How to Really End ESG

Russell Greene September 13, 2024 @AIER, Tags: Daily Economy, Environmentalism, Capitalism, Books

 

Eleanor Roosevelt holds a poster of the Universal Declaration of Human Rights. Lake Success, NY. 1949. Courtesy FDR Presidential Library & Museum.

ESG investing poses a grave threat to the principles that lifted billions out of poverty. It neither does much good nor performs very well. Therefore, it must end.  

So asserts Ending ESG, a collection of essays edited by Phil Gramm and Terrence Keeley. Gramm, a former Republican senator and economics professor, and Keeley, a former managing director at Blackrock, are well-suited to make the case. The book’s lengthy introduction is co-authored by Gramm and Keeley. It traces the Environmental, Social and Government (ESG) investment movement back to the United Nations. Not to the Kofi Annan era of the late 90s and early 2000s, that is, but all the way back to the 1948 Universal Declaration of Human Rights.  

The authors do not dwell upon this early history, but it is worth briefly unpacking. Eleanor Roosevelt chaired the drafting committee of the UN Declaration. She explained that many of its members “thought that lack of standards for human rights the world over was one of the greatest causes of friction among the nations, and that recognition of human rights might become one of the cornerstones on which peace could eventually be based.” This was a pressing priority in the wake of World War II.

Jacques Maritain, a French Philosopher who provided intellectual inspiration for the document, explained how consensus was achieved: “we agree on these rights provided we are not asked why. With the ‘why’ the dispute begins.” History has since tested the stability of agreeing not to ask why.

Over the next 75 years, the UN’s declaration of rights eventually led to ESG. Inspired by the declaration, the UN launched development goals (eradicating poverty, gender equality, environmental sustainability, etc.). Then, the UN released investment principles based on these goals, to be adopted by major asset managers, banks, public pensions, and regulatory bodies. To the shock of anyone familiar with other UN efforts, the UN’s work on ESG has paid off.  

ESG has been adopted by major institutions over the world, in word if not always in deed. The result is that “the private economy is increasingly being coerced into meeting a growing number of environmental and social goals that Congress never mandated.”  

The cost of such coercion is high. For one, it undermines the legal and ethical basis of economic progress. Whereas the economic Enlightenment was “founded on the principle that people own the fruits of their own labor and thrift,” ESG is a “throwback to the medieval concept of communal property.” Throughout 14 essays, mostly penned by Gramm and/or Keeley, Ending ESG argues against such an ESG-inspired return to medieval economics.

ESG might seem high-minded and noble compared to the hard-nosed alternatives of fiduciary responsibility and shareholder primacy. But appearances are deceiving. When it comes to results, the economic enlightenment enabled 128,000 individuals to escape abject poverty every single day. In contrast, it’s not clear if the ESG movement has accomplished anything of note, other than lowering the popularity of Wall Street and Corporate America among conservatives, contributing to the anti-business turn on the right.

And though the ESG movement claims to care about eradicating poverty and protecting the environment, we should not take these claims too seriously. Keeley cites a research finding that there is “no evidence that socially responsible investment funds improve corporate behavior.” Moreover, it’s difficult to even assess the impact of ESG strategies since “ESG scores among leading rating agencies correlated only 54 percent of the time.”  

The evidence is compelling, but it raises a puzzling question: if ESG does “neither much good nor very well,” why do so many people seem to believe it does both? Where did ESG critics go wrong? Why did it take nearly two decades for ESG to face substantial backlash?  

One problem is that the defenders of fiduciary responsibility failed to provide adequate moral foundations for their view. Keeley cites Milton Friedman’s classic 1970 New York Times piece, “The Social Responsibility of Business is to Increase Its Profits.” There, Friedman argued:

In a free‐enterprise, private‐property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to 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.

Friedman, a committed positivist, did not found his concept of social responsibility on a universal ethical standard, other than the need for business executives to defer to shareholder desires. And, in his view, this will usually mean to seek profits while conforming to existing laws and customs. These laws and customs will vary from time to time, and from place to place. And so, apparently, will the social responsibilities of businesses.

