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What Are ESG Policies, and Why Are They Harmful?

Activists are using ESG policies as a cudgel to try to force companies to bend to the will of their political causes.
Caroline Reeves
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Revised
Activists are using ESG policies as a cudgel to try to force companies to bend to the will of their political causes.

Recently, Heritage Action for America unveiled a new initiative: ESG Hurts.

You’ve likely heard of ESG. It stands for Environmental, Social, and Governance, a set of criteria that investors are using to measure companies’ supposed risks and long-term sustainability. Activists are using ESG policies as a cudgel to try to force companies to bend to the will of their political causes.

As Heritage Action explains, ESG is being used to “punish” American energy and advance a “‘woke’ cultural agenda … from the boardroom down to the factory floor.”

“This agenda is being pushed by green activists, woke culture warriors, global elites, and the big businesses they control.”

Over the past two decades, companies all over the world have started abiding by the demands imposed on them by ESG. In fact, more than 90 percent of S&P 500 companies have adopted practices or changed their business policies due to ESG, as well as about 70 percent of Russell 1000 companies. But now Americans are waking up to the danger ESG policies pose. A growing number of individuals, groups, and companies are paving an alternative path forward for business.

 

How ESG began

Although many Americans have heard of ESG, not many know where it came from.

Almost 20 years ago, former United Nations Secretary General Kofi Annan contacted over 50 CEOs of large financial institutions, encouraging them to join forces in partnership with the International Finance Corporation (IFC) and the Swiss government.

Their goal? To force ESG investment methods into the market. One year later, they produced a report titled “Who Cares Wins,” which argued that weaving environmental, social, and governance policies into businesses made for better sustainability—and a brighter future for the world.

Fast-forward to 2006, and “Who Cares Wins” was published in the UN’s Principles for Responsible Investment (PRI) report. According to Forbes, this was the first time ESG criteria were used to estimate the value of companies.

At the time, 63 investment companies had assigned $6.3 trillion in assets to companies abiding by ESG policies. Since then, the focus on ESG issues has only intensified; Forbes reports that as of June 2019, 2,450 investment companies have assigned over $80 trillion in assets to ESG. Major companies such as Vanguard Group and BlackRock Inc. lead the pack, and today, most companies are expected to incorporate ESG policies into their workplaces.

While ESG investment methodology is shrouded in financial jargon and data, don’t underestimate the political motivations driving it. Those promoting ESG claim it will act as a “force for good on a truly massive scale.” But that raises a big question: what do they mean by “good”?

Consistently, the ESG vision of “good” coincides with progressive political goals. For example, The New York Times has reported that according to the nonprofit group Confluence Philanthropy, “[r]eproductive rights at the corporate level are the newest frontier for the environmental, social and governance investing framework.” Those “rights,” of course, refer to abortion access—just one example of an ideological agenda item under the ESG umbrella.

 

Understanding ESG policies

In a telling article published by the advocacy organization GreenBiz, business leaders are told they must integrate ESG strategies into their workplaces with an all-or-nothing mindset: “Companies will not get return on investments unless full integration has succeeded,” the article claims. “Top management needs to fully go for it 100 percent or else it will fail.”

If a company decides not to adopt ESG policies, it risks being de-platformed. So what does adopting ESG policies actually look like?

First, if a company wants to boost its environmental score, it needs to go green. Facing pressure from investors, banks, and shareholders, companies are rushing to appear as if they’re doing their part to save the planet.

This includes creating policies that appear to address climate change—prioritizing wind and solar energy, limiting waste and water usage, and combating pollution.

Second, in order to appear more socially conscious—the “S” in ESG—companies are coerced into educating their employees on critical race theory, supporting radical gender ideology, and adopting pro-abortion policies.

The hope is that if a company can prove that it emphasizes diversity, equity, and inclusion (DEI) in the workplace, or that it provides travel coverage for employees to access abortions out of state, it will appear more valuable to investors, and hopefully major banking institutions will grant them bigger loans.

Lastly, a company’s governance score is a measure of the diversity among its corporate leaders, the fairness of company shareholder rights, and compensation of CEOs and top executives.

Companies that rank well in this category have gender and racial minorities represented in their C-suites and allow their shareholders to vote on executives’ compensation packages.

 

Who does ESG hurt?

