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National Review
National Review
24 May 2024
Matthew Lau


NextImg:ESG: A Luxury Good Faces Tougher Times

T he continued decline of ESG’s popularity since it peaked around 2021 is documented in two recently published reports. Both are worth recapping.

The first, “Putting Politics Over Pensions,” was released in April by the Committee to Unleash Prosperity and tracks large investment-management companies’ shareholder votes. In a report issued last year, the organization found that most of these companies routinely supported “even the most radical” shareholder resolutions, “putting political considerations over the financial interests of tens of millions of Americans whose pensions and other retirement funds they manage.” The committee’s latest report examines how more than 600 investment-management companies voted “on 50 of the most extreme ESG-oriented resolutions in the 2023 proxy voting season,” including divestment from oil and gas companies and the imposition of racial quotas in hiring.

While large investment companies still supported ESG resolutions more often than not, the report found that some funds, at least, are now backing away. “In 2023, private sector, non-ESG branded funds were 25 percent less likely to support extreme shareholder proposals than they were in 2022,” according to the report. “And the 25 most active voting funds were 30 percent less likely to support such proposals in 2023 relative to 2022.” The authors attributed this to two factors: increasing public pressure against ESG and the overzealousness of ESG proposals — which have become more extreme.

Indeed, while BlackRock’s global voting spotlight reported last year that shareholders submitted a record number of environmental and social-related proposals, “the quality of proposals continued to decline,” and BlackRock “observed a greater number of overly prescriptive proposals or ones lacking economic merit.” The proposals were “unlikely to help promote long-term shareholder value and received less support from shareholders, including BlackRock, than in years past.”

Echoing the Committee to Unleash Prosperity report was a short bulletin published in May by a trio of Stanford researchers, who noted, “Ample evidence suggests enthusiasm for ESG has waned.” Among the evidence cited: a decline in the number of S&P 500 companies citing ESG on earnings calls from a high of 155 as recently as 2021-Q4 to only 61 in 2023-Q2, negative or essentially zero net flows into ESG funds for six consecutive quarters ending 2023-Q3 (versus very strong inflows in preceding quarters), and declining shareholder support for environmental and social-proxy proposals, from 37.4 percent in 2021 to 25.5 percent in 2023. Just as BlackRock reported, the Stanford researchers noted that the number of environmental and social-proxy proposals continued to increase through 2023, but fewer were approved.

More evidence cited: A 2023 survey — done by the same researchers and published by the same institutions (Rock Center for Corporate Governance at Stanford University, Hoover Institution at Stanford University, and Stanford Graduate School of Business) as was the latest bulletin — found that investors were considerably less willing in 2023 than in 2022 to give up investment returns to achieve environmental or social objectives. Notably, while in 2022, 70 percent of Millennials and Gen Z investors and 57 percent of Gen X investors were “very concerned” about environmental issues, in 2023 this fell to only 49 percent for Millennials and Gen Z and 41 percent for Gen X. Concern about social issues also went down, although the decrease was not as pronounced.

The declining popularity of ESG, the Stanford researchers suggested, could well be because it is a luxury good. Like a Rolls Royce or a Rolex watch, demand for ESG goes up when it becomes more expensive “in part because of the social benefits the purchaser receives by signaling to others their ability to afford it.” And since “a case can be made that ESG is a luxury good,” it makes sense that the rising popularity in ESG took place when prosperity was rising and inflation low and when corporations had the means to spend on collateral objectives to gain public praise. Recent economic headwinds, however, changed all this. The scattershot approach of approving so many environmental and social initiatives cannot be sustained when cost pressures are high and not matched by income growth.

On top of the Committee to Unleash Prosperity and Stanford reports, a Wall Street Journal article earlier this year observed that online searches for ESG investing have returned to 2019 levels, and after peaking at 8.3 percent, now only 3.3 percent of new funds in the United States and Europe have “ESG” in their names. All this evidence points to the same thing: that increasingly, the idea, famously articulated by Milton Friedman, that the social responsibility of business is to increase its profits, continues to regain ground.