Recently, proponents of the use of “environmental, social and governance” (ESG) factors in investing have been promoting themselves as the true defenders of capitalism while trying to paint ESG critics as anti-capitalists. Before diving into the substance of this claim, let’s use the following thought experiment as a basis for identifying at least part of what is required for someone to be deemed a capitalist in this context.
If you have some money to invest for your retirement, are you going to give it to a communist or a capitalist? Most people would choose the capitalist. That’s because the communist could be expected to redistribute your money to the poor, who will then spend it (or at the very least be unlikely to generate a market rate of return), ultimately leaving both you and the welfare recipient poor – or at least you poorer than you likely would have been had the money been properly invested.
The capitalist, on the other hand, should be expected to invest your money in the venture or ventures providing the most positive expected value. And any capitalist worth their salt would be able to show you precisely how they calculated that expected value, including accounting for opportunity costs. If you subsequently want to donate some of your gains to the poor, you are obviously free to do so.
In light of the foregoing, it is perhaps surprising to discover how vigorously ESG proponents contest incorporating some version of expected value calculations into legislation designed to protect the retirement nest eggs of ERISA participants and beneficiaries. (ERISA stands for the Employee Retirement Income Security Act of 1974.)
This fight can be traced back at least to then-President Trump’s Labor Department Rule, which stated that a “fiduciary's evaluation of an investment … must be based only on pecuniary factors” (subject to certain exceptions) and that “pecuniary” in this context means “a factor that a fiduciary prudently determines is expected to have a material effect on the risk and/or return of an investment.”
Arguably, this is all any true capitalist would need in making investment decisions but, as Steve Soukup recently noted, ample room was provided for incorporating factors that might not fit into a traditional expected value calculation:
The Trump Labor Department rule – which President Biden rescinded on his first day in office and which his Labor Department has replaced – openly and willingly accepted the use of ESG analysis by financial managers, on the condition that they could demonstrate that the ESG considerations were material matters. That’s it. It didn’t ban ESG…. It merely said that pension investment decisions should be based solely on pecuniary factors, unless there was a good and DEMONSTRABLE reason why they shouldn’t be…. Show that “sustainability” criteria are material and we’ll be good. How hard is that?
All of which brings us back to the question: Which side is defending capitalism — ESG proponents or critics? Before providing a final answer, we should distinguish a form of capitalism that is not capitalism at all: crony capitalism. Crony capitalism is what you get when the value- and innovation-generating power of capitalism is rerouted to value- and innovation-destroying rent-seeking behaviors.
This might be the case, for example, when relevant decision-makers are essentially bribed by government subsidies or activist threats to divert productive capacity towards pipe dreams like wind farms, electric vehicles, and “net zero 2030” commitments that wouldn’t require such arm-twisting if they were justified by reasonable expected value calculations.
So, maybe what ESG proponents mean when they say they are the true capitalists is that they are the true crony capitalists. Relatedly, David Blackmon has referred to the wind power industry as “the rent-seeking wind industry.”
But even putting aside the crony capitalism issue, the fact that ESG proponents repeatedly stake out positions resisting a focus on pecuniary factors in investment decision-making really tells you all you need to know about who the actual capitalists in this story are.
It’s the people who are unwilling to put retiree pensions at risk by investing those retiree funds on the basis of non-pecuniary factors — otherwise known as factors intended to account for something other than financial risk and return.
What might those other considerations be? Well, they might include a commitment to a radically utopian climate change agenda or “equity” initiatives that operate on the premise that discriminating on the basis of race is okay so long as you’re discriminating against whites and Asians. Meanwhile, it’s the “anti-ESG” folks who are actually the neutral value maximizers, simply seeking investments consistent with relevant fiduciary duties.
So, the next time ESG proponents claim they are the true capitalists, ask them to explain how that can be true if they consistently seek to avoid being held to a standard based on the one word true capitalists should love: “pecuniary.”
Stefan Padfield is an associate at the National Center’s Free Enterprise Project (FEP), whose stated goal is to oppose the woke takeover of American corporate life.
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