Date: 03/13/2023
Author: Mr. X
It’s my contention that all economies are controlled economies. The companies that benefit are those which have political backing as well as customer support. Political support by itself is insufficient – the long history of failure surrounding state-mandated monopolies should be proof of that. However, companies that can set themselves up as inconspicuous middleman or politically mandated rent seekers can survive for a long time, even if their role is essentially parasitic.
The craze for ESG (Environmental, Social, Governance) investing is a critical example. To put it bluntly, I hate it. ESG companies are defined by a subjective scorecard determined by some of the most powerful people in the world. It’s practically a parody of Woke Capital, in which companies can use pleasing language about equity and diversity in order to avoid sacrifices that would actually help people in the real world, such as raising wages. It’s this kind of strategy that has allowed Wall Street to not just avoid the populist uprising that seemed to be presaged by Occupy Wall Street, but actually frame itself as the leaders of progressive social change.
Nontheless, the world is as it is and ESG’s critics haven’t been able to lay a glove on it. That was proven yesterday when President Joe Biden used the first veto of his Administration to defend ESG investing. “I just signed this veto because the legislation passed by the Congress would put at risk the retirement savings of individuals across the country.” He further blamed the effort on “MAGA Republicans.”
This isn’t true. The legislation in question won two Democratic votes in the Senate from Joe Manchin of West Virginia and Jon Tester of Montana. Not coincidentally, both are up for re-election. “Despite a clear and bipartisan rejection of the rule from Congress, President Biden is choosing to put his administration’s progressive agenda above the well-being of the American people,” said Senator Manchin. He went on to call it “absolutely infuriating” and said the ESG rule “will weaken our energy, national and economic security while jeopardizing the hard-earned retirement savings of 150 million West Virginians and Americans.”
Tbh, he just wants to get re-elected. I wouldn’t be surprised if he quietly supports it.
“Retirement plan fiduciaries should be able to consider any factor that maximizes financial returns for retirees across the country,” President Biden said in a message to the House. “That is not controversial – that is common sense.” Of course, that is not what his veto accomplishes. The ESG rule implemented by the Biden Labor Department allows retirement plan fiduciaries to consider ESG factors and pick investments based on “collateral benefits other than investment returns.” It does not allow fiduciaries to pick investments purely based on political factors or to abandon their financial responsibilities. However, it weakens the standard.
“Instead of siding with Americans – who are increasingly unable to afford retirement – Biden’s veto puts the climate activists and special interest groups he is beholden to ahead of middle-class Americans,” said Andy Barr (R-KY). He charged that President Biden “is beholden to woke special interest groups, NOT the American people.”
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Yet those “woke special interest groups” are an important part of the Democratic coalition. Politics is about rewarding friends and punishing enemies – what President Biden did is just politics 101. It would have been foolish had he not done this. And besides, there is an argument that President Biden and others can make about the long-term interests of the country. If you truly believe that climate change, income inequality, gun violence, or other targets of ESG investments are barriers to American prosperity, why shouldn’t major investments prefer socially conscious companies? It would be irresponsible to do otherwise.
If anything, I expect the trend to strengthen. Currently, fiduciaries must at least regard the economic benefit of a certain investment to be roughly equal to a non-ESG investment. I’d expect that to change with time.
More importantly, ESG investments have a self-fulfilling quality to them. As elite institutions continue to align with ESG companies and investments, those who do not meet the new standards will be left behind. Consider gun companies. Led by the financial institution Amalgamated, a growing number of financial institutions are trying to create a new merchant category that will characterize purchases of guns and ammunition. That will pave the way for discriminatory treatment against firearms purchases, making it less financially lucrative. Over time, as the industry becomes less profitable, it will have less money to donate to supportive candidates or spend on lobbying, even as its opponents continue to make more. This is the way an industry can be choked off entirely.
There was a time when the tobacco industry was considered too politically powerful. Today, it is struggling for survival – and its best bet may be to try to get on board with marijuana. The firearms industry could conceivably be next. Oil companies are already moving towards clean energy as a political tactic, even though there is little possibility Western economies will be able to move past petroleum anytime soon. For better or worse, there is no wall between capital and state, and the choices of governments and politicians determine which industries can survive and which will be driven into the dirt. President Biden took forceful action to protect the industries he prefers and punish those he did not.
Contrary to his justification, it wasn’t about protecting Americans’ retirement benefits. But Americans who want to enjoy retirement need to look at the financial effects of his decision – if the federal government is opposed to a particular industry, don’t invest in it for the long term. ESG will remain useful as an indication of what those in power support, whether we like it or not.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.
