Is The ESG Colossus Stumbling

Reposted from Forbes

Tilak Doshi Contributor

I analyze energy economics and related public policy issues.

Yesterday, leaders of the Florida’s House and Senate hailed legislation that would “protect Florida retirement accounts and state investments from financial discrimination by eliminating the consideration of environmental, social, and governance (ESG) investment strategies” and “protect Floridians from being denied loans based on their political or social beliefs.” It is perhaps with a special irony that Florida Governor Ron DeSantis announced, on the day before Valentine, his latest legislative proposals against the ESG movement that has ruled investment strategies of the largest corporations in the West for the past several years.

The proposals will prohibit fund managers for state and local government in the state from considering ESG factors in any investment decisions. State government entities will not be allowed to request ESG information from suppliers in the procurement process. The governor has been among the leading anti-ESG advocates, barring fund managers for state pension funds last year from incorporating ESG factors in the investment process. The state recently pulling $2 billion from BlackRockBLK -0.8% , the world’s largest asset manager with over $8.5 trillion under management, over its use of ESG factors. A pittance for BlackRock, but it is the demonstration effect that often matters in the scheme of things.

Is the ESG colossus – standing astride the worlds of business and political mandates over the past two decades in the Western world — stumbling?

Origins of ESG

The roots of the ESG movement can be traced to concerns about “corporate social responsibility” (CSR), a term coined in 1953 by American economist and author of “Social Responsibilities of the Businessman” Howard Bowen. He used the phrase to refer to “the obligation of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of objectives and values of our society.” By the 1970s, CSR began to be popular among corporate circles and became part of mainstream management culture in the business world of the developed countries. In 1973, the World Economic Forum’s “Davos Manifesto” proclaimed that management must also serve employees as well as societies, as a “trustee of the material universe for future generations”.

The morphing of CSR into ESG and “stakeholder capitalism” can be traced to the then-United Nation secretary-general Kofi Annan who told a gathering of business and finance leaders at WEF’s Davos forum in 1999 to initiate, with the UN, “a global compact of shared values and principles, which will give a human face to the global market”. With Annan’s speech, ESG fused with the concept of “sustainable development” under the aegis of the Davos annual meetings and the UN.

As the central organizing principle of all things economic, social and environmental, the concepts of sustainable development and ESG fed into existential concerns of the “climate crisis” and have become a central preoccupation over the past two decades in public policy and social discourse across the Western world.

ESG’s Onslaught on Fossil Fuels

The constellation of leading actors in Western governments, multilateral agencies and business corporations – from financial regulators to development agency bureaucrats, and from CEOs to investment advisors – promoting “stakeholder capitalism” have primarily one target in sight: the fossil fuel industries, namely coal, oil and natural gas. The popularized logic employed is deceptively simple and extraordinarily simplistic. The combustion of fossil fuels is the predominant source of greenhouse gas emissions which lead to global warming. Carbon dioxide, a greenhouse gas, constitutes the ‘control knob’ of climate change. Hence the urgency in ‘saving the planet’ by rapidly shutting down the fossil fuels industry (“net zero by 2050”) with ESG and stakeholder capitalism leading the charge.

BP was among the first major international oil and gas companies to declare in 2002 that “We need to reinvent the energy business. We need to go beyond petroleum.” No more the British Petroleum of yore but “beyond petroleum” — bp in small letters — of the new. In 2020, the company’s CEO, in a shock announcement, promised to slash oil and gas production by 40% and boost capital spending on low-carbon energy tenfold to $5 billion a year – a plan that “even Greenpeace is cautiously praising”. The company, along with the other major European oil and gas majors Shell and TotalEnergies, have committed to the “net zero by 2050” carbon emission targets of the Paris Agreement, a non-binding international accord signed in 2015. Its announcement merely signified another milestone in the quest for corporate environmental redemption.

The ESG movement which has gained momentum over the past two decades is not without consequences. Oil and gas capital expenditures fell by almost 60% from their peak of $780 billion in 2014 to $328 billion in 2020. While this was partly caused by the collapse in oil prices over 2014 – 2016 and during the covid year 2020, it clearly has been accentuated by the hostility of the ESG-infused environment in the West. According to a recent study by Goldman Sachs, investment delays in oil and gas projects since 2014 will lead to a loss of 10 million barrels a day (or another Saudi Arabia) and 3 million barrels per day of oil equivalent in liquefied natural gas (LNG) (or another Qatar) by 2024-25. The bank warned: “We have exhausted all of the spare capacity in the system, and can no longer able to cope with supply disruptions like the one we are currently witnessing because of the Russia-Ukraine conflict.”

