Bad Corporate Governance
Corporate board rooms have a new friend in the ESG movement: the federal government.
In 2019, Georgia passed a ban on abortions after a fetal heartbeat could be detected. Within days, the CEOs of Disney, Warner Media, and Netflix announced they would consider halting all film production in the state if Governor Brian Kemp signed it into law. Less than a month later, 187 CEOs took out a full-page advertisement in the New York Times declaring their opposition to that and other anti-abortion legislation passed in states around the country.
“Restricting access to comprehensive reproductive care, including abortion, threatens the health, independence and economic stability of our employees and customers,” they wrote. “Simply put, it goes against our values, and is bad for business.”
Corporations increasingly see no daylight between their “values” and their bottom lines. The marriage between the profit motive and progressive politics sits at the heart of the environmental, social, and governance (ESG) movement. The ESG movement seeks to leverage corporate power for progressive ends by rating firms on their compliance with ideological criteria and making investment decisions accordingly.
ESG is rooted in a feedback loop. Under the ESG framework, corporations consider it sound policy to divest from fossil fuels, for example, since progressive legislators have said they intend to abolish the fossil fuel industry. Progressives threaten to regulate or disgrace their opponents, and corporations embed those regulatory or “reputational” risks in their investment decisions.
Consulting groups bully corporations and investment firms into tailoring their policies and investments to toe the progressive line. Malk Partners, which advises corporations collectively worth more than $500 billion on ESG-related issues, suggested its clients provide “coverage for out-of-state [abortion] expenses” to “help prevent unwanted attrition” and improve their “competitive position.” PSECU Financial counsels its clients on how to make “socially responsible” investments in “LGBTQ+ friendly companies.” PWC instructs firms on how to chronicle their DEI initiatives and enhance their ESG scores.
The ESG movement has been a critical part of the progressive movement's cultural advance over the past decade, which is why Joe Biden's first veto, signed around noon on Monday, blocked a congressional override of his Department of Labor's pro-ESG policies.
The rule Congress overturned began as an executive order in 2021. Biden directed his secretary of Labor to “identify agency actions" that could “protect the life savings and pensions of United States workers and families from the threats of climate-related financial risk.” That “risk,” of course, included not only the putative effects of climate change, but the “risk” that progressives would regulate fossil fuels out of existence or impart “reputational risk” to banks that did business with fossil fuel companies. Biden also directed the secretary to consider revoking Trump-era guidance that banned employers from weighing ESG criteria in their investment decisions with employees' pension funds.
Then, in November, the Department of Labor followed through on the president's directive, publishing a proposed rule to repeal the Trump administration's guidance requiring employers and their fiduciaries to make investment decisions solely on the basis of “pecuniary factors.” It also proposed a repeal of Trump administration guidance barring proxies, the representatives of shareholders at annual corporate meetings, from “subordinat[ing] the interests of the participants and beneficiaries in their retirement income to unrelated objectives” such as ESG.
Proxies are an integral part of the ESG movement, since they represent large numbers of small shareholders who often decline to attend corporate meetings. As Stephen Soukup writes in The Dictatorship of Woke Capital, proxy advisory groups, which counsel institutional investors and their proxies on pending votes at meetings, have prompted a leftward shift in corporate policy:
If corporate managers learn, for example, that one or both of the two dominant proxy services is supporting a proposal, they often seek to preempt the vote by negotiating instead .... By law, shareholders who introduce proposals are not allowed to campaign for their proposals, as such campaigning would constitute a solicitation. The advent of large, widely used, and conflicted proxy advisors has, in many cases, rendered this anti-solicitation provision moot.
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The capture of proxy advisory groups and the rise of ESG rating firms have together starved the fossil fuel industry of needed capital and prompted corporations across the country to devote increasing resources to diversity, equity, and inclusion initiatives to demonstrate their ESG bona fides.
While Trump sought to bar proxies from weighing ESG criteria, the Biden Department of Labor's proposed rule would overturn that prohibition. That move prompted members of the House and Senate, led by Senators Mike Braun and John Kennedy, to pass a Congressional Review Act resolution overriding the department's guidance, reverting to the status quo ante and requiring investors and proxies to make decisions on the basis of financial performance alone without respect to ESG criteria. Two Senate Democrats, Joe Manchin and Jon Tester, joined their Republican colleagues in getting the bill across the upper chamber's finish line.
Biden's veto of the CRA resolution is unlikely to be overcome in a tightly divided House and Senate. At the state level, nineteen governors, including Florida Governor Ron DeSantis, have promised in the wake of the veto to protect their states' pension funds from ESG influence. Those governors' efforts and the president's veto underscore that both sides understand ESG's role in moving Corporate America leftward. Corporate America may not make laws, but its investment, production, and hiring decisions affect workplaces, markets, and the culture. And right now, through the ESG movement, it's dedicated to bankrolling vice and starving virtue.