Stakeholder Statism is Coming

A unification of forces has produced the array of Environmental, Social, and Governance (ESG) policies that have fervently emerged across Europe and in America in the past two decades. Broadly defined, ESG promises environmental activism, egalitarianism across races and genders, and an aspirational commitment to social justice, enforced in and through corporations. How should we think about this incredibly skilled and powerful movement that has enlisted our largest and most successful corporations in its efforts, along with a host of transnational institutions, NGOs, and national and subnational governments? Is ESG an actual threat to free institutions, most notably markets and civil society? Or, as advocates contend, do ESG policies provide better pricing and risk factors to what are dangerous, risky, and environmentally unsound practices? Will ESG help us to both earn money and do well by serving people and the planet?

Answering these questions in a compelling way is Paul Tice’s The Race to Zero: How ESG Investing Will Crater the Global Financial System. Tice spent decades on Wall Street working for JP Morgan Chase, Lehman, and BlackRock. This book’s critical analysis of ESG highlights that the entire financial industry has been co-opted in a giant swindle by an aggressive global scale humanitarian ideology. On almost every page Tice illuminates a tremendous con job being perpetrated in full sight of finance professionals, who know better, but lack the courage to state clearly that ESG’s promises are fraudulent in operation, destroy investor wealth, and enrich discrete groups of players who sharply influence the allocation of capital under ESG. That effort has required Wall Street professionals to “willingly suspend disbelief and forgo the traditional financial approach” of “comparing leverage metrics, cash flow margins, and earnings momentum.” Instead, they are now “sizing up carbon footprints, checking on water and electricity usage, and making sure companies are paying their ‘fair share’’ of corporate taxes.”

In general, ESG follows the trajectory of efforts by the progressive left to replace a free, voluntary, and competitive society and its institutions with centrally ordered institutions on behalf of social justice and a plethora of auto-generating rights. In many respects, ESG is just another version of top-down coordinated efforts by progressives to engineer their preferred society. ESG’s variation on left-progressive ideology, Tice observes, is sustainable investing, that “subjective environmental, social, and governance factors should drive corporate policy and investment decisions, as opposed to objective financial metrics and returns.” Primary elements hold the sustainable, salvific ESG glue together: ending global poverty, preventing climate change, and striving for social justice, generally. Of these elements, Tice observes, “climate change remains the highest-priority ESG issue.” The ideological urgency it adds to the entire concept of sustainable investing has made resisting the sweep of ESG incredibly difficult for financial institutions and professionals.

As Tice notes early in the book, “the master ESG list is kept, not by financial market participants, but rather by an informal working group comprised of the United Nations (UN), the World Economic Forum (WEF), liberal politicians, academics, environmental activists, social justice warriors, and the media.” The list itself, typically of progressive ideology, changes and evolves. But the constant is sustainable investing, which “redefines all of the core tenets of progressive ideology over the past 100 years as corporate policy goals and investment criteria.”

ESG reveals that we confront ideology and the desire to seek rents by “doing good” with other people’s money. That mixture reinforces a phalanx of organizations convinced that their efforts would save the world, so long as they have access to a steady stream of institutions delivering capital and rents in their preferred fashion. Attempting to diminish greenhouse gas emissions is incredibly expensive, of course, so the grand narrative must drown out any voices pointing to feasibility, accountability, and consequences.

Tice stresses that ESG’s plan for integrating capitalism into its objectives has always involved replacing shareholder capitalism — a central tenet of American corporate law — with stakeholder capitalism. Tice notes the foundational 1987 Brundtland Report, which built its recommendations for sustainable capitalism on stakeholder theory. The two became a natural fit. The former provides the grand narrative needed to reset capitalism for ideological purposes, that is, a market system that leaves no carbon footprint, generates little pollution of any kind, provides equity for all, and directs profits to the marginalized and oppressed. Stakeholder theory provides the legal and administrative means for accomplishing these objectives.

Stakeholder theory asserts shareholders cannot claim company profits, because corporations must serve stakeholders: employees, suppliers, customers, not to mention unions, non-profits, NGOs, the state, even society at large. Stakeholder capitalism’s effectual truth places shareholders last in line, behind a list of participants that keeps expanding. Tice details how the WEF and UN combined their efforts around stakeholder capitalism to accomplish their broader goals.

Initially named the European Management Forum, which held its annual meeting in the ski resort of Davos, Switzerland, it was renamed the World Economic Forum in 1987. Led by German engineer and economist, Klaus Schwab, who stresses in his first book Modern Company Management (1971) that capitalism must adopt “the corporatist model prevalent in Germany and other Western European nations during the postwar period.” He suggests a legal arrangement scarcely distinguishable from stakeholder capitalism whereby businesses, labor, and the state engage together to achieve shared public goods, frequently involving government and union representatives sitting on a corporation’s board of directors. One of the prime aims of the Governance platform is to mandate gender and race requirements on company boards, a position endorsed by NASDAQ, the state of California, alongside BlackRock and other major financial institutions. The expectation would clearly be for the federal government to begin mandating seat requirements for groups of people on publicly traded corporation boards, if not closely held companies, in due time.

