ESG: Why Some Argue Government Shouldn’t Interfere with This Business Practice

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Today, running a business is difficult. When the left is in power, stricter regulations and higher taxes can be expected. When traditional conservative allies targeted corporate environmental, social, and governance practices, however, the business sector was stunned. These disagreements have weakened the historic alliance between these long-standing allies more than anything else.

This spring, anti-ESG legislation rattled the confidence of corporations in Republican states. Companies, including those in the fossil fuel industry, began to list restrictions as new business risks in their 10-K filings. During the Republican-led “ESG month” this summer, hearings fluctuated between a healthy skepticism of ESGs and a witch search. The irony is that ESG became ubiquitous under President Donald Trump, primarily due to market forces that were entirely voluntary.

Meanwhile, Democrats continue mandating ESG compliance in the private sector. According to business surveys, regulation became the primary driver of ESG under the Biden administration. Blue states are interested in incorporating ESG into pensions. Divestment from industries such as fossil fuels that the government deems unethical is of particular concern.

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The Costs and Consequences of Anti-ESG Legislation

In both instances, the lesson is that ESG is perilous when used as a political weapon. Anti-ESG legislation imposes billions of dollars in costs, has been labeled “anti-free market” by state chambers of commerce, and consolidates power in the hands of government officials. Environmentally ineffective and detrimental to returns, pro-ESG divestment is deemed counterproductive by the Chamber of Commerce, which also cites excessive disclosure regulations as counterproductive.

All things considered, the common adversary of America’s self-inflicted ESG wounds is ignorance.

ESG is primed for ambiguity. The umbrella term encompasses numerous investment and management techniques. Financial ESG focuses on maximizing returns, such as thematic risk management. During the past decade, fund managers flocked to this industry. In contrast, values-based ESG investment decisions, such as divestment from fossil fuels, may be willing to sacrifice returns.

This distinction explains why conservatives were surprised when Texas, contrary to the intent of the first anti-ESG law, blacklisted financial firms that continued to invest in fossil fuels. Anti-ESG laws may be effective political messaging against “woke capital,” but they endanger public pensions and state economies.

A common misconception among conservatives is that ESG is an elite-led conspiracy. Some ostensibly pro-liberty organizations argue that extensive government intervention is required to safeguard economic liberty. ESG has become the litmus test for the libertarian movement against the backdrop of political realignment.

If the rise of ESG was a conspiracy, then it was a mass conspiracy. Companies began implementing ESG not because “woke” C-suites demanded it, but because ESG values became popular with their business milieu, namely younger consumers, investors, lenders, and employees. Environmental reputation has a growing impact on a company’s earnings, credit rating, cost of capital, and human capital. Financial ESG is a predictable business response intended to improve shareholder returns.

It is absurd to assert that ESG undermines Milton Friedman’s theory. Voluntary ESG reinforces Friedman’s view that a company’s social responsibility is to maximize profits. Many businesses are compelled by the current business climate to incorporate stakeholders’ environmental and social preferences in order to maximize profit. Companies did this decades before ESG, and they will continue to do so even if ESG politics require a new terminology.

This does not imply that the entire ESG movement is the product of the invisible hand’s green thumb. Conservatives are justified in their skepticism regarding new regulations and government-crafted rules that favor specific industries. However, using the government as a club to promote the preferred industries of conservatives is not the solution.

Governments should be modest and neither pro-ESG nor anti-ESG. This includes averting politicization and empowering markets. Targeted policies could elucidate muddled ESG measurements and ratings while reinforcing the superiority of fiduciary standards for investors and retirees.

ESG also presents a concealed treasure of freedom. The surge of voluntary greening of businesses warrants reconsidering the environmental role of government to enable private markets rather than regulate economic activity.

Thankfully, conservatives are becoming more discriminating. The problem, according to a recent Republican hearing, is government ESG mandates, not ESG itself. The red states are shifting their focus from anti-ESG legislation to clarifying fiduciary duties. Florida, for instance, passed a law allowing state funds to invest in ESG while protecting against “woke” values investing. These limited solutions will safeguard millions of retirees from political weaponization.

The ESG solution for the United States resides in free and informed markets. Simply ask any business owner.

The R Street Institute’s director of energy and environmental policy is Devin Hartman. Former president and chief executive officer of the Electricity Consumers Resource Council, an organization that represents industrial energy consumers.

 

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Source: Washington Examiner

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