In his essay “How Conservatives Can Get ESG Right”, Keeley endorses Friedman’s analysis. Yet it suffers from two major flaws, flaws that also weaken Keeley’s arguments. First, businesses and investors are not just passive recipients of laws and ethical customs. Business leaders are norm-makers, not just norm-takers.  

The most successful business leaders are able to cast a compelling long-term vision, one that includes but goes beyond making money, and to persuade their investors to remain focused on the long-term. That is, business leaders lead their investors, they don’t merely respond to investor preferences. Further, policymakers depend on the counsel of industry to respond to technological innovations, as we are now seeing with artificial intelligence. And business leaders seek to influence both the law and public opinion, such as through lobbying, public relations, media, and publishing their own thoughts.  

This is understandable. To survive, businesses cannot merely conform to the basic rules of society — they must influence them. But how, and in which direction? For example, should they oppose crony subsidies and regulations, which may help their profits, at least in the short term, but undermine economic dynamism and the very legitimacy of their businesses? Friedman’s positivism does not provide much guidance here.  

After all, the ethical customs and laws of a society may grow increasingly hostile to private enterprise. Indeed, they seem to be doing so now. Business leaders cannot be expected to stand by as activists assault the legal and ethical foundations of economic progress, or as government agencies violate their constitutional rights. While Ending ESG recommends that business leaders “keep politics out of the boardroom,” this is no longer an option for major corporations, if it ever was.

Moreover, activist shareholders increasingly are advancing shareholder proposals that are harmful to the long-term interests of the very corporations in which they own shares. This means businesses increasingly have to defend themselves against their own shareholders. Complicating matters further, the nature of business ownership has radically changed since 1970, with the rise of passive index investors and pension-fund activism. It’s no longer safe to assume that major investors will all agree on maximizing the long-term value of a particular firm, especially if that firm is engaged in ESG-unfriendly lines of business. What most investors do, and should, prioritize is very much up for debate.

Keeley claims “there is no practical alternative to shareholder primacy.” But clearly, there is. For one, many American states now have the option of “benefit corporation,” an option that replaces shareholder primacy with responsibilities to an array of stakeholders. And in Europe, the concepts of double materiality and co-determination override any commitment to shareholder primacy.  

Now, it’s true that such stakeholder governance often comes at a cost. On the other hand, stakeholder advocates will claim the cost is worth it, whether to save the planet, or to advance “equity.” It’s incumbent, therefore, upon ESG critics to advocate an alternative vision, not merely to fall in line with convention.

Without casting a bold vision for the future of free enterprise, there is no hope of ending ESG. Keeley himself recommends that “Republicans need a road map that would enable society to get all the good out of ESG without the bad.” He also refers approvingly to “growing numbers of shareowner resolutions seeking lower carbon emissions or increased workforce diversity.” But why defer to the United Nations, of all institutions, as a moral authority? Why grant any moral worth to counterproductive Western divestment from fossil fuels? Why pay even lip service to skin-deep diversity metrics?  

Just as Friedman recommended business leaders “conform” with convention, Keeley accepts ESG’s goals, while challenging its methods on pragmatic grounds. This is not a sustainable division of labor. It makes no sense for capitalists to legitimize the NGOs, global institutions, and academics working to delegitimize capitalism and advance the “religion of humanity.”

In the words of Argentine President Javier Milei,

Milton Friedman used to say that the social role of an entrepreneur is to make money. But that’s not enough. Part of their investment must include investing in those who defend the ideals of freedom, so the socialists can make no further advances. And if they don’t do it, they [the socialists] will get into the State, and use the State to impose a long term agenda that will destroy everything it touches. So we need a commitment from all of those who create wealth, to fight against socialism, to fight against statism, and to understand that if they fail to do so, the socialists will keep coming.

Fortunately, there are reasons for hope. 

Some business leaders are taking a more active role in advocating for the principles of economic enlightenment. In 2023, prominent Silicon Valley investor Marc Andreesen published the Techno-Optimist Manifesto. Andreesen’s manifesto defended free markets and attacked ESG as part of a “mass demoralization campaign.” Tech founder Brendan McCord launched the Cosmos Institute. Cosmos is bringing together philosophers with technologists in an Oxford University seminar, to discuss how technology can promote human flourishing. Elon Musk, of course, been scathingly critical of ESG, calling it a scam. And Liberty Energy CEO Chris Wright releases an annual Bettering Human Lives report that argues for prioritizing the elimination of energy poverty over ESG goals.

