ESG: The Invisible Fist

Welcome Naked Dollar readers. This week we have a special guest blogger: Marlo Oaks, Treasurer of the State of Utah. Pay attention, because Marlo has something very important to say, and he is a brave man to say it. -SCJ

DEI, CRT, SEL… It can be hard to keep up with the acronyms, but there’s a relatively new one you need to know: ESG. 

 

It’s safe to say most Americans haven’t yet heard of ESG. It stands for Environmental, Social, and Governance. I’m here to tell you what it is, and why it’s a huge problem. 

Pushing back against ESG should be a bipartisan effort important to all Americans because it will fundamentally alter our American system. If you take away nothing else, know this: ESG uses economic force to drive a political agenda through corporate America. As Larry Fink, CEO of BlackRock, the largest investment manager in the world, so succinctly stated, “You have to force behaviors, and at BlackRock, we're forcing behaviors.” 

 

BlackRock manages $10 trillion of other people’s money. Other investment managers have trillions more. Unelected by anyone, they are using the might of other people’s capital to drive a far-left agenda. Arguably, no one outside the Federal Government has more power, and few people outside the industry know what’s going on.

 

As a state treasurer, I operate at the intersection of politics and capital markets, squarely where ESG resides. Many are afraid to speak out about it, but people need to understand the threat that it poses to our American system, one based on free-market capitalism and constitutional principles.

There’s a small tech company in my state of Utah that employs fewer than 75 people. A Silicon Valley tech titan was a client. Call it Twoogle. Last year, Twoogle explained to the company that if they wanted to continue to do business with Twoogle, they would need to implement a whole range of policies. 

For example, the Utah company would have to provide six months of full pay and benefits for maternity and paternity leave. The company responded that Utah’s fertility rates are higher than other states, and offering the benefit to all employees would imperil the company financially. Since fewer than five employees served the Twoogle account, they asked if they could implement the policy for just those employees. 

 

Twoogle said no, they must implement the benefit regardless of the financial impact. 

 

That every employee knew what benefits the company offered before they agreed to work there was beside the point. The tech company was forced to drop Twoogle as a client, a serious blow.

And what about Twoogle? Presumably, they engaged the company because they had the best product at the best price. They, too, will pay a price for their policies when they move to the next-best provider. How is this good for Twoogle's shareholders 

 

This is just one small example of how ESG plays out across our economy. Multiply it by a million.

 

ESG is a political scoring system for investors, with companies like S&P Global issuing ESG scores on corporations. It sounds great, right? In reality, ESG is dictatorship in capitalist clothing. Our banks, investment managers and corporations are all promoting ESG, cleverly lending ESG the veneer of free-market capitalism. But it is not capitalism.

Capitalism is freedom in an economic context. ESG is a system of force. ESG substitutes our pluralistic institutions for conformity to centralized power, one that makes up the rules as it goes. If you don’t believe me, think about the indeterminate nature of ESG. There are two layers of subjectivity: the determination of the ESG factors themselves and the answers to those factors. If you ask people what the factors should be, you will get different answers depending on their shade of leftist politics. 

 

Even if people agree on the factors, the answers as to what constitutes a “good” or a “bad” score for a particular factor also depends on whom you ask. Is British Petroleum “bad” because it sells oil or “good" because of its focus on developing alternatives?

This is an inherently political exercise, and ESG cedes power to the entities determining those two central questions. Government bureaucrats appear to be colluding with investment behemoths like BlackRock to make the agenda, and they use the threat of regulation and the power of our investment money to bully corporate America into carrying it out.

 

What would prevent new factors from being used as a weapon against the other side? For example, what if the government under different party control suddenly decided to use capital to favor donations to pro-life groups? I would oppose this on the same grounds. We need to keep our capital markets and businesses politically neutral. Corporations and investors are free to engage in the political process but should not be bypassing that process to drive their political agendas.

 

Pension allocators, most of whom are government employees, are also in on the game. As one insider put it, they are “effectively creating law and enforcing it without voter input, debate, or even knowledge. Given their size, their standards flow downstream, changing everything.”

Why, you may ask, is any of this a problem for the average person?

Well, why do you think gas prices are so high? 

In the past, capital would have flowed to traditional energy companies to fund profitable projects. With oil prices so high, there are plenty of projects to choose from. But these projects find themselves on the wrong side of this administration's regulators and the ESG mob, so they don’t get funded. The result is less supply and higher prices.

The misallocation of capital leads to vital industries dying on the vine. This is not merely inflationary, but also a national security threat. We see this playing out in Europe right now, their own early version of ESG having largely banished much-needed fossil fuels. When Russia invaded Ukraine, their moral assessment of fossil fuels and firearms flipped. There's no consistency with ESG. 

When power is centralized, society suffers. Pluralistic institutions like free capital markets protect us from the tyranny of elite power.

On the other side of the ledger, ESG leads to asset bubbles in favored industries. The resulting bursts harm us all, as we saw in 2008 when the federal government forced banks to provide mortgages to high-risk borrowers in the name of social justice. The resulting defaults nearly brought down our economy.

ESG also leads to just plain bad investing, where high ESG scores trump mundane concerns like balance sheets and income statements. Solyndra, anyone?

If you’re in a large pension plan, these mistakes are being made right now in your portfolio. You will see it in the form of lower returns, which we are witnessing in ESG funds this year. When entire industries—fossil fuels, tobacco, defense, etc.—are excluded from your portfolio, returns will naturally suffer.

 

Ultimately, ESG consolidates power into the hands of elites who like to decide what’s best for us. It bypasses our legislative process and undermines our constitutional republic. Proponents of ESG are socialists pretending to be capitalists. Many of them have enriched themselves through the very system they now seek to undermine. Larry Fink is a billionaire.

One more anecdote.

Just this week, I learned a large insurance company informed one of our local utility companies that they could no longer bid for the company’s automobile insurance because some of the power they provide as a utility is coal-based. Is this insurance company going to stop insuring motorists if they drive gasoline-powered cars? What about the electricity used to recharge an EV vehicle? If it comes from a coal plant, will this company decline coverage for that vehicle? Where does this end? 

When corporate America starts down this path, it is hard to stop. Just ask Disney. It is not just childish; it is dangerous and destructive.

If I could wave a magic wand, I would get American business back to doing actual business and out of politics. Capitalism has served us well. It is the greatest generator of wealth and innovation the world has ever known. ESG is a stealth cancer threatening the economic fabric of our country, and those who know better must join me in speaking out. Do what our little company here in Utah did and say “no” to the intolerance, hate and tyranny. 

Say no to ESG.