By David Bach
David Bach, International Institute for Management Development (IMD)
Ron DeSantis, Florida’s Republican governor and likely future presidential contender, has opened up a new front in his party’s war on “woke capitalism”. He is proposing to change the rules around how public bodies within Florida borrow from the markets by issuing bonds.
The proposal is that they would no longer be able to work with ratings agencies that value the bonds using the ESG (environmental, social and governance) sustainability criteria that have become commonplace in the world of finance in the past few years. Public bodies and companies with lower ESG scores can see this reflected in their borrowing costs, and some politicians on the right object to this “interference” with market valuations.
DeSantis already pledged in December to pull US$2 billion (£1.7 billion) of the state’s investment from BlackRock, the world’s largest asset manager and a key player in the ESG movement. This was after 19 Republican state attorneys-general told the asset manager in a letter: “Our states will not idly stand for our pensioners’ retirements to be sacrificed for BlackRock’s climate agenda.”
Eighteen states have also either proposed or adopted legislation over the past two years restricting state business with financial institutions that use ESG criteria to limit funding to industries like fossil fuels.
According to Republican senator Kevin Cramer from North Dakota, banks and asset managers “should ignore calls for ESG and woke capitalism and stick to what they do best”. Former vice president Mike Pence wants the the next Republican congress to work to “end the use of ESG principles nationwide”.
What they get wrong
Newly in charge of a Congressional branch, Republicans are taking their quest to Washington, DC. Andy Barr, the new chair of the House financial services subcommittee responsible for financial institutions, claimed America’s financial system had been “co-opted by the intolerant left that is intolerant of diversity”. For the US to be economically competitive, he said “we need our financial system to provide equal access to capital to all kinds of businesses”.
This revealed either a remarkable ignorance about financial markets and the financial risks posed by environmental and social challenges – or he was being cynically misleading to score political points.
The notion of equal access to capital flies in the face of one of the central tenets of capitalism. The ability of different organisations to borrow and the price they pay is never equal. It depends on the risk of the investment and how many investors will take that risk.
Consider mining. It inherently impacts the environment and surrounding communities. Communities can tie owners up in lawsuits or even block mining access if their concerns go unaddressed. This can affect the mine’s profitability.
Researchers have shown how two gold mines with the same volumes of gold and extraction costs can be valued radically differently depending on local support. ESG ratings seek to capture such factors to enable investors to make better informed decisions.
For asset managers like BlackRock, it’s also about customer demand. If investments that mitigate ESG risks offer a better risk-adjusted return and investors are increasingly shunning certain companies – be it gun manufacturers or fossil fuel producers – it will affect where money flows.
BlackRock’s CEO, Larry Fink, recently said that his company lost about US$4 billion in assets from Republican-led states withdrawing money in 2022, but added US$400 billion overall. Nothing nefarious or political here, just capitalism at work.
Owners of dirty assets can still raise capital. It’s just that the price may be higher. Look at the divergent coal strategies of mining giants Rio Tinto, Anglo American and Glencore.
Rio Tinto entirely exited coal in 2018. Anglo American has created a separate entity for these assets called Thungela, while Glencore still has coal in its portfolio and proposes to run it down responsibly over time. (Full disclosure: I hold the Rio Tinto Chair in Stakeholder Engagement at IMD, but the company has no influence over my research.)
Investors can choose between these strategies. At any moment, these companies’ borrowing costs will reflect the consensus assessment of the underlying risk, including from ESG factors.
Glencore has not been cut off from capital markets and is doing quite well – reporting record 2022 profits fuelled largely by coal. Yet its share price has not outperformed its peers, reflecting investor concerns about the long-term strategy.
Woke capitalism?
David Remnick, editor of The New Yorker magazine, recently said that for “conservatives now, wokeness is the root cause of everything negative”. He interviewed linguist Tony Thorne, who traced the term to a 1971 Black liberationist play in which the main character says “I must stay woke”.