Beyond business leaders themselves, the Alliance Defending Freedom recently released a “Statement of Principles on the Purpose of a Corporation.” The statement declares that “the proper purpose of business is to advance human flourishing by creating economic value through excellence in the provision of goods and services.” And the Abundance Institute has been making the case for “long-term tech optimism.”

To be sure, no particular one of these efforts is definitive. Nor, combined, will they be sufficient to defend the “economic enlightenment” against illiberal assaults. Yet if more affirmative visions for free enterprise are paired with reasonable, evidence-based critiques of ESG, such as those offered by Gramm and Keeley, ESG’s days might, indeed, be numbered. 

 

Russell Greene is a Senior Fellow for the Economy at Stand Together Trust, where he manages a grant making portfolio focused on federal regulatory affairs and strategic litigation. Prior, he worked for CrossFit Inc., directing the company’s brand defense and government affairs efforts. He has a BS in International Politics from Georgetown University’s Walsh School of Foreign Service, where he learned both Classical and Modern Standard Arabic. He studies Ancient Greek and Latin in his spare time. Russ has published a number of articles on classical liberalism, ESG and related issues. 

 

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Lethal carbon-imperialism in Glasgow and DC

Climate alarmists intend to keep poor nations energy-deprived, impoverished, jobless, dying 

Paul Driessen 

Days before the twenty-sixth Conference of Parties in Glasgow, Scotland.Pope Francis and President Biden met in Rome to discuss “efforts grounded in respect for fundamental human dignity,” including “tackling the climate crisis and caring for the poor.” 

They should have read Climate Change: The Facts 2017 before they met, especially my chapter critiquing His Holiness’s energy and climate “ethics.”

A key point: Climate changes due to human activities pose no catastrophic threats to people or planet. 

Their horse-blindered focus on “ manmade climate change ” wildly exaggerates the small human influences on climate and weather – and ignores skyrocketing energy and food prices; the sporadic, unpredictable nature of wind and solar power; and that many times more die in cold weather than in summer heat waves, especially sick and elderly people who can’t afford to heat their homes properly.

Moreover, “caring for the poor” is very different from lifting people out of poverty – helping them use abundant, reliable, affordable, mostly fossil-fuel energy to expand economic opportunities, create jobs, and improve health, living standards and life spans. Indeed, most of the “solutions” presented in Glasgow are the antithesis of respecting human dignity, improving living standards and saving lives. 

What’s really being presented in Glasgow is lethal carbon-imperialism. Thousands of glitterati flew in on private jets, joining some 25,000 politicians, climateers, bureaucrats and activist journalists. They’re telling the world, “We don’t do sacrifice. We impose sacrifice on you commoners.” 

But even the International Energy Agency recognizes that any “transition” from “dangerous” fossil fuels to “clean, sustainable, renewable” energy will require unprecedented amounts of metals, minerals and other materials. Electric cars need three times more copper than gasoline-powered vehicles. Onshore wind turbines 9 times more materials per megawatt than gas-fired co-generating plants, including copper, iron, lithium, cobalt, rare earths and concrete; offshore turbines need 14 times more materials. That means far more mining, processing, manufacturing, waste disposal and habitat destruction than ever in history. 

But climate fanatics hobnobbing in Glasgow, blocking DC roadways, storming federal buildings or planning to sabotage pipelines are not about to allow more mining, processing or manufacturing in the United States, Europe or most other modern countries. They’ve made even major copper-cobalt-nickel deposits (essential Green New Deal materials) in Alaska and Minnesota off limits. 

They demand that these activities take place somewhere else – mostly in China or via Chinese-owned operations in Africa, Asia and Latin America ... often with child and slave labor ... under minimal to nonexistent pollution, workplace safety, fair wage, fair trade, mined land reclamation, and other laws, ethical standards and human dignity guidelines. It’s also a path to environmental and economic disaster. 

Concerns about “responsibly sourced” materials, components and products apply to T-shirts, sneakers and coffee – not to wind turbines, solar panels, backup batteries and electric vehicles for “saving the world.” 

