This week, both houses of Congress have passed a bill to overturn a Biden executive order that allowed 401(k) managers to offer “ESG” funds to retirement investors. President Biden intends to veto the bill.
ESG stands for “environmental, social and governance,” and is meant to signify that those funds pursue such goals as well as non-monetary profits in their investments. The three letter moniker names the latest in a string of efforts to infuse non-monetary values into investment and corporate management. They include SRI (socially responsible investing), CSR (corporate social responsibility), Stakeholder (e.g. employees, communities, etc.) Capitalism, and others.
The idea of reconciling ethical values with monetary gain in management and investing is very old. The mills of Lowell, Massachusetts were envisioned as enablers of education and independence for young women. The dean of Harvard Business School called business leaders in 1927 to a “higher degree of responsibility” to develop “social consciousness.” SRI takes the form mostly of funds that excluded investment in firms engaged in activities deemed detrimental to society. Various rubrics are applied to gain the ESG label.
These calls, approaches, or rubrics all suffered from some combination of vagueness, subjectivity, the argument that they reduce monetary returns to investors, ineffectiveness, and other shortcomings. The overall impulse, while old, has always been criticized for neglecting fiduciary responsibilities to make money for investor clients. Among ESG adopters, there have been accusations of “greenwashing,” or exaggeration of environmental benefits provided by companies and investment funds. Different ESG ratings systems are widely divergent.
In short, while there is a widespread appetite for investment that satisfies social or ethical concerns as well as providing monetary returns, there is no end of confusion, disagreement, and controversy around every effort. The impulse to do good while doing well has encountered much wrestling among those who aim (or profess to aim) to attain that goal.
Now, around its latest and most widely cited label, it has fed our partisan political division. Partly because of a rise in appetite, sparked by growing concern about climate change, race relations, and other worries, partly because of active and visible promotion from some investment managers, “ESG” has become a meme of its own. Once such a meme gets widespread public attention, the politics will follow. To some extent politics, largely though not entirely of the blue/left/progressive/Democratic side, was always a part of this whole discourse. But the long term potential for polarization, fueled by a host of incidents and campaigns, has now given “ESG” the classic badge of status as a partisan beacon – a presidential veto.
Many constructive ways to address the questions of values in business still exist. We could discuss the moral formation of so many investors and managers, and how they might weigh ethical merit against monetary returns. We could research ethics and social effects and conduct rigorous debate, to inform ratings systems and performance measurements. We could consider alternative methods of allocating resources. We might look further at innovations such as the B Corporation, which enables firms that embed non-monetary goals in their founding charters. But a headline focus on a vehemently argued partisan issue reduces all such thoughts or ideas to rhetorical stages. Considerations of alternatives of morality, ethics, principle, or even sustainable economic goods, now become political cannon fodder.
The issue may well expand … we might expect “pro-ESG” people to be lumped with, say, Islamic finance. “Anti-ESG” people will no doubt be accused of racism and environmental destruction. Whether we can revive a considered discourse is problematical. If not, our partisan divide will deepen that much further, along one more new axis of alienation.
Common Conviction 