The Daily - What Is E.S.G., and Why Are Republicans So Mad About It?

Episode Date: March 13, 2023

The principle behind E.S.G. is that investors should look beyond just whether a company can make a profit and take into account other factors, such as its environmental impact and action on social issues.But critics of that investment strategy, mostly Republicans, say that Wall Street has taken a sharp left turn, attacking what they term “woke capitalism.”Guest: David Gelles, a climate correspondent for The New York Times.Background reading: How did environmentally conscious investing became a target of conservatives?Republicans are likely to keep making E.S.G. a political punching bag.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday.

From The New York Times, I'm Michael Barbaro. This is The Daily. In the coming days, President Biden will issue the first veto of his presidency in defense of an investment philosophy that many Americans have never heard of. philosophy that many Americans have never heard of. Today, my colleague David Gellis on why that philosophy has become so controversial. It's Monday, March 13th. I ever had, I imagined it would be a rejection of a big social proposal from Republicans, maybe something related to abortion or a cherished Democratic program. And instead,

we now expect Biden to wield his first veto pen to defend an acronym that I'm going to be honest, I haven't really ever heard of before, ESG. It is not what most people had on their bingo cards. The fact that Biden's first veto would be about this arcane investing philosophy that has sort of out of nowhere become this political lightning rod. Mm-hmm. No, wasn't on my bingo card. So just to get this out of the way, what is ESG? What is this investment philosophy? ESG is one of these acronyms that Wall Street comes up with to explain what it is they think they're trying to do. The E stands for environmental priorities. That's things like reducing carbon emissions. The S stands for

social factors. That is things like good labor policies and improving diversity in the workplace. And the G is for governance, that is, good corporate governance, making sure a corporation's house is in order and that their executive compensation policies are best in class. make sure that companies were not just doing right for investors and taking care of their bottom line, but also taking care of all these sort of softer issues that people have decided companies ought to be paying attention to over the last couple of decades. Okay. Well, that timeframe of two decades or so makes me want to understand exactly where ESG comes from. What's the origin story behind this? ESG comes from? What's the origin story behind this? Well, the term itself has been around since 2004, but it really isn't until the years after the financial crisis that it starts picking up steam. And you have to remember that the financial crisis, especially here in the United States, was this traumatic event.

Millions of homeowners saw their savings and their assets wiped out. Big banks were bailed out by the government. None of the people responsible seemed to go to jail. There is fresh evidence that Americans are increasingly angry at Wall Street, at Washington, and more. And there was a real sense of betrayal by the American public. Whose side are you on? Main Street or Wall Street and the big corporations? Trust will be Wall Street's issue for a long time to come. In the wake of that, Wall Street, and big business in particular, needed sort of a rebranding. And lots of new narratives came to the fore.

There used to be a myth that you couldn't do well and do good at the same time. You certainly know the role that corporate Americans can play when they put their mind to things. There was CSR. They are starting with their own CSR operations, corporate social responsibility. For corporate social responsibility, people started talking about DEI. The issue is not finding diverse

candidates, it's making sure that they have access to hiring. Diversity, equity, and inclusion. But at the end of the day... There's a process in investment called ESG. And that's really catching on with investors right now. ESG emerges as this sort of influential umbrella term. This is the sort of work that we do at our institution. Yes.

ESG. ESG. There's too many letters in here. What's ESG? ESG is Environmental, Social, and Governance Standards. It's the Uber acronym that encompasses all of these other efforts that businesses seem to be pursuing to do right, not just for their investors, but for society too. There are about seven different areas that we look at. The environment, diversity practices. A lot of these issues are things that companies believe they can measure.

For example, companies can track how much pollution and waste they're putting out there. They can measure their gender and diversity policies. And they can tell you how much employees on balance are making and how that's affecting things like income inequality at the country at large. And so it creates the framework for a real industry that is able to start measuring just how good different companies are doing on their ESG journeys. I think there's hope that every company can have a very strong environmental social governance profile.