Let Boston Celtics center Enes Kanter protest Uighur forced labor, rape, sterilization, torture and indoctrination on his shoes and in his Twitter videos. Like Nike and the NBA, climate-obsessed COP-26 fear-mongers will happily do business with Xi Jinping on “clean, green, renewable, sustainable” energy. That all this mining and manufacturing somewhere else will also involve prodigious amounts of gasoline, diesel, natural gas and coal – and greenhouse gases – is likewise irrelevant to COP-26ers.  

Don’t hold your breath waiting for President Biden, Pope Francis or Climate Envoy John Kerry to speak out about any of these climate and human rights atrocities. 

Just as evil, Western banks will no longer finance fossil fuel, nuclear or even hydroelectric power. In fact, the UN’s Glasgow Financial Alliance for Net Zero recently announced that financial groups with assets of $130 trillion have committed to forcing companies to cut emissions, by blocking financing for fossil fuel projects, channeling trillions of dollars to “renewable” technologies, and imposing “pathways” and demands on corporations and financial institutions to “restructure themselves.” 

“We now have the essential plumbing in place to move climate change from the fringes to the forefront of finance, so that every financial decision takes climate change into account,” an alliance leader said – “transforming the global financial system in the process.” 

The US Securities and Exchange Commission plans to announce rules for “carbon disclosure” – but none for disclosing information about child and slave labor, habitat destruction and the slaughter of birds, bats and other wildlife so intimately associated with Green New Deal mining and wind and solar installations. 

Even more outrageous, the Biden Administration’s Labor Department has proposed a rule that would explicitly direct your retirement plan administrators and asset managers to “consider” progressive environmental, social and governance (ESG) ideologies and factors every time they choose investments. Employees would be enrolled in woke ESG funds as a default, unless they select a different option. 

That means your 401(k) retirement funds could be channeled into leftist causes, all with the connivance of the Left’s Wall Street, corporate and political allies – and to the enduring detriment of the world’s poor. 

Under these and other COP-26 agendas and edicts, US, EU, Canadian and Australian living standards would go down a few notches, to levels the Left deems “more fair and equitable” for homes, travel and diets. Poor developing countries would be restricted to improving their people’s living standards to levels that sprawling wind and solar installations could support. No fossil or nuclear power for them. 

Poor nations may improve their crop yields only through agro-ecology. There will be no financing for tractors, pesticides, modern fertilizers and large-scale farming, or anything possibly involving methane. 

These policies are eco-imperialistic, lethal, racist and white supremacist. But the COP-26 crowd is unlikely to utter a word of concern, much less opposition; nor will it mention the energy deprivation, joblessness, nineteenth-century living standards, rampant disease, primitive stoop-labor agriculture, and premature death that their policies perpetuate. 

To help drive this agenda, Big Media and Big Tech will suppress any questions and dissension – and debunk, defund, deplatform, censor and cancel anyone who tries to debate such “climate denial.” 

It’s no wonder the Group of 77 poor countries has issued an ultimatum. They will agree to Paris-Glasgow climate/energy pledges only if rich countries give them at least $750 billion per year in reparation, compensation, mitigation and adaptation assistance. African nations and the coalition of Like-Minded Developing Countries have presented an even bigger figure at Glasgow: $1.3 trillion annually! Moreover, they want the money as grants, not loans. Who can blame them? 

“Africa can’t sacrifice its future prosperity for Western climate goals. Africans have a right to use reliable, cheap, energy,” in conjunction with renewables, says Uganda President Yoweri Museveni. Restricting Africa to solar and wind power would impose poverty and death. Ditto for other regions.  

The $750-billion number was reportedly met with silence by John Kerry. French President Emmanuel Macron said, “We should be focused on delivering the $100-billion [per year that rich countries already promised at COP-21 in Paris], before we start talking about huge numbers.” ($100-billion isn’t huge?) 

They didn’t mention the $1.3-trillion demand. Nor did anyone question how these incredible sums are going to come from now-rich nations that are also expected to hamstring their energy output and use, economies, jobs, living standards and revenues – and still come up with trillions of dollars in new aid. 

Maybe that’s why they plan to use your 401(k) funds and force every bank and financial institution to kowtow to their climate demands. It’s time for African, Asian and other developing nations to chart their own destinies, finance their own energy – and tell all these COP-26 attendees “Let’s go, Brandon!” 

