In the past year, there’s been a push to include environmental considerations in investing and corporate operations. Now, it’s a “culture war” on Wall Street’s doorstep for investors and a partisan debate in states like Florida. You may recognize this as part of the unfolding story on environmental, social, and governance (ESG) — a new method of investing associated with socially conscious market practices. Around this time last year, it gained a lot of traction. Since then, it’s become a flashpoint in economic debates, with the Republican Party legislating against it on account of “woke capitalism” and “far left policy.” It has dragged the investment accounts of Americans, the partisan split over climate change, and a conversation about corporate responsibility into the spotlight. As ESG investing gets pulled into the culture war by the Republican Party, climate policy becomes increasingly tied up in partisan controversy, as environmental considerations are increasingly considered “leftist.” In the meantime, the glimmering green light of ESG investing seems to offer a solution via the market, further distracting from the urgent need for government intervention. While ESG investing may not be the environment-first action that’s needed, it’s a highly profitable investing practice with positive secondary effects for the environment. Although ESG is a flawed system, Republicans are against it for the wrong reasons.
Environmental, social, and governance criteria identify the non-financial factors that investors consider when evaluating a company. In broad terms, these include climate conservation, treatment and rights of employees, and how the company is managed. The idea is that shareholders will invest in companies who achieve a higher ESG score—meaning that the more socially and environmentally conscious companies would receive more investments. Social and governance ratings look for things like women in leadership positions, access to healthcare, tax transparency, and so on. Companies that In the past year, there’s been a push to include environmental considerations in investing and corporate operations. Now, it’s a “culture war” on Wall Street’s doorstep for investors and a partisan debate in states like Florida. You may recognize this as part of the unfolding story on environmental, social, and governance (ESG) — a new method of investing associated with socially conscious market practices. Around this time last year, it gained a lot of traction. Since then, it’s become a flashpoint in economic debates, with the Republican Party legislating against it on account of “woke capitalism” and “far left policy.” It has dragged the investment accounts of Americans, the partisan split over climate change, and a conversation about corporate responsibility into the spotlight. As ESG investing gets pulled into the culture war by the Republican Party, climate policy becomes increasingly tied up in partisan controversy, as environmental considerations are increasingly considered “leftist.” In the meantime, the glimmering green light of ESG investing seems to offer a solution via the market, further distracting from the urgent need for government intervention. While ESG investing may not be the environment-first action that’s needed, it’s a highly profitable investing practice with positive secondary effects for the environment. Although ESG is a flawed system, Republicans are against it for the wrong reasons.
Let’s break that down. What started in 2004 has since grown into a network of data companies that contribute to the ESG scoring system by indexing publicly available data and selling their ratings to investors. A bandwagon in investing, every rater has their own methodology. Morgan Stanley Capital International (MSCI) is one of the leading forces in ESG rating, scoring companies on how likely they are to sustain production in the coming climate transition, amongst other factors. How exposed a company is comes up a lot. This is a reflection of how likely a company is to survive the climate transition. Variables they consider expand beyond just negative externalities, evaluating state and federal legislation and policy changes (such as “regulatory bans”). Within this ranking system, “negative externalities”, or the damages to the environment, aren’t considered a result of corporate production – they’re considered a threat. To be clear, the “E” in ESG investing isn’t designed to prevent or undo climate change, and ESG investing isn’t designed to save the planet, though it has made some positive changes. Instead, it’s designed for dynamic investing in the shifting terrain of climate change, and if people assume it’s trying to save the environment, investment firms probably aren’t going to correct them. Methodology aside, it’s had a lot of financial success and empowered sustainable companies. The upshot is this: while ESG may partially contribute to slowing down climate change, investors’ main goal still remains maximizing profits.
