By Paul Tice

As the current banking crisis continues to roll through the global financial system, one common denominator among all the bank failures to date has been corporate ESG policies promoting climate action, diversity, equity, and inclusion, and other progressive initiatives.

Silicon Valley Bank , the first bank to collapse, lent to more than 1,500 start-up climate tech firms, the majority of which had no cash flow or ability to service bank debt. Most of the directors on the bank’s board had no banking experience but were instead chosen for the DEI boxes that they ticked.

Signature Bank, the second institution to be seized by federal regulators, prided itself on being “the first bank in the United States to have an openly gay man on the board” and held internal seminars on the use of proper pronouns in the workplace. The bank was also an official supporter of the Task Force on Climate-Related Financial Disclosures and had started to disclose its lending portfolio emissions as the first step toward a net-zero banking model.

First Republic Bank, which recently required a $30 billion bailout from its industry peers to stay afloat, became the first large U.S. bank to stop lending to the fossil fuels industry back in 2021, achieving carbon neutrality that same year.

Even Credit Suisse, the most systemically important bank to fail thus far, believed in “sustainable finance for a better world” and did its part to direct capital toward the achievement of the United Nations’ Sustainable Development Goals for 2030. The Swiss bank also actively promoted its transgender “allyship” by having a high-profile, non-binary, gender-fluid section head within its Global Markets Technology group.

In response, the hashtag “GoWokeGoBroke” has gone viral over the last month. But sustainability activists have been quick to argue that ESG was not the direct cause of any of the recent bank collapses. Technically speaking, this is a valid point. Rising interest rates, hot deposits, and faulty asset-liability management doomed Silicon Valley, Signature, and First Republic, whereas Credit Suisse was a slow-motion, scandal-ridden management train wreck for years.

Nonetheless, the recent spate of bank failures may still spell the end for ESG on Wall Street since, in all of the above cases, a corporate focus on ESG was more than just a distraction and time-sink for executives and employees. It was symptomatic of more deep-seated fundamental operating problems with these financial institutions, and clearly a comorbidity of weak management.

Touting one’s sustainable finance credentials now correlates with bad “G” governance under the ESG system’s own rubric. It raises a red flag for analysts to perform enhanced due diligence around any financial firms that fully embrace ESG. Shareholder activists scoping out poorly run corporate targets and hedge funds looking for short candidates should probably start including a pro-ESG filter in their initial screening criteria.

Investors would be well advised to charge more for the capital that they allocate to banks that publish glossy hundred-page sustainability reports and splash 17-color pinwheels across all their corporate presentations, which is ironic since this is the antithesis of what the ESG movement is trying to accomplish.

At the very least, the recent run of bank collapses offers still more proof that ESG does not lead to better business performance or investment outcomes. This is fatal to the core ESG argument that activist groups have been making for years that such policies “build long-term value” for companies and investors.

While a showy sustainable image may attract the marginal millennial customer or consumer during good times, such corporate virtuosity won’t prevent a bank run when the going gets tough. No matter how much the two terms are conflated, sustainability (or the appearance thereof) is not the same thing as financial solvency, with the latter being the only thing that really matters to investors and the markets.

Ever since the bankruptcy of Lehman Brothers triggered the 2008 global financial crisis, Wall Street has been bracing for the next “Lehman moment,” often mistaking minor volatility events for something more catastrophic. While the current problems centered in the bank market are likely to continue spreading, the more-seismic systemic shock this time around may be to the progressive ESG movement.

Overlooked in all the Lehman post-mortems over the past 15 years has been the failed investment bank’s own ESG policy proclivities toward the end.

In the last few years of Lehman’s existence, its president and COO, Joe Gregory, spent almost all his time promoting diversity and inclusion programs at the company. Instead of meeting with clients and participating in quarterly earnings calls, Gregory regularly hosted internal off-site conferences where he lectured the firm’s managing directors on how clients and customers wanted to “see people that looked like them on the other side of the table,” as opposed to the best bid or best execution.

During the 2000s, race and gender considerations increasingly factored into Lehman’s management and personnel decisions, even as the company’s decision-making became more sclerotic and its proprietary risk tolerance and balance sheet leverage both spun wildly out of control.

As with today’s vintage of failing banks, ESG was not a direct cause of Lehman’s collapse, just a coincident indicator. ESG history is now repeating itself.

The last financial crisis in 2008 spurred Wall Street to double down on sustainability to burnish its ethical image and counter criticism of the industry for taking government bailout money after wrecking Main Street. Hopefully, the current banking crisis flushes ESG out of the financial system once and for all.

Mr. Tice is an adjunct professor of finance at New York University’s Stern School of Business. His forthcoming book on ESG and sustainable investing will be published by Encounter Books in January 2024.