Thorne explained that for today’s progressives, particularly following Black Lives Matter, “woke” became synonymous with “socially aware” or “empathetic”. But conservatives, he said, made this vague term a proxy for leftist self-righteousness, and so “anti-woke” became the rallying cry for any social change they oppose – just like “political correctness” a generation ago.
While US conservatives are particularly fixated on anti-wokeness – “Florida is where woke goes to die,” intoned Governor DeSantis in his November victory speech – it is not just an American phenomenon. For instance, the Atlantic magazine’s Thomas Chatterton Williams recently observed: “The French are in a panic about Le Wokisme.” Europe’s debate has not yet spilled into financial markets, though it may only be a matter of time.
By labelling ESG “woke”, conservatives imply that large parts of the US$100 trillion global asset management industry have been hijacked by leftists. Having spent time with lots of asset managers, it’s nonsense.
Of course, not all is well in ESG land. Greenwashing is rampant, and rating agencies and asset managers get criticised for insufficiently scrutinising firms’ actual ESG performances.
Most dramatically in May 2022, German prosecutors raided the offices of DWS, Deutsche Bank’s asset management unit, following allegations that it had vastly overstated its ESG investments. Lawsuits are ongoing, and DWS denies it misled investors.
Yet the idea that a firm would dress up “normal” assets as ESG simply demonstrates the investor demand for these products. Equally, greenwashing is pilloried because it makes it harder for investors to assess the underlying risks to a firm’s future profitability. These problems highlight the need for better standards and regulation, which is to be expected in a nascent field like this.
Despite conservative opposition, analysts expect ESG investment to almost double over the next three years to nearly US$34 trillion, representing one in every five dollars invested worldwide. This is not an aberration of free-market principles but a reflection of them. That US Republicans are puzzled by this says more about them and the echo chambers in which they have been moving than about the state of ESG.
David Bach is Rio Tinto Chair in Stakeholder Engagement and Professor of Strategy and Political Economy, International Institute for Management Development (IMD).
Reader Interactions
Comments
Leave a Reply
This site uses Akismet to reduce spam. Learn how your comment data is processed.
Pogo says
@Everything except the truth
The Republican Party is a wholly owned subsidiary of big oil and mining, big pharma, the merged insurance and banking industry, the cartoon villains that loot the pension funds of companies they raid, and then dismantle them, in the same manner criminals hollow out businesses they use as fronts, shells, and shills. And don’t forget God: they falsely, as usual, claim they invented Him too.
Look! There they go! Follow the scapegoats before they get away! Never mind this:
Don’t look, don’t ask
https://www.google.com/search?q=millions+of+abandoned+oil+wells
If you didn’t look at the previous, you’ll believe you don’t need this
https://www.google.com/search?q=superfund+sites+laid+off+on+tax+payers
Don’t look — really, really, really don’t look
https://www.google.com/search?q=fl+retirement+system+losses+from+Republican+cronyism
Don’t look or you’ll go blind
https://www.google.com/search?q=cost+of+tax+evasion+us
God says he is a visitor from another planet
https://www.google.com/search?q=mormon+hedge+fund
God says she is broke
https://www.google.com/search?q=cost+of+church+property+exemptions+us
God says it was framed
https://www.google.com/search?q=non-profit+organizations+that+violate+the+rules+regarding+non-profits
God is on vacation — leave a number where God can contact you
https://www.google.com/search?q=government+losses+from+private+school+bankruptcies
Etc., etc.
Dennis C Rathsam says
Another hit job…. by a sore loser! All this WOKE crap is killing America. Look at the mess in big cities where 90% of the kids cant do math, cant read, while the morons in Washington, shut our childeren out of a real education. Reading,Math, Science, & History! Our children will never recover from missing so much school. Thank God we have a governor with a brain, and cares about Florida,s childeren. How will these kids cope, in real life situations? Who will hire a 18 year old who cant add or read! These kids will be in a disadvantage, for the rest of thier lives. Lets all give a hand, for that lieing Anthony Facci!