When companies embrace ESG, they are encouraged to prioritize DEI quotas and ideological initiatives over providing quality products and services to customers. The damaging effects of ESG policies are numerous, affecting every American.

Employees who disagree with a company’s politicized pursuits are often coerced into silence. Polarizing activist agendas like abortion and critical race theory are smuggled into our institutions. Customer needs are shelved for the sake of attaining better ESG rankings, causing businesses to suffer.

ESG threatens to tear at the fabric of our freedom.

 

The backlash against ESG policies

As ESG has spread throughout corporate America, many are waking up to its dangers and proving that there’s another, better way to do business.

A recent Newsweek article chronicles the rise of groups like Strive Asset Management, Free Enterprise Project, and 2ndVote, all dedicated to putting a stop to far-left activism in corporations.

Vivek Ramaswamy, author of Woke, Inc.: Inside Corporate America’s Social Justice Scam and the founder of Strive, spoke with Newsweek about the problem.

“BlackRock, State Street and Vanguard are using the capital of their clients—everyday Americans—to advocate for policies most of them probably don’t agree with,” he said. “The role of a depoliticized private sector is to bring us together, whether we are Black or white, red or blue. A divided body politic is dangerous, and this problem is caused in part by asset managers who demand that CEOs engage in a political agenda.”

People are also waking up to the fact that in addition to being detrimental to civil society, adopting ESG isn’t beneficial for a company in the long run. In a 2021 study, Vanessa Burbano of Columbia University looked at the benefits and costs of corporate politicking and found that companies that go “woke” have little to gain and much to lose:

“Among [the study’s] conclusions, Burbano says: ‘Employees who disagree with a political stance taken by their companies are demotivated—they do less extra work and do lower quality work.’ On the flip side, ‘Those who agree with a political stance taken by their companies are not motivated—they behave no statistically differently than a control group.’ There's similarly a downside in regard to wooing consumers, as they are likely to boycott over a political position they don't like but are not likely to ‘buycott’ over stances they agree with.”

Although ESG policies have taken hold of corporate America, the tides may be changing. Opposition to ESG is growing, and companies that have refused to bend the knee to ideology have proven that there is success in independent thinking.

In a special report on ESG, The Economist highlights how the environmental, social, and governance approach to investing is “broken.” And problems run the gamut.

To start with, ESG scoring is subjective, and ESG rating agencies are infamously inconsistent. Then there’s the problem that ESG funds are simply not delivering on the promises they made; ESG funds are actually underperforming the broader market. Third, ESG has been captured by ideologues and financial elites who either want to smuggle an ideological agenda through the private sector or use the flashy label to overcharge for asset management fees.

ESG is being used to circumvent the free-market process, and companies are being coerced into adopting ESG policies to the advantage of large asset-management companies and activists. Heritage’s Andy Puzder puts it well: “Rather than encouraging companies to focus on generating returns for investors by providing the best quality products and services at the best price, ESG incentivizes the politicization of every aspect of a company’s business,” he says. “It is socialism in sheep’s clothing.”

That’s why Inspire Investing CEO Robert Netzly just exited the ESG scene and why Vident Financial chief economist Jerry Bowyer predicts that the tide is turning against ESG. “[The] controversy is now so undeniable that the ESG industry is lashing back at the backlash,” Bowyer says.

 

ADF's Viewpoint Diversity Score

Netzly and Bowyer both serve on the advisory council for Alliance Defending Freedom’s Viewpoint Diversity Score, which launched its first annual Viewpoint Diversity Score Business Index earlier this year.

Examining 50 companies on the Fortune 1000 list, the Business Index is the first comprehensive benchmark designed to measure corporate respect for religious and ideological diversity in the market, workplace, and public square. True diversity requires protecting freedom of expression and belief for employees, customers, shareholders, and other stakeholders.

Companies aren’t just economic actors; many have emerged as social activists on a variety of causes and provide funding and essential services to countless nonprofits. Complicity in cancel culture is not only harmful to companies’ workforces, brand integrity, and bottom lines—it also poses a serious threat to open markets and our democratic republic.

It’s time for businesses to recommit to respecting the diverse religious and ideological views of their employees, customers, shareholders, and stakeholders.

Learn more about ADF’s Viewpoint Diversity Score and Business Index at www.ViewpointDiversityScore.org.

Caroline Reeves
Strategic Communications Writer
Caroline Reeves serves as Strategic Communications Writer at Alliance Defending Freedom