Paul Driessen is senior policy analyst for the Committee For A Constructive Tomorrow (www.CFACT.org) and author of books and articles on energy, environment, climate and human rights issues.

 

The Dao of the Austrian Investor

Mises Daily: Friday, December 20, 2013 by Mark Thornton

The economy is extremely complex. As Leonard Read taught, no single individual in the world knows how to make something as simple as a pencil. The level of complexity has only increased over time with the expansion of knowledge, technology, transportation, and international trade. Our individual labor is increasingly focused on a narrower slice of the overall process of production.

Even the static picture, if it could be seen, is complicated by the fact that our world is a work in progress dating back thousands of years. Look around you and you will see the savings, investments, and work of individuals who are long dead. Previous generations made their choices, some of which have been maintained, repurposed, neglected, or destroyed. Ownership of all that capital is recognized in the form of stocks, bonds, titles, and deeds.....To Read More.....

The Volcker Winter Storm — Bad Rule, Worse Implementation

by John Berlau on December 11, 2013

This appeared here and I wish to thank John for allowing me to publish his work.  RK

On a snowy day in Washington, several federal agencies packed some mean regulatory snowballs that will most likely overshoot their supposed destination of Wall Street and crash-land with a thud on the businesses and investors of Main Street. Rather than postpone the planned vote on Tuesday, when the federal government was officially closed, agencies sheltered themselves from public view and pushed through the rules.

According to USA Today, “CFTC spokesman Steven Adamske said his agency will not hold a public meeting, but commissioners will approve the rules in writing.” This lack of transparency on voting on the rule was symptomatic of a series of last-minute changes from the rule the agencies had initially proposed two years ago. The agencies never submitted these changes for public comment, and thus according to a Reuters analysis, may be vulnerable to lawsuits for violation of the Administrative Procedure Act.

Beyond that, nothing good ever comes when the government utilizes an opaque process to force “transparency” on the private sector. For all the supposed “toughness” of the new rule, there is nothing specific that would prevent something like J.P. Morgan’s much-despised “London whale” trade.

In the meantime, the new rules could sharply reduce the stream of initial public offerings that have been propelling the stock-market upsurge. And just as regulatory impediments to smaller IPOs were relaxed modestly with the bipartisan Jumpstart Our Business Startups (JOBS) Act signed by President Obama last year, the Volcker rule will likely erect new barriers to market making by Main Street banks underwriting the offerings of these smaller firms.

Even as written in the Dodd-Frank financial “reform” statute, the Volcker rule was a solution in search of a problem, or in search of a factor that was not even a minor cause of the financial crisis. The provision, often referred to a “Glass-Steagall lite” – after the 1930s law that was repealed by President Clinton in 1999 – maintains Glass-Steagall’s false dichotomy of inherently “risky” trading and inherently “safe” lending.

And it doesn’t ban or restrict trading based on level of risk, but on whether the trading is ”proprietary.” Most discouragingly, in the statute and in today’s edict, the Volcker Rule contains explicit exemptions for trading in risky government-backed securities, such as municipal bonds and foreign sovereign debt.

There is no evidence that proprietary trading — a bank trading for its own portfolio — is more dangerous than executing trades for customers. In the leadup to the financial crisis, banks traded mortgage-backed securities for themselves and for their customers, but at bottom the instruments were dangerous due to the underlying mortgage loans — loans encouraged by governmental entities such as Fannie Mae and Freddie Mac and by mandates such as the Community Reinvestment Act.

Moreover, even the rule’s architect, former Federal Reserve Chairman Paul Volcker, concedes that banks must do some incidental trading for their own portfolios to carry out other functions. This type of trading includes buying shares to “make markets” for companies they take public and to hedge the risk of ordinary loans such as mortgages.

But in practice, it’s very difficult to tell which type of trading is “proprietary.” As former Sen. Ted Kaufman, D-Del., who (wrongly) advocates bringing back Glass-Steagall, wrote in Forbes Tuesday after the rules were released:

Who’s to know what’s a hedge, what’s market making (trading on behalf of clients), and what’s trading for the bank’s own account? The paper trails can be inconclusive. Like angels on pins, there is never going to be an answer.