JOE D says
The GOP is hinting that ESG environmental and social criteria LOSES money. I inherited a BLACK ROCK investment account from my blue collar, union machinist, father, and in those 15 years it has done SO WELL, it paid a large portion of my down payment for my Flagler retirement home! MUCH better than other savings.
For Gov DeSantis to bar state and local municipalities from investing in Groups that use the ESG investing criteria is going to impair local retirement groups, and local governments from deciding on their own what the investments should be….even cost those groups much needed financial return on their ( and frequently OUR incomes as taxpayers) investments.
Saying that taking into consideration Environmental/Social /and Governance in investing, is “WOKE “ is just another HEADLINE grabbing attempt to “appear” in defense of the “average” person!
Several articles ( unfortunately SPECIFIC ones I can’t reference here at the moment), have said that investment groups ( not just Black Rock) that use ESG criteria in investing decisions do better OVERALL in returns for even their SMALL investors ( union pensions/401 K retirement accounts/ local and state investment funds holding taxpayers funds for later use).
Barring Florida state and local government funds from being invested with EGS criteria groups is a political stunt that in the long run going to HURT Florida residents…..then again……anything to stay in the news!!!
Timothy Patrick Welch says
Why some oppose ESG and similar ideas…
– They openly encourage fornication and child rape.
– They perpetuate racism.
– Encourages outsourcing of “dirty” operations to achieve status.
– Increase in risk, as compliance shifts from facts and regulations, to theories and agenda.
Timothy Patrick Welch says
Yep…
Corporations are bad and may be the reason capitalism fails.
Skibum says
“Woke capitalism” seems to be the GOP and Deathsantis’ latest darling term du jour to justify (in their little minds) proposing more draconian laws to get what they want when they realize they don’t have the support of the majority of voters. Even when poll after poll tells the gov and the legislature that the overwhelming majority of Florida voters do NOT agree with them, they just double down and hammer through more ridiculous laws that pander only to their far right wingnut base. Then Deathsantis stands there in front of Faux infotainment to proclaim that he is fighting against all things “woke” in the so-called “freedom state” of Florida where the vast majority of this state’s citizens have less and less freedom from GOP extremist views and legislation every day. Unless we are able to turn this ship around, we are heading for the “Handmaid’s Tale” as a life altering reality right here in our state. And Deathsantis surely will not be satisfied with just Florida as he coyly runs for election nationally without actually revealing to anyone that he is running for president.
Ed says
Pogo,Pogo,Pogo
Huh?
ESG ?
I don’t follow your logic.
Laurel says
Ed: Pay no attention to the man behind the curtain. Just follow my newspeak (woke), hate half the country (Dems) and pray to my God, and my God only, and do not deny him.
The “GOP” is the Grand Old Party no more.
These *leaders* are not looking out for us. They are working hard to deprive us of our liberties. Wake up from the poppy field.
Laurel says
OMG Dennis, you so make my case.
Laurel says
TPW: Please tell us where you get this information.
Laurel says
Far right mantras:
Witch hunt, witch hunt, witch hunt, witch hunt, witch hunt, witch hunt, witch hunt, witch hunt, witch hunt, witch hunt, witch hunt, witch hunt….cancel culture, cancel culture, cancel culture, cancel culture, cancel culture…socialism, socialism, socialism, socialism, socialism, socialism, socialism, socialism, socialism… woke, woke, woke, woke, woke, woke, woke, woke, woke, woke, woke, woke, woke….and throw in a couple of ANTIFAs in there too…
Meanwhile, the average working or retired Floridian says “What are the politicians going to about insurance rates?”
Pogo says
@Laurel
Thank you. The usual suspects remind me of dogs responding to the sound of a passing mail truck. At least the dogs know why they are barking.
They won’t “get” this either:
“Where it is a duty to worship the sun, it is pretty sure to be a crime to examine the laws of heat.”