Enter the Governor of Florida, Ron DeSantis. One of the leading figures of the Republican Party and a potential presidential candidate for the 2024 elections, DeSantis is legislating to keep ESG criteria out of investing. Their war on woke capitalism has a new front: Wall Street, or more specifically, Wall Street investors. His claim, backed by several members of the Republican Party in Florida and Texas, is that ESG criteria is “woke capitalism” and that investors who use it waste the money of the Americans who entrust their investment accounts to them. The term “woke capitalism” caught on in 2018 and refers to a company with a political agenda, usually with left-leaning tendencies. By choosing not to back these companies, investors prioritize long-term gains over short-term ones. To DeSantis and others, this is a misuse of money and a threat to the economy. They argue that, by ignoring a company’s success in the present, investors provide fewer returns for Americans’ investment accounts.
“The leveraging of corporate power to impose an ideological agenda on society represents an alarming trend,” said Governor Ron DeSantis in a public statement. “From Wall Street banks to massive asset managers and big tech companies, we have seen the corporate elite use their economic power to impose policies on the country that they could not achieve at the ballot box. Through the [legislative proposals] I announced today, we are protecting Floridians from woke capital and asserting the authority of our constitutional system over ideological corporate power.”
DeSantis is far from alone in this belief. Darrell Issa (R-CA), Rep. Dan Crenshaw (TX), and Sen. Tom Cotton (AK) are amongst his cohorts, with Blake Masters, the Republican Senate nominee for Arizona, pushing to take ESG practices to the Senate if he wins in the upcoming midterm election. In Florida, DeSantis and his party have approved a resolution banning the state’s $186 billion pension fund from using environment, social, and governance measurements for investments. In Texas, the company at the forefront of ESG practices, BlackRock Inc., has been barred from operating on the grounds that it’s “boycotting energy companies.” This political pushback against ESG investing is a key chess piece in the Republican Party’s war on woke capitalism.
For the Republican Party, it’s about the culture war. Their campaign against ESG isn’t about taxpayer pensions or corporate accountability—it’s a continued trigger-happy response to leftist market policies. The words “environment,” “climate change,” and “social governance” invite Republican pushback. Like other left-leaning policies and legislation, ESG practices have been set up as strawman arguments. By setting up these strawmen to then knock them down, the Republican Party seeks to strengthen its position in the culture war. ESG is not exempt, and its front in the culture war can be found under the term “woke capitalism.”
The self-contradiction for the Republican Party lies in this woke capitalism argument. If capitalism is about a competitive market, privately owned companies, and capital accumulation (shareholder returns), the “wokism” aspect is rejected because it adds a political agenda that might limit private ownership and capital accumulation. What the Republican Party is fundamentally misunderstanding about ESG investing is that its purpose is not a political movement towards environmentalism; it’s a risk-management tool for ensuring capital accumulation and shareholder returns in the shifting landscape of climate change and regulation. It’s not woke capitalism, it’s just capitalism. Furthermore, when DeSantis and others pass legislation against use of ESG ratings, the private ownership of investment companies is reduced because they impose their own political agendas on companies. They impose the same political bias they accuse the Democrat Party of committing through ESG. In many ways, they have seemingly fallen for the environment-first rhetoric surrounding ESG.
Ultimately, ESG is a flawed system. The data used for scoring is self-reported and largely unmonitored. Its purpose is futures investing and shareholder returns when the climate situation is rapidly worsening. Unless there’s a financial motive, companies are unlikely to pursue climate protection. If you’re not someone with an investment account, or an investor in Florida, this isn’t going to have a direct impact on your life. What should concern everyone, however, is that the climate conversation is continually pushed to the back-burner, and things are heating up. Furthermore, DeSantis is a likely candidate for the Republican Party in the 2024 presidential election, and although ESG practices are questionable, his party asks the wrong questions. Instead, they set about stoking the flames of the culture war. Their responses to ESG, however, are very real, and DeSantis’ policies this past summer have redirected investments toward gas and oil companies without any expressed interest in climate protection. Finally, it’s worth asking what DeSantis and his Republican colleagues stand to gain. He’s currently positioning himself to run for the 2024 presidential election, and has just passed legislation to protect energy producers, all the more likely to win their support in 2024. It’s great timing if you don’t account for climate change.
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