And IPOs, particularly for smaller companies, are likely to take a hit. In order to underwrite a stock market offering, banks have to engage in “market making.” They “make” a liquid market for the stock by buying shares in the company to generate demand. But the new rule, according to various interpretations (that will be further revised as the new language is examined), puts many new burdens on this traditional practice.

According to The Wall Street Journal, “the rule … will require banks to provide ‘demonstrable analysis of historical customer demand’ for financial assets they buy and sell on behalf of clients.” But how does a bank show “historical customer demand” for a company that has never gone public before?!

This could have the biggest impact on smaller IPOs, in which banks can’t easily measure “historical demand” and would have to likely buy more shares to create more demand than they would for a larger firm. Some banks may look at the compliance costs, and simply not underwrite smaller IPOs, harming innovation by entrepreneurs and wealth-building by ordinary investors.

This could also slow the growth of IPOs underwritten by non-Wall Street banks. In recent years, and since the modest regulatory relief from some Dodd-Frank and Sarbanes-Oxley provisions from the JOBS Act, regional banks such as Atlanta-based SunTrust and Cleveland-based Key Bank, have increased their sponsorship of new companies going public.

And in further showing that the Volcker Rule and its implementation is not focused on preventing risk, the new rules contain explicit and blanket trading exemptions for municipal bonds and foreign-based sovereign debt. And exemptions for banks to buy and sell securities in Fannie and Freddie, the two proximate causes of the crisis, were already in the Dodd-Frank statute.

The Volcker Rule may create the “perfect storm” of lessened innovation in the private sector and more-of-the-same gambling by government.

In Free Speech Victory, SEC Lifts Gag Rule On Hedge Funds And Venture Capital

By John Berlau on August 29, 2012

This first appeared here.  I would like to thank John for allowing me to post his work. RK

Today’s proposed Securities and Exchange Commission (SEC) rule lifting the outdated ban on “general solicitation” by hedge funds and venture capitalists is a victory for entrepreneurs, small investors, and, most of all, the First Amendment. Pursuant to the bipartisan Jumpstart Our Business Startups (JOBS) Act signed by President Obama, the SEC voted 4-1 to scrap a rule that had turned into an effective ban on routine communication with the general public from hedge funds, private equity firms, and venture capitalists.

The Competitive Enterprise Institute had previously filed an amicus brief supporting the Bulldog Investors hedge fund’s challenge to this and its state variants of this ban as unconstitutional restrictions on free speech. We argued — as did Bulldog’s outspoken co-founder and chief Phillip Goldstein and his counsel, the famed liberal First Amendment attorney Laurence Tribe — that the general solicitation ban was keeping the “99 percent” of ordinary investors in the dark about the workings of financial markets.

Over the decades, the SEC rule had come to broadly define just about any type of communication with the general public as an illegal stock “offering” to investors not wealthy enough to qualify to invest in hedge funds and venture capital. Under the solicitation ban, venture capitalists had less freedom to communicate over the Internet than the pornography industry. Non-wealthy adults who couldn’t meet the threshold for investing in vehicles exempt from SEC rules were treated as children who couldn’t be trusted with any information about investments not available to the general public.

Worries that lifting this ban will cause an increase in fraud, such as those expressed by dissenting Democratic SEC Commissioner Luis Aguilar, are wholly misplaced. Nothing in the proposed rule restricts the SEC’s ability to punish falsehoods and deceptions in dealing with investors. Hedge fund managers and venture captialists still may only sign up investors meeting wealth criteria of more than $1 million in assets or $200,000 in income (though this should eventually be changed too for non-wealthy investors willing to take this risk). But they will now be able to communicate their strategies to everyone, and ordinary investors will be able weigh this new information in their investing decisions.

The general solicitation ban did nothing to prevent Bernie Madoff from peddling his fraudulent scam to “qualified” individual and institutional investors. With barriers to general communication lifted, there will be fewer shadows where fraudsters like Madoff can hide.

What’s ironic is that hedge funds and private equity firms are accused of not being transparent, but much of this is due to the government’s own rules that force them to keep mum. The SEC should move with all deliberate speed to get it right with the First Amendment  and investor transparency.

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