— John Morley
The demonizing of ESG by malelovent shits like desantis, and his ilk, is classic: asked a question, they simply ignore it and talk about something else, e.g.: Why do you perform sexual favors for pay from lobbyists? Their answer: We will not allow ESG to interfere with Casino Capitalism and short term profits before all else — as was given to us by Jesus, creator the Second-rate Amendment, and all that other stuff, our Lord, broker, and not least, our Bail Bondsman accredited in hell. They are then hoisted to the shoulders of their adoring dupes and carried into elected office, where they will continue to prostitute their position, abuse their authority, and steal anything within reach.
How about these apples?
https://www.theamericanconservative.com/casino-capitalism-literally/
Pogo says
@Skibum
Hello brother.
desantis is delaying announcing to avoid reporting requirements. Our corrupt campaign finance laws, the shameless bribery/purchase of politicians, who choose the voters instead of being chosen — these things will be the last things Democracy sees as it dies, alone and forgotten.
Joe D says
To: TP Welch…
what the Green Earth are you TALKING ABOUT?
ESG ( Environmental/Social/Governance) means that BEFORE an investment group decides to put people’s money in a particular stock or fund, they look at the Environmental impact of that company’s business practices. Then they look to see whether the company is fair in its business practices with local areas, then finally whether that are considered “fair” to their employees (and their customers), and Governance means they look at how a company is run from the top down. All this gets rated on an overall “score” to
Help them decide on sound investments…
Your list of concerns /statements, sounds like you copied it from a White Nationalist bulletin board? What does any of that have to do with deciding how to invest in companies or stocks???
universitas muhammadiyah surabaya says
thank you for this educative information we really appreciate.
Whathehck? says
Yes indeed I need to know where you got your information too. That’s the only way I can start to believe what you wrote.
Geezer says
How soon they forget the ventilator shortage and the overflowing morgues.
This is the Milk of Amnesia at work…
Ralph6 says
To those who see a difference in the political parties, you are being misled by what they say. Look at what politicians actually do. As to outcome, there is no difference.
Ray W. says
Once again, Timothy Patrick Welch posts a comment that suggests that Wittgenstein was correct in asserting that one of the most difficult things in life is to not fool oneself.
From the outset, I accept that I am capable of wearing blinders. Timothy Patrick Welch is most certainly capable of wearing blinders.
Timothy Patrick Welch suggests that capitalism can fail, as if it were an economic theory. If capitalism is an economic theory, if follows that if anyone were to create a better, more precise, or more comprehensive economic theory, then capitalism would soon be relegated to the dust heap of history, i.e., it would fail. For example, trickledown economics has never worked as described. Yes, it created less wealth than predicted and, yes, the wealth it created barely dripped down; it was better described as an economic theory that created a torrent-up form of wealth. For another example, John Maynard Keynes was one of the architects of the Bretton Woods agreement, which created the International Monetary Fund and what we now call the World Bank Group. The dollar was standardized as the world’s reserve currency, with a preset price of $35 per troy ounce. The agreement held until 1971, when Nixon took the dollar off the gold standard. A new international currency policy eventually replaced the Bretton Woods agreement and parts of it were relegated to the dust heap of history.
What if capitalism is actually the most accurate explanation of human economic behavior ever devised by the mind of mankind? What was the motive that drove Adam Smith to investigate his concept that he termed capitalism? The title of his book, published in 1776, suggests one possible answer. Adam Smith did not publish “The Wealth of Nations.” He published, instead, “An Inquiry into the Nature and Causes of the Wealth of Nations.” Other people decided to change the title of his work to suit their own interests.
Smith was a product of the educational system known today as the Scottish Enlightenment. He described his motive as unique, in that others before him had investigated why people were poor. He decided to investigate why nations became rich. He concluded that wherever people act in their perceived selfish economic best interests, nations create wealth. When people do not act in that way, less national wealth is created. If this accurately depicts his conclusion, then capitalism will exist everywhere across the world in every marketplace, in every port, in every transportation hub, everywhere. As the old lawyer’s joke posits: If a town can afford one lawyer, it can afford two.
For example, in my youth, there were numerous newspaper articles about Soviet citizens standing in lines extending for blocks near stores that had received a shipment of a quality item, like fur-lined jackets or insulated boots. Word passed rapidly through the populace. There was no mention of advertising. The articles carried pictures of the hundreds of people patiently and without any violence enduring cold weather to get the best quality product at the preset communist price. There were pictures of empty shelves. The reporters emphasized that people bought their quota of jackets or boots regardless of size, knowing that they could barter whatever they bought for something else that they needed. Compare this with the lines outside Walmart or Best Buy or Kohl’s on those Black Fridays before the prevalence of online shopping, with Americans camping outside overnight or longer to get the best deals where supplies were advertised as limited, complete with mad dashes upon opening and violence among customers in the aisles. It didn’t matter whether communism, socialism or democracy prevailed in whichever country that experienced this type of phenomena. Everywhere across this great globe, people will wait in line to purchase a quality product for a reasonable price. That, to me, is capitalism.
What if all human beings act in their own perceived selfish economic best interests? What if the invisible hand of the marketplace acts on this principal all over the world. What if Adam Smith was right in his assertion that capitalism is best explained by the invisible hand of the marketplace? What if capitalism cannot ever come to an end, because it is not a part of socialism, communism or democracy, or caused by any political action? What if capitalism is the most basic part of the many-faceted human economic existence, and that socialism, communism or democracy is layered onto it, but does not ever change its foundation? What if capitalism is a first principle?
If capitalism is viewed in this way, then it can be regulated, distorted by advertising, manipulated by corporate or political interests, etc., but it cannot be ended, because we will always be driven by the innately human desire to get the best possible product for the lowest possible price. Yesterday, my wife reminded me that she is walking in a dog parade next weekend in DeLand; she wanted some dry dog food to donate to the organization hosting the parade. Publix has Iams puppy food on a BOGO sale.
Can it be argued that Timothy Patrick Welch has internalized a popular republican fantasy that democratic policies are not capitalist, fantasies that can never come to pass if capitalism is an explanation of human economic behavior? What if Timothy Patrick Welch is wronger than wrong? Does he meet Madison’s definition of a pestilential member of faction or is he an example of the zealous advocate who carries a burden of intellectual rigor?
There are three great questions in philosophy, questions that can never be answered. Any moment at which anyone thinks he or she knows the answer to any of the three questions is the moment he or she loses the argument. While the three questions can never be answered, we must always strive to answer them. How shall I live my life? How shall I be governed? How do I know what I know?
Laurel says
Pogo: Too funny about the dogs! The first thing that popped into my mind was a Warner Bros cartoon with a pack of hounds on the hunt. They faced different directions, bouncing up and down, yapping away stupidly. I love Warner Bros!
Even though she’s not a politician, but works for them, Kellyanne Conway is the Queen of Distraction. She just keeps rambling on endlessly in multiple directions. I’m sure she has taught many Republican politicians the art of this rambling distraction.
I once went to a casino with friends, I think it was in Davie, thinking it would be fun. I hated it. I mean I h-a-t-e-d it! The noise and the lights were relentless. We forgo the free prime rib dinner and left. It’s gotta effect your synapses.
Ray W. says
Thank you, Ralph6.
I am reminded of the old political joke:
There is no such thing as a conservative Republican.
There is no such thing as a liberal Democrat.
The only conservative is a Democrat who has been mugged.
The only liberal is a Republican who has falsely been accused of committing a crime.
The rest race to the center, plant their flag, proclaim to all who will listen that they got their first and that their plan is best, and they then ask everyone to vote for them.
And the old political science maxim:
Never listen to what a Middle Eastern politician says in private; always listen to what he says in public.
Never listen to what an American politician says in public; always listen to what he says in private.
Ray W. says
You left out CRT, CRT, CRT, CRT. You know, critical race theory, with an emphasis on critical, as in “to critique”, i.e., a detailed analysis and assessment of something, especially a literary, philosophical, or political theory. As in the stuff of academia, which might explain why CRT is only taught as an elective class in law school.