Biden strikes back as the war against ‘woke capitalism’ rages

Where previously its core principle reflected Milton Friedman’s conviction that the paramount duty of managements and boards was to the company’s shareholders, it was re-stated to say that the long-term interests of all stakeholders – including customers, suppliers, employees, communities and shareholders – were inseparable. The statement (which was signed by 181 CEOs, including Lachlan Murdoch) cited issues such as diversity, social inclusion and the environment.

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According to McKinsey, more than 90 per cent of the companies in the S&P 500 index now publish ESG reports. The adoption of ESG principles and reporting of adherence to those principles has, therefore, become quite mainstream and including ESG factors in investment decision-making wasn’t controversial until quite recently.

To the extent that there were any controversies, they related to “greenwashing” or the false labelling and marketing of funds as ESG investors, and arguments over the relative performance of ESG funds against those that don’t claim to use ESG frameworks.

Somehow, however, ESG investing has become caught up in the culture wars raging in the US and, to a lesser extent, elsewhere. The Republicans have embarked on a war against everything “woke,” including what they regard as “woke capitalism.”

To them, the inclusion of ESG influences in investment decisions is a plot by the Democrats and the left to enlist other people’s money to support causes that they wouldn’t be able to successfully pursue via legislation; to direct investment towards climate change initiatives, for instance, or to withdraw funding from industries like the oil or gun industries that conflict with the left’s agendas.

While there is undoubtedly a strain of conviction to the conservatives’ assault on ESG investing – there are a lot of Friedmanites who believe the sole purpose of boards, managers and fund managers is to maximise profits and returns for shareholders – there is also a lot of politics. The Republicans, with the 2024 federal election on their horizon, see the “war against woke” as a winning strategy.

So much so that when Silicon Valley Bank collapsed Republicans blamed it on the bank’s woke policies on diversity, equity and inclusion – even though it was immediately obvious that it was the bank’s inept and profit-maximising management of its balance sheet that was the actual reason it imploded.

The attacks on woke capitalism have produced some odd outcomes, like Florida governor (and potential presidential candidate) Ron DeSantis’ removal of Disney’s more than half a century-held self-governing status of the land around its Florida theme park. Disney had criticised DeSantis’ legislation banning early years’ classroom education on sexuality and gender issues.

Banks and fund managers that espouse ESG frameworks for their decisions in Texas, Florida and other conservative states have also been banned from providing their services to state-owned or controlled entities.

In Texas, that ruled out the major Wall Street banks from underwriting state and municipal bond issues. The banning of the biggest banks, with the best balance sheets and most powerful distribution networks, may cost the state an estimated $US500 million or so in higher interest costs, according to some academic studies that have compared the yields on its bonds issues with those of states that don’t exclude the Wall Street heavyweights.

Similar bans on fund managers who offer ESG products – Black Rock, State Street and Vanguard among them – has cost the states’ pension funds access to the biggest investors on the planet while making barely a dent in those firms’ assets under management.

The conservatives’ opposition to ESG investing is mainly because they see it as enabling what DeSantis calls the “woke mob” from injecting political ideology into investment decisions and corporate governance but there are also some who see it adversely impacting performance.

The data on the relative performance of ESG and non-ESG funds is murky and complicated by the fact that there are funds that label themselves as investing along ESG principles but which hold fossil fuel company shares, or tobacco stocks or gaming stocks. There isn’t a clear definition of ESG-conforming investment, although securities regulators worldwide are now aggressively pushing for better disclosure of funds’ policies and their implementation.

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There is some evidence that the inclusion of non-financial objectives in corporate decision-making does produce better long-term performance and protects companies’ social licences and, despite the US conservatives’ views, it is hard to argue that companies shouldn’t take environmental issues into account when governments in much of the world are introducing measures to reduce carbon emissions and creating both major threats and major opportunities for business.

There’s also little doubt that investors are voting with their money and increasingly putting their savings into funds that screen their investments (or say they screen them) using an ESG framework. It has been the fastest-growing segment of the funds management industry over the past couple of decades.

There’s something quite peculiar in the sight of Joe Biden, a Democrat president, acting to preserve the choice for investors to choose or reject a manager who uses an ESG framework while the supposedly free-market Republicans – including the two front-runners for nomination as their candidate for the presidency, Donald Trump and Ron DeSantis – want to take those choices away.

Ultimately, the market will sort out whether ESG funds remain popular. There is no evidence that the funds produce lower returns because they invest ethically but, if there were, their investors should decide whether they are willing to accept that trade-off.

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There’s nothing woke about allowing people to make their own decisions about where to invest their own money. That is, after all, how market capitalism is supposed to function.

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