Schwab’s stakeholder capitalism has necessarily evolved to a global standard in his book Stakeholder Capitalism: A Global Economy that Works for Progress, People and Planet (2021) to reflect the priorities the UN has identified in its Sustainable Development Goals for 2030. Schwab now focuses on a global agenda for companies to pursue in the operations of their businesses. The new stakeholders are really two: “people and the planet.” As Schwab grandiloquently put it, “the planet … is the central stakeholder in the global economic system.”

The UN’s most decisive contribution to ESG occurred in 2005 and 2006 under the direction of its then-Secretary General Kofi Annan who convened an international summit in 2005 to discuss ways that the global financial sector could be harnessed to serve global goals of equality, environmental justice, human rights, labor rights, etc. In 2006, the UN formed the Principles for Responsible Investing (PRI) to extend hard ESG tentacles into the financial industry globally, focusing heavily on Europe and North America to “benefit the environment and society as a whole” and ensure a “sustainable global financial system.” The PRI fields a membership encompassing as of March 31, 2023, 5,381 signatories from over 90 countries with an aggregate of $121.3 trillion in assets under management. Core membership for PRI remains in Europe, home of more than half the group’s signatories. PRI’s work is dominated by six principles, with each principle entailing action items for members to pursue.

Members pledge themselves to the following for ESG: integrate, engage, push, proselytize, collaborate, and report on all their efforts (and everyone else’s efforts). In a word, control. Tice notes in his book that behind PRI was the realization that all these efforts are for naught without adherence by the financial sector. The financial and investment sector couldn’t be left alone to do the measured work of capitalism if UN and WEF sustainability goals were going to be accomplished.

The ESG pricing function is not working as advertised. PRI, Tice observes, wanted by 2027 to ensure that financial markets price ESG risk as “the main discriminant factor in determining the cost and availability of capital for specific industries and issuers.” To accomplish that requires the clearing away obstacles that might stand in the way, notably, the fiduciary rules between management and shareholders, and investors and their clients.

Tice argues no data shows that ESG drives “relative value,” nor “the availability or cost of capital for different sectors and issuing companies.” ESG proceeds in a socially pressuring manner while also promising to create value for investors. The latter is not true. Markets readily ignore ESG-driven pronouncements. This is incredible, Tice says, given the size and scope of the PRI’s global membership. Tice concludes that “empirical evidence has shown little correlation between ESG factors, corporate performance, and investment returns.” Energy debt and equity prices remain aloof, despite years of ESG’s hectoring them and investors about their environmental crimes.

Tice stresses, however, that even though ESG can’t cash the checks it writes, the movement itself may become more dangerous as it enters a new stage: state enforcement. One method for state action is “greenwashing” investigations. ESG portfolios underperform conventional portfolios, as they underweight or eschew “bad” and “dirty” industries and companies. The inevitable temptation is greenwashing by investment firms who label funds as compliant with ESG factors, but are conventional non-ESG funds that have been falsely labelled to signal appropriate virtue. What counts, then, as an ESG fund? Tice notes the inevitable investigations and enforcement actions against investment firms for the crime of greenwashing under European governments. Similar suits and government enforcement efforts will happen in America, led by the SEC.

The list of federal agencies proposing or implementing rules within the ESG wheelhouse is large: the Department of Labor, the SEC, Federal Acquisition Regulatory Council, the Federal Reserve, and Office of the Comptroller of the Currency. This is surely an expanding list. The only solution against what is becoming a frontal assault on capital markets and shareholder corporate form, Tice argues, is to fight back.

On one level, Tice observes, climate change is the symbol of every effort for ESG interventions. Those who would defend a classical liberal order must take it squarely on, noting that markets themselves can better price this risk without ESG. Moreover, Tice himself is incredibly skeptical that doomsday is coming, and he measures his case against the allegedly accurate UN statistics that the earth is warming, and the oceans are rising, hence the need for ESG intervention on a global scale. Tice also notes that antitrust suits should be pursued by targeted companies against the non-profits and NGOs who have colluded and organized boycotts against them. The path for an aggressive counterstrategy lies open under current antitrust law, a fact acknowledged by ESG proponents who try to legislatively exempt their collusion efforts from these suits.

Ultimately, the ESG movement is the latest in a dark legacy of attempts to subvert corporate America from within. Somehow, business leaders keep embracing the ideas of people who hate them. The true ESG goal remains to raise the cost of capital or choke it completely for the unclean sinners in the current economy. Many say the ESG tide appears to be receding as its goals prove unworkable. Tice’s book demonstrates the opposite. ESG now finds favor in progressive governments and bureaucracies to enforce its dictates at large on society. We are entering a new, more pronounced phase of its power. Prepare accordingly.