David, as admirable as all those measurable metrics might be, there are plenty of investors who just want to make money. They don't care whether the corporation they're buying stock in or the fund that they're buying shares of has diversity or cares about the environment. So isn't that a significant limitation on this philosophy? That is certainly an argument many of ESG's critics make. But here's the jujitsu of ESG, right? ESG proponents would tell you that not only are a lot of these things that ESG is paying attention to good for the world, but they're actually good for business in the long term. This strategy's proponents will tell you that it's

good long-term investing for companies to wean themselves off fossil fuels because the science is clear, society needs to stop burning fossil fuels. So the companies that are further along in that journey, they say, are going to be better investments. Interesting. Similarly, on the diversity side, many people would argue that more diverse corporations that are reflective of the broad and diverse population, that is the United States, for example, are going to be better suited to meet the needs and consumer demands of an increasingly diverse marketplace. And all of this reinforces this

broader point that proponents of ESG make, which is that this isn't just about doing the right thing for the world or the right thing for society, that at the end of the day, all of this is good for business. Got it. Okay. So how widely adopted does this ESG philosophy become? It's really hard to find a company these days that doesn't lean in to ESG at some level. Apple has a plan and a promise to make every single Apple product carbon neutral by 2030. Even yours. Apple, Nike.

Respect for human rights is embedded in Walmart's core values. Walmart, Walgreens, Target. Here at Target, we've had a longstanding commitment to diversity, equity, and inclusion. All of these companies have big operations where they're pursuing their ESG goals and telling the world about it. Our efforts are making a difference in our stores and our communities. And it's not only the companies that are doing it themselves. From this emerges a whole cottage industry of ratings agencies, companies like Bloomberg and Dow Jones and Thomson Reuters them in portfolios that retirement funds that invest in, they start creating ESG funds.

Wow. So that the biggest investment firms in the world, BlackRock, Vanguard, these titans of finance are now increasingly putting their money into an ESG strategy that is taking up more and more of the assets under their management, as much as $18 trillion in the last couple of years. Wow. I mean, that's a huge amount of money and very clearly suggests that this is a widespread, meaningful movement within American business right now. It's become a huge deal. But even as it is becoming just ubiquitous in the corporate world,

it's not without its critics. There are those who dispute the degree to which they see it sort of prioritizing certain social and political issues they might not agree with. And there are those who just dispute this premise that it's actually a good long-term investment to pursue these policies. And over the last couple years,

we've seen those critics get organized and go on the offensive. We'll be right back. David, tell us that story of ESG's opponents. that story of ESG's opponents. I think one of the most crucial moments in the backlash against ESG comes about three years ago, right around the start of the pandemic, when independent oil producers, small drillers in Texas, find themselves going to the usual banks that they've worked with for decades now, JPMorgan Chase among them, and saying, hey, we'd like some money for continued operations, a little more money for new exploration. And the banks say, actually, we're not companies to pay back their loans over time. Now, what the oil men hear is that J.P. Morgan's not lending us money because they're turning their back on fossil fuels full stop. And they start complaining. They start complaining to the Texas state legislature.

They start complaining to the Texas Railroad Commission, which is the energy regulator in the state. And they start complaining to conservative activists, groups like the Texas Public Policy Foundation. All of these major influential forces in Texas start hearing their concerns. And in 2020, a bill emerges in the Texas legislature and is signed by Governor Greg Abbott that essentially says the state needs to stop doing business with financial firms that are, quote unquote, boycotting fossil fuels. That is, companies that have made it their mission to reduce their exposure to oil and gas, which is, of course, the biggest industry in Texas. The Texas state legislature says, well, if you are going to stop doing business with us, we're going to stop doing

business with you. And this bill is essentially designed to punish companies that are pursuing the E in ESG. And what does punishing companies that are worried about the E and ESG actually look like once this bill is signed into law? that it deemed were quote-unquote boycotting fossil fuels. And it set in motion a process of actually pulling billions of dollars of state money, funds held by the retirement accounts of teachers and firefighters and police officers out of some of the most mainstream investment vehicles available on the market today, companies like BlackRock and Credit Suisse. available on the market today. Companies like BlackRock and Credit Suisse.

