"New Zealand has become trapped in a malaise of wanting to be seen to do good at the expense of achieving anything."

"[T]he Environmental, Societal and Governance mantra ... has proven to be a drag on commerce since it emerged two decades ago. ...

"Social responsibility, the forerunner of ESG, was a popular way for executives to appear virtuous while spending their shareholder’s money ... [Milton] Friedman ... claim[ed] that there is only one social responsibility of business: 'to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.'

"The Chicago University economist was campaigning against business leaders voluntarily engaging in acts of moral worthiness with other people’s resources, but today we face a more pernicious evil; state-mandated virtue. ...

"Section 7A of the Financial Markets Conduct Act 2013 ... obligates certain large firms, from AA Insurance to Z Energy to prepare climate statements and report on their greenhouse gas emissions.

"It is an absurdly onerous regime that achieves nothing. ...'[C]limate change reporting,' harrumphed [Warehouse chair Joan Withers] to the NBR, 'is taking up more director’s time than financial statements' ... [with] not one carbon molecule less ... emitted as a result of the thousands of pages these reports produce. ... a symptom of a wider malaise. ...

"New Zealand has become trapped in a malaise of wanting to be seen to do good at the expense of achieving anything."

~ Damien grant from his column 'Why climate change reporting is achieving nothing'

"Eric's Principle of Green Energy: Green policies are self limiting. The ultimate backstop on political climate ambition is the catastrophic economic mess green policies cause."

 

Pic: Tadeáš Bednarz, via Jo Nova

"When climate advocates say 'Net Zero,' are they actually referring to how much cash green investors will have left when the last bubble bursts?'
    "It seems people only wanted renewable energy if they got cheap loans.
    "The general US S&P shares index gained 15% this year but The Invesco Solar ETF (Fund) which invests in solar energy stocks around the world — fell by a dire 40%. Even the [ill-named pork barrel subsidy-packed] US 'Inflation Reduction Act' couldn’t save the solar sector. As finances tighten with rising interest rates, apparently solar panel orders are among the first to be cancelled.
    "Some of the worst performers in the whole US share market are solar shares ... Solar panels [are] a luxury item. If only solar panels were cheaper, in tough economic times, everyone would want them. [Instead, some headlines:]

• Solar Stocks Shaken By High Interest Rates And Supply Chain Issues ...
• What happened to solar stocks? Investors ‘pick up the pieces’ after a brutal earnings season ...
• Solar Stocks Still Searching For A Bottom ...

"This once again demonstrate’s Eric [Worrall]’s Principle of Green Energy – green policies are self limiting. The ultimate backstop on political climate ambition is the catastrophic economic mess green policies cause.
    "The high interest rates which are crippling green energy and EV supply chains are largely due to energy price inflation, which is a direct consequence of green obsessed regulatory hostility towards fossil fuel. Green energy policies are directly driving the demise of the green energy industry.
    "Personally if I was invested in companies with exposure to this insanity, I’d be calling for the scalp of whichever intellectually challenged executive decided to gamble with my shareholder capital. This crash was inevitable and obvious, it was only the timing of the crash which was uncertain."

~ composite quote from Jo Nova and Eric Worrall, from their respective posts 'Solar Stocks crashed in the last quarter too, down 40% so far this year around the world' and 'The Great Green Crash – Solar Down 40%'

RELATED:

What's ESG? What's ZIRP? -- and why should you care?

ZIRP (zero-interest rate policies) characterises the cheap credit that has flooded out of central banks in the last decade or more. 

ESG (environmental, social, and governance) is the dripping wet "stakeholder" theory that demands that so-called "ethical investors" should direct companies to undertake more politically-correct projects. It is the stakeholder theory route to collectivism.

Fortunately, as Peter Earle explains in this guest post, shareholders and consumers are starting to flex their muscles, and the credit contraction is making a lot of what was formerly cheap very expensive.

ESG as an Artifact of ZIRP

Guest post by Peter C. Earle

Founding myths tend to be mired in obscurity, and like many other investment trends, the roots of environmental, social, and governance (ESG) philosophies are unclear.

The founding of the World Economic Forum is one origin. Stakeholder theory is another of ESG’s clear antecedents, especially as formalised in R. Edward Freeman’s 1984 book Strategic Management: A Stakeholder Approach. The 2004 World Bank report “Who Cares Wins: Connecting Financial Markets to a Changing World” is another contender, providing as it did guidelines for firms to integrate ESG practices into their daily operations. And the publication of the reporting framework United Nations Principles for Responsible Investing in April 2006 (the most recent version of which can be found here) was another.

Its origins however are less important than the destruction it has caused.

Wherever it began, ESG clearly hit its stride within the last five to ten years. Those were heady times for bankers and financiers, first characterised by zero interest rate policies (ZIRP) and then, during the pandemic, by massively expansionary monetary and fiscal programs. Yet in the last two years or so, the prevailing economic circumstances have changed considerably. Inflation at four-decade highs is battering firms by raising the cost of doing business. It is also negatively impacting corporate revenues, as consumers retrench by cutting back on expenditures.

Nowhere are these effects more evident than in shareholder land, where the fourth-quarter 2022 S&P 500 earnings season is just about over. “Earnings quality” is an evaluation of the soundness of current corporate earnings and, consequently, how well they are likely to predict future earnings. For the past year, and certainly for the last quarter, the quality of earnings has been abysmal. One particular element – “accruals,” or cashless earnings – are their highest reported level ever, according to UBS. In that same report, we find the somewhat shocking revelation that nearly one in three Russell 3000 index constituents is unprofitable.

For those and other reasons, a theme in many of the fourth-quarter corporate earnings reports has been cost-cutting: Disney, Newscorp, eBay, Boeing, Alphabet, Dell, General Motors, and a handful of investment banks are all eliminating jobs and slashing unnecessary expenses. And although firms regularly write off the value of certain assets and goodwill, that process accelerates during recessions. 

Firms are additionally contending with the highest interest rates they’ve faced since 2007, and in some cases back to 2001. A substantial amount of corporate debt assumed at lower interest rates is now more costly to service, as a generation of managers grapple with a world of interest rates (and its effects) that they've never seen before.

Dividend payments for example, typically considered sacrosanct during all but the most severe financial straits, are being targeted for savings. February 24th in Fortune:

Intel, the world’s largest maker of computer processors, this week slashed its dividend payment to the lowest level in 16 years in an effort to preserve cash and help turn around its business. Hanesbrands Inc., a century-old apparel maker, earlier this month eliminated the quarterly dividend it started paying nearly a decade ago. VF Corp., which owns Vans, The North Face, and other brands, also cut its dividend in recent weeks as it works to reduce its debt burden … Retailers in particular face declining profits, as persistent inflation also erodes consumers’ willingness to spend. So far this year, as many as 17 companies in the Dow Jones US Total Stock Index cut their dividends, according to data compiled by Bