ESG: Woke Capitalism or Smart Investing?

Jeff Siegel

Written By Jeff Siegel

Posted March 6, 2023

Last week, the Senate voted to overturn a Labor Department decision that would allow retirement plans to consider ESG factors in their investment strategies.

If you’re unfamiliar, ESG stands for environmental, social, and governance.  And ESG investing is simply an investment strategy that takes into account those three factors when screening potential investments.

While I don’t have any theoretical hang ups about ESG investing, I do have a problem with how it has mutated from non-compulsory investment strategy to political fodder. 

When ESG first came on the scene, it was merely an idea.  A concept.  A voluntary set of standards that could be used or not be used.  It was fairly benign.

In fact, there are a number of funds, retirement plans and companies that already employ ESG standards into their daily operations and investment decisions.  They just don’t refer to those standards as ESG.  They’re simply basic factors that figure into a scrutinous investment analysis.

Like climate change, for instance.

It is generally understood that climate change has resulted in an increase in extreme weather conditions. 

Even if you find the consensus on climate change to be unsound, it is undeniable that we are seeing an increase in extreme weather conditions, and these conditions are expected to continue for the foreseeable future. 

We’re talking about everything from extreme droughts and heat waves to more frequent and intense flooding conditions and tropical storms. 

As an investor, I need to understand how these conditions are going to affect the operations of the industries in which I invest.  And there are few industries that can ignore these extreme weather conditions.

Some of the industries that are most affected by the increase in extreme weather events include …

  • Agriculture
  • Energy
  • Insurance
  • Food production
  • Construction
  • Commercial Fishing
  • Water infrastructure

While some want to label climate change (or the reality of increasing extreme weather events) as an integral factor to consider under the ESG model, smart investors look at this as simply a very serious risk factor, and does not need to be labeled as ESG.

Truth is, any retirement fund that hasn’t already considered this risk factor isn’t serious about creating and protecting wealth for its clients.  And none of these funds need permission from the government to integrate this risk factor into their analyses, either.

Let’s also consider the “governance” part of ESG, which again, doesn’t need to be set aside as something special or new, as this includes things like transparency, leadership accountability and anti-bribery and corruption indicators.  All valid components of any investment analysis that,  left unchecked could result in severe losses and financial damages.

Consider the Volkswagen emissions tests scandal, which ended up costing the car maker more than $20 billion in fines while losing more than $100 billion of its market cap. 

Or WeWork, where there was no leadership accountability or oversight. There were also massive conflicts of interests left completely unchecked.

On a bigger scale, because of lack of oversight, transparency and leadership accountability, consider the damage done by Enron in 2001, which absolutely crushed investors, or Lehman Brothers in 2008, which actually shook the core of the global economy.

This isn’t about a cute acronym designed to make investors “feel good.”  This is about fiduciary responsibility.  Plain and simple. 

Then there’s the “social” part of ESG, which again, is not trivial and should always be an integral factor of proper analysis. 

Consider sexual harassment risks, for example, which fall under the “social” part of ESG.

Not to sound crass, but this goes beyond just the cringe element of sexual harassment.  There is also a very real economic impact of sexual harassment.

Deloitte did an economic analysis on this back in 2018 and found that sexual harassment results in $2.6 billion in lost productivity.  That’s billion, with a “B.”

Then consider the lawsuits, which in some cases can result in tens of millions of dollars in damages.  Like the Fox News Roger Ailes sexual harassment lawsuit, which cost 21st Century Fox $20 million.

As far as I’m concerned, it is absolutely necessary for a fiduciary to investigate potential losses that could stem from corporate cultures that trivialize or even ignore sexual harassment in the workplace. 

You don’t need to wave an ESG banner to know that sexual harassment is a risk factor worth serious scrutiny.

Look, my point is simple …

While the fundamentals of ESG are sound, politicizing them does little more than instigate bad actors to persuade investors and fiduciaries to second guess risk factors that otherwise wouldn’t have been questioned before. 

Truth is, these retirement funds can absolutely consider all of these ESG factors into their reporting without referring to them as “ESG” factors.  And by doing so, they can avoid being targeted by those who want to equate ESG to what they now call “woke capitalism.”  Which is actually just as stupid as waving the ESG flag.

The term woke is simply defined as being alert to racial or social discrimination and injustice.

Certainly you can consider racial and social discrimination as a risk factor for any investment, but to call ESG “woke capitalism,” is nothing more than partisan fodder designed to trick voters into believing that this thing called ESG is a mechanism created by overzealous liberals to siphon their wealth. 

They want to claim that they’re just looking out for their constituents’ financial freedom and independence.  Which they are not.  Because if that was ever their intention, they would’ve been out in front of the Enron Scandal, the 2008 housing market collapse and recession, and the Madoff Ponzi Scheme,  I mean, shit, Bernie Madoff was the former chair of the Nasdaq, and still suckered investors out of $50 billion. 

So don’t let these anti-ESG politicians make you think that ESG investing is somehow at odds with responsibly growing and protecting your wealth.  

As well, don’t believe for a second that government approval of ESG will guarantee that you can grow and protect your wealth in a way that is “socially and economically responsible.”  If any institution has zero credibility when it comes to social and economic responsibility, it’s the government. 

Bottom line: These ESG standards already exist without having to set them apart from any other risk factors that are considered in responsible investment analysis. And any partisan buffoonery that is underway now is nothing more than noise designed to distract you from the fact that the last thing you need to build and protect your wealth is government interference. 

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