And is that actually in the financial interest of either Texas or its retirees and pensioners? Not necessarily. These big financial institutions are big because they're good at what they do. And as a result, they often have lower fee structures. They tend to have pretty good returns over time. And in fact, there's been a flurry of studies over the last couple months

that show that in states like Texas that do stop doing business with big mainstream financial institutions, they are likely to incur hundreds of millions of dollars in additional fees by working with smaller players on Wall Street. Got it. So this backlash starts in Texas with these wounded oilmen not getting their loans.

It escalates to the Texas legislature and the Texas governor. How much bigger does it become than Texas? This has become a truly national movement. So very quickly, something called ESG has become one of the most destructive forces in the American economy. About a half dozen states have passed very, very similar laws. Yeah, West Virginia today announcing that it is severing ties with five financial institutions that the treasury there deems as being discriminatory towards certain industries. The state of Louisiana is pulling nearly $800 million from BlackRock,

says its, quote, blatantly anti-fossil fuel policies would destroy Louisiana's economy. Other states, including West Virginia and Louisiana. By the way, Kentucky is a fossil fuel producing state. It's joining a growing number of states saying no to woke capitalism. It's West Virginia, also Florida, Texas, Utah. Have pulled hundreds of millions of dollars out of funds managed by companies like BlackRock. BlackRock, Goldman Sachs, JP Morgan, Morgan Stanley, and Wells Fargo. This is a growing movement in pushback against ESG and woke capitalism.

And we've seen dozens of conservative legislatures around the country push bills like this. For us, it just does not make sense. We're not going to pay for our own destruction, right? Even in democratic states where they are unlikely to pass at this very moment. It is truly a big and growing national trend right now. Every state in this country still has massive fossil fuel businesses operating today, and the conservative legislatures see it as part of their mission to defend those companies. But what's going on here is actually bigger than just that. Critics have a much broader set of concerns. They see ESG writ large as sort of a Trojan horse

that is advancing liberal policy priorities. Everything from diversity in the workplace to LGBTQ rights to economic policies that don't necessarily focus on the bottom line. And that gets to this essential point that the critics of ESG make. They say that the point of business, as you said earlier, Michael, is to make money. And that with the rise of ESG, that fundamental imperative, the profit motive, is being lost. But David, as I recall, the proponents of ESG argue forcefully that this is not just a do-gooderism philosophy. They say it's a money-making philosophy. So do these mostly Republican skeptics and critics of ESG, do they have a point? Now that this has been in place across so many companies for a number of years, are they right to question whether it's actually improving financial returns? There are a lot of ESG funds, and there are a lot of ways to slice

and dice the timeframe on which you measure the profitability of any of these funds. The upshot is there are studies that conclude that ESG investing is indeed a good bet in the long term. But you only need to look at the markets to understand that if you had divested from all your fossil fuel investments last year, when oil and gas companies were some of the major winners because of the war in Ukraine, well, you missed out on a big market upswing. And that is really proof positive to critics that ESG is just not good business practice at the end of the day. Okay, well, let's turn to

the other significant critique here, which is that ESGs are a kind of liberal Trojan horse. Help me understand what exactly Republicans fear. Do they fear that at this point, ESG has become so popular that companies are being pressured into doing it, even if they don't want to, so that they can get the proper ratings?

Is that a fear? That's exactly right. And beyond that, they would say that many of the CEOs of America's largest companies have really adopted what they see as a progressive political agenda that they are trying to implement. They look at companies protesting President Trump's immigration policies. They look at companies doing things like objecting to abortion bans in different states. And they see

the business world, corporate America, effectively in their minds acting as a proxy for the Democratic Party. And that's why this whole movement has gone beyond state houses to Congress, where just a couple weeks ago, Republicans in the House and then Republicans in the Senate, joined by a couple Democratic senators, Republicans in the Senate, joined by a couple Democratic senators, passed a bill that would prevent the people that invest retirement funds on behalf of federal workers from considering ESG factors when making their investment decisions. And so that's, of course, how we get to Joe Biden promising to veto this bill, which we touched on at the beginning of our conversation, right? Not what we had on our bingo cards. Right. And why has the president said that he's going to veto this? Because it certainly sounds like Biden putting his seal of approval on ESG as a philosophy. It is. And I think it's important to remember two things at the same time here. I think the Biden administration in vetoing this rule is essentially backing