Don’t Mess With Texas

The epicenter of the counterattack on the ESG movement is undoubtedly in the state of Texas which accounts for the largest production of oil and gas in the US. In August 2022, the state published a list of financial firms that could be banned from doing business with Texas, its state pension funds, and local governments. Texas congress leaders assert that the ESG investment trend is an attack on fossil fuels, effectively a boycott of conventional fuels production which make up a large portion of the state budget.

Texas blacklisted several financial firms including ESG funds managed by leading investment banks Goldman Sachs and JP Morgan and said they would be banned from doing business with the state. The blacklist includes the world’s biggest asset manager BlackRock, along with BNP Paribas, Credit Suisse GroupCS +1.5%, Danske Bank, Jupiter Fund Management, Nordea Bank, Schroders PLC, Svenska Handelsbanken, Swedbank, and the UBS Group.

Texas Comptroller Glenn Hegar said that “The ESG movement has produced an opaque and perverse system in which some financial companies no longer make decisions in the best interest of their shareholders or their clients, but instead use their financial clout to push a social and political agenda shrouded in secrecy.”

This January, twenty-one state attorneys general released a letter to the two largest proxy advisory firms, Institutional Shareholder Services (ISS) and Glass, Lewis & Company, which control nearly all of the US proxy advisory market in the US, They hold enormous leverage of how institutional shareholders vote on company resolutions across the country. In the letter, the attorneys general warned “Your actions may threaten the value of our States’ and citizens investments and pensions – interests that may not be subordinated to your social and environmental beliefs or those of your other clients.”

The attorneys general objected to the use of social and climate criteria in advice to state investment vehicles and provided evidence of possible violations of fiduciary duty, alleging that the proxy advisors potentially violated their legal and contractual duties to their clients by “pledg[ing] to recommend … against” proposals that failed to implement ESG goals adequately.

The social responsibility of business is to increase profits

The question about the ethically appropriate role of business firms in societies in which they operate is as old as the business firm itself. Adam Smith, the sage of classical political economy, was as keen observer of businesses as any. He authored An Inquiry into the Nature and Causes of the Wealth of Nations after all. He was not at all uncertain in his response to the question of ethical business in 1776: it is from the appeal to the self-interest of the butcher, the brewer and the baker that we expect our dinner, not to their benevolence. He had also “never known much good done by those who affected to trade for the public good.”

Almost two centuries later, Milton Friedman — among Smith’s most famous acolytes — was just as clear in his response: “There is one and only one social responsibility of business – to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” He too was distrustful of businessmen who talk of promoting desirable social ends, for they are “unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.” His words ring just as true today, perhaps with even greater urgency.

The ESG establishment is not just the colossus standing astride the world of modern business. It occupies a dominating place in the politics and administrative bureaucracies of the ever-expanding regulatory state across the Western world. It has brazenly entered the boardrooms of financial regulators, the seminars of economic planners, and the townhalls of politicians. The great essayist H. L. Mencken’s dictum on “practical politics” is apt in encapsulating the role of ESG in contemporary Western politics: “The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.” Practical politics in the West today are no less afflicted by hobgoblins, “fighting climate change” and the demands for “social justice” above all.

Milton Friedman is passé today, repudiated by the likes of the US Business Roundtable and its powerful CEO members such as BlackRock’s Larry Fink. The widespread aversion to shareholder capitalism and profits in popular culture and in the business world, inculcated by ESG and “stakeholder” advocates in political parties, business corporations and NGOs, bodes ill for capitalism.

But we now see the emergence of a counterrevolution — in law, legislation and culture — against mandates and corporate behavior favoring ESG and “stakeholder capitalism”. In the backlash against the corrosive intrusions into capital and financial markets by the critics of Friedman’s shareholder capitalism, there is hope.

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Tilak Doshi

I have worked in the oil and gas sector as an economist in both private industry and in think tanks, in Asia, the Middle East and the US over the past 25 years. I focus on global energy developments from the perspective of Asian countries that remain large markets for oil, gas and coal. I have written extensively on the areas of economic development, environment and energy economics. My publications include “Singapore in a Post-Kyoto World: Energy, Environment and the Economy” published by the Institute of Southeast Asian Studies (2015). I won the 1984 Robert S. McNamara Research Fellow award of the World Bank and received my Ph.D. in Economics in 1992.