. MSCI ESG Metrics, Bloomberg, Institutional Shareholder Services, and others offered distinct cocktails that emphasized different dimensions. Not surprisingly, companies can receive different evaluations depending on who’s doing the evaluating. The Wall Street Journal reported that the ratings of three leading providers, MSCI, Sustainalytics, and Refinitive, provided surprisingly divergent evaluations yielding different market performance. 

The confusion around ESG is built into its definition. It is not entirely clear why E, S and G belong together. Environmental metrics assess a company’s use of resources, carbon emissions, and other contributions to the natural environment. Social metrics range from the treatment of employees and human rights issues in supply chains to corporate political activism. Governance metrics evaluate how well the corporation is configured to serve investor interests (or possibly “stakeholder interests”), as well as questions such as the diversity of directors.  

In recent years the World Economic Forum worked with the Big Four accounting firms (Deloitte, EY, KPMG, and PwC) “to identify a set of universal material ESG metrics and recommend disclosures that could be reflected in the mainstream annual reports of companies on a consistent basis across industry sectors and countries. The metrics should be capable of verification and assurance, to enhance transparency and alignment among corporations, investors and all stakeholders.” The advantages of these measures are their clarity and accessibility. 

ESG is just a hate factory. It's a factory for naming enemies, and we should not be allowing them to do that
- Peter Thiel

The optimist’s case for ESG 

What’s the point of ESG? Why is so much capital being allocated based on a set of contentious metrics? Some investors prefer that their savings be invested in green or ethical companies. Moreover, some ESG proponents believe that this movement of investor dollars may encourage companies to become more sustainable, socially responsible, and well-governed (others strongly disagree). Requiring companies to examine and report on their practices may have a positive effect. In an ideal case, when companies find that they are competing with other companies on ESG dimensions, they will up their game, creating a positive dynamic that makes the whole field more sustainable. A race to the top, for the benefit of all.  

There is also the pessimist’s case: our carbon-intensive economy is hurtling our species toward extinction and governments seem incapable of taking collective action on something as basic as a carbon tax. Only large investors have the muscle to force global corporations to take the actions needed.  

The Right’s case against ESG 

A set of obscure metrics that investors might use to assess their portfolio choices seems technical and anodyne. It was thus somewhat surprising to see a full-scale assault on ESG emerge this spring from business and political leaders on the Right. Musk tweeted that “ESG is a scam. It has been weaponized by phony social justice warriors.”  The former Vice President, Mike Pence, wrote in the Wall Street Journal that “the woke Left is poised to conquer corporate America and has set in motion a strategy to enforce their radical environmental and social agenda on publicly traded corporations … the shift is entirely manufactured by a handful of very large and powerful Wall Street financiers promoting Left-wing environmental, social, and governance goals (ESG)”. 

Meanwhile, the Republican Texas legislature passed a law banning its state pension and investment funds (worth $330 billion) from working with asset managers who “boycott” investing in fossil fuels, a remit that could include many or most ESG firms. And Utah’s Republican governor and senators demanded that S&P Global stop rating states and their bonds based on their ESG performance, which they claimed was politicization of a fiscal matter. 

The source of this hysteria is the growing realization that three giant asset managers (BlackRock, Vanguard, and State Street) own nearly a quarter of the shares of the average S&P 1500 company, a level of concentrated corporate control not seen since the Gilded Age. And those wielding the votes are not the people whose capital is at stake. This potential power was demonstrated at ExxonMobil’s 2021 annual meeting, when the Big Three index funds voted to oust three incumbent directors and replace them with more environmentally oriented board members.

To hear the Republican establishment come out swinging against Wall Street, “woke” corporations, and ESG investors is something new. Railing against shareholders in the land of shareholder capitalism is puzzling.

Elon Musk
“ESG is a scam. It has been weaponized by phony social justice warriors”
Elon Musk

The Ayn Rand theory of corporate governance 

Perhaps the real enemy is not ESG and “woke capitalism” but the threat of outside oversight and accountability, with ESG serving as an easily demonized straw man. It is notable that the most vocal opponents of ESG in the business world are the same Silicon Valley founders and VCs who resist any form of outside accountability, including by their own investors. Musk allegedly ignores Securities and Exchange Commission constraints on his public pronouncements and fails to follow timely disclosure requirements. Thiel operates the Founders Fund, which gives extreme voting rights to founders of up to 20 votes per share. Mark Zuckerberg’s Class B Meta/Facebook shares give him 10 votes per share and an absolute majority at the corporate ballot box. No investor, not even the board of directors, can check his power. 

Behind this practice is what I call the “Ayn Rand theory of corporate governance,” in which founders are visionary makers and builders while the rest of us, including their investors, are moochers and takers who are not qualified or entitled to oversee how their companies are run. From this perspective, ESG investing is just another assault on the autonomy of visionary leaders. This latest eruption in the battle for corporate control is just beginning, but it lays bare some of the fundamental questions of who has the right to control the corporation.


Jerry Davis

Jerry Davis

Professor of Business Administration and Professor of Sociology, University of Michigan’s Ross School of Business

Jerry Davis is the Gilbert and Ruth Whitaker Professor of Business Administration and Professor of Sociology at the University of Michigan’s Ross School of Business. He has published widely in management, sociology, and finance. His latest book is Taming Corporate Power in the 21st Century (Cambridge University Press, 2022), part of Cambridge Elements Series on Reinventing Capitalism.


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