the status quo in the financial industry, this whole apparatus of corporations and ratings agencies and fund managers that are invested in ESG and that are arguing that it is a good long-term investment. But it's impossible not to also remember that that whole apparatus is largely supporting policy priorities that are in line with the Biden administration's own political agenda. Right, and I can't help thinking that a Democratic president's promise to veto a bill that would reign in ESG is only going to further antagonize the critics of ESG who think it's truly just doing the financial crisis, when the reputations of big business and Wall Street in particular were so tarnished, and many people viewed big business at large as sort of morally bankrupt. The response over the last 15 years or so has been this increased engagement in political, social, and sometimes highly controversial issues

by the biggest CEOs in the country. That has gotten to a point now where politicians, especially on the right, are essentially questioning whether it's really CEOs who we want to be listening to. Why, they ask, are we letting CEOs set policy when they are the elected leaders? So, David, I want to zoom really far out here because at the heart of this whole fight, and really at the heart of this whole conversation we're having, is a power struggle, right? Who gets to tell society how to operate, what priorities to emphasize? And it strikes me that for a very long time, Republican elected officials had no problem giving corporations a very significant amount of power in American society. And it seems like this

worry about giving corporations too much power has really only arrived on Republicans' radar since those companies began espousing a social agenda at odds with that of the Republican Party. For the longest time, for decades really, Republicans, the GOP, was the party of big business. And I think they feel like they've lost this historic and very powerful ally. And some of all of this legislation is reflective of this deep sort of identity crisis that the Republican Party is having as they look to corporate America and see that some of their most trusted allies for the past generation are suddenly not standing by their side. Which is painful, I have to imagine. I think it's painful. I think it's disorienting. There was a pretty amazing episode just very recently when Mitch McConnell, the Senate majority leader, was asked about the degree to

which just how engaged in politics businesses have become. And he said businesses should stay out of politics. And then he was asked, well, should they stop giving money to politicians? And he said, well, no, not necessarily. Right. I mean, so that really makes me wonder if what we're witnessing here is a Republican frustration with where corporate winds are now blowing, right? I mean, if we're talking about $18 trillion of money

pouring into these ESG funds, it starts to get hard to see these Republican laws as anything but a kind of protest by people who feel that they have ended up on the losing side of this kind of corporate cultural battle, right? And I wonder if it's reached a point in the business world where it's kind of impossible to stop ESG, even if Republicans really wanted to.

If you ask the CEO of a big company, as I often do, if all this noise is making an impact on their ESG goals, they will very quickly tell you that they are committed to going net zero carbon emissions in the next couple of decades. They will tell you that they believe a diverse workforce is a healthy and productive workforce, and they are all for good governance. In the same breath, they will tell you, off the record usually, that if they never have to say the word ESG again, they would be totally fine with that. This whole debate has become a political liability that they don't necessarily like dealing with every day, even as they continue to fundamentally believe in a lot of these priorities as the right thing to do in the long term.

So whether or not we call it ESG two years from now, these policy priorities are not going anywhere anytime soon. Well, David, thank you very much. I appreciate it. Thank you, Michael. We'll be right back. Here's what else you need to know today. On Sunday night, federal regulators approved an unusual intervention into the banking industry to avoid a financial crisis after the government shut down two

regional banks. The intervention would ensure that everyone with money at the two banks, Silicon Valley Bank and Signature Bank, would be paid back in full even if their deposits exceeded the $250,000 normally insured by the government. It was the culmination of a frenzied four days in which customers of Silicon Valley Bank, fearful about its financial health, withdrew tens of billions of dollars, forcing regulators to take it over on Friday. Soon, those fears spread to customers of similar banks, including Signature Bank. That in turn raised worries that the entire banking system might be at risk, and prompted the Biden administration to declare that all depositors at both banks would have access to all their money as of this morning.

That decision and what led to it will be the subject of tomorrow's show. Today's episode was produced by Will Reed, Alex Stern, Stella Tan, and Michael Simon-Johnson. It was edited by Lisa Chow and Anita Bottigio, contains original music by Dan Powell, Rowan Emisto, and Marion Lozano, and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Landsberg of Winderle. That's it for The Daily. I'm Michael Barbaro. See you tomorrow.