March 5, 2021
New Orleans Free marketeers are caught in a crisis of contradictions. They want to pretend that market forces exist independent of any interference from government or other factors, but they also want to put their fingers on the scale based on their political ideology. A good example might be the current gyrations around ESG investments.
ESG stands for Environmental, Social, and Governance. What in means in practice is that investors and institutions review whether there are material risks in putting money into some companies and projects based on risks in any of these areas. Such screens on social and governance sometimes include labor practices, gender equity, questions of leadership accountability, diversity in hiring and leadership, and other issues. Environment these days would seem to be a no-brainer as climate change is an unavoidable issue that touches on everything from the smallest farmer to giant oil companies. What may have started as a niche concern for certain social conscious wealthy investors thirty or forty years ago has now become a hot item with scores of funds and reportedly exploding levels of total investments.
Yet, in the way that politics, especially in the United States, seems to color everything, conservative politicians are tripping over themselves trying to make ESG investments and screens controversial. They may claim this is free market capitalism, but its really a form of protectionism for locally favored interests, particularly around resource extraction companies in coal, oil, gas, and others. Efforts are bubbling in Congress to try and tie the hands of the Security and Exchange Commission, the key corporate regulator, to insist that the only standard that should exist is profit and return on investment.
Read another way, if Exxon is paying its dividend now, investors shouldn’t be informed or cautioned that climate may kill the company in ten or twenty years. This kind of interference has always been a problem for union pension managers who, naturally, want to invest in companies that have good labor records, pay fairly, and, even as importantly, employ their members. Now in our polarized politics – and economics – some would tighten the reins even more.
Maybe it’s just us. Germany has recently announced that it is moving to require investments to include ESG screens. They aren’t Americans of course, but they do have the biggest economy in Europe. The Biden administration to their credit has claimed that the climate catastrophe is going to be part of their yardstick on policies across the board. That’s past due and just common sense. The cow is out of the barn, and conservatives need to decide if they are capitalists or not before they keep trying to control the market. Consumers want to know what companies are doing before they support #MeToo abusers, corruption, climate avoidance, conspiratorialists, and leadership tone deaf about race and workers’ rights. Facing the facts, investors want to be able to follow those consumers rather than lose their shirts. Wising up is different than getting hip, and conservatives need to learn the difference when these culture wars infect the economy.