Some advocates of ESG practices from the business world oppose the charge that ESG is anti-capitalist.

NRPLUS MEMBER ARTICLE E nvironmental, social, and governance investing (ESG) brings with it immediate partisan connotations. Favorable use of the term “ESG” is a nearly perfect indicator of support for a whole set of Democratic Party policies. Meanwhile, to criticize it is a GOP marker. Some advocates of ESG practices from the business world, such as Michael Bloomberg, however, oppose the charge that ESG is anti-capitalist, arguing that it is an example of private firms acting in the interests of their clients.

The Bloomberg claim has, in turn, drawn criticism from commentators such as Stand Together’s Russ Greene, who, in these pages, has argued that “ESG is a bad idea for the same reasons that central planning and cronyism are always bad ideas,” that it is “an attempt to impose a single approach on everyone, from the top down,” and that conservatives ought to combat it, sticking with more long-standing tenets of shareholder primacy. Greene might not dispute that the issues Bloomberg raises — such as long-term climate risk — are worthy of investor consideration, but, with his focus on traditional shareholder values, he would probably disagree with the weight that should be attached to them.

While Greene is correct to be concerned with the effects of existing ESG priorities, the ESG model should not be wholly dismissed. Rather, ESG offers a useful template to conservatives, free marketeers, and the fusionist Right. A reconfigured ESG could enable the Right to exert influence over economic and social outcomes without resorting to the cudgel of government policy. Bloomberg, it turns out, has a point.

As opposed to the Economist’s recommendation to pare ESG down to the “E” — and to truncate environmental concerns solely to greenhouse-gas emissions — a more conservative approach would be to pivot in a different direction and emphasize sound corporate governance, national resilience, and constructive social policy.

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One obvious goal is limiting exposure to the influence of the Chinese Communist Party (CCP) and withdrawing passive consent to its misdeeds. While legislation is making important inroads — for example, on the problem of forced-labor infecting the solar-energy supply chain — private funds and public pension funds remain entangled with China’s state-owned enterprises.

One small example can be found in the New York City Employees’ Retirement System (NYCERS) annual financial report. Seventeen percent of NYCERS’s 2022 investment portfolio was made up of international equities. Nestled among dozens of other brokers to whom NYCERS paid commissions for trading those equities is China International Capital Co. (CICC), a financial-services firm whose largest shareholder is the Chinese government.

That a New York City public pension fund is using the services of such a company (CICC traded more than 1,400,000 shares on behalf of NYCERS in the year ending June 30, 2022) is something that many conservatives would protest because of its “social” and “governance” implications, piddly though the traded dollar value may be as a fraction of NYCERS’ total activity. The bigger point is not that NYCERS does business with a Chinese broker, but that it may be providing capital to CCP-controlled companies. (A request from the writer for a complete list of NYCERS’ Chinese equity holdings has yet to be fulfilled.) While American public-pension beneficiaries (and the taxpayers underwriting those benefits) do not want funds to forgo market gains, to benefit from relationships with regimes that perpetrate injustice is unwanted as well.

In a contrast to the existing ESG priorities, which, according to a 2021 Invesco report, push capital toward China, conservatives may favor a concentration on businesses that advance U.S. national interests in areas such as energy and supply-chain security. Venture capitalist firm Andreessen Horowitz’s American Dynamism 50 project exhibits this approach, funding a pool of companies that tackle economic and defense problems of national importance.

Another example of a social end toward which a great number of conservatives would be keen to urge corporations is more generous family-leave policies. American norms around family leave for births and other events notoriously lag behind those of our peers. The mechanism of ESG is a way for pro-natalists to influence social conditions through the operation of the market, rather than through coercive state means. Other conservative causes could surely follow the same pattern. Indeed, examples of conservatism-inflected investing already exist, such as Ave Maria Funds, which screen out companies that promote or support activities contrary to the core moral teachings of the Catholic Church, and Guidestone Funds, which is affiliated with the Southern Baptist Convention.

An objection to this line of reasoning is that individual shareholders often no longer hold power, that they are usurped, in effect, by the managers of funds such as BlackRock, who may have agendas of their own. This argument cannot be ignored, but the problem can perhaps be resolved through shareholder engagement, an idea that entrepreneur Vivek Ramaswamy champions. Ramaswamy advocates for “strictly pro-fiduciary” ends, but the means hold regardless. In this context, it’s worth noting that companies such as BlackRock are instituting programs that essentially offer clients who hold “their” shares in a corporation through its funds the right to vote on those shares.

As Ramaswamy stresses, electing to invest in funds managed according to ESG principles or a more conservative configuration thereof involves a trade-off between pecuniary and nonpecuniary targets. Informed by AQR head Cliff Asness’s maxim that a constrained portfolio cannot outperform an unconstrained portfolio, opting for an environmental, social, or governance tilt necessarily entails a willingness to accept lower returns. As stalwart ESG critic Andrew Stuttaford reported recently, evidence supports this thesis, with the price of BlackRock’s ESG Screened S&P 500 ETF having declined about 22 percent in the 2022 calendar year, underperforming the S&P 500, which fell around 20 percent over the same period. It is important for those on the Right to communicate their ethical outlooks and the investment trade-offs that may come with them. Equally, they must accept that if their reformed ESG drags too heavily on returns, it will fail in the marketplace.

For the Right to discard in its entirety the role of ethical values in investing is to cede the moral high ground to the Left, to crown it as a home for the ethically aware and, potentially, to grant undue credence to the insidious environmental and racialist nostrums that have become the leading signifiers of the ESG approach.

A parallel example exists in education. In recent years, increased awareness of what is going on in public schools has led many parents to the conclusion that our system now preaches as much as it teaches. The truth is that values always have been a part of education. What has changed is the profundity of disagreements among the American people. Investing has functioned in much the same way. Questions, or presumptions, about values have always been there, but we are becoming more attuned to them. Investing, like education, is values-laden — and can be no other way. As with educational pluralism, an investing and business pluralism that respects our differing ethical views will be our best option for lowering the pressure in our public discourse — a point Stand Together’s Greene makes well.

But while Greene suggests that thinking about investing in an ethically explicit way is to be co-opted by the Left, there is an abiding, benign compatibility between some of ESG’s abstract fundamentals, the values conservatives hold, and market capitalism. Whether public or private money is at stake, values cannot be disentangled from investing. The question for us is whose values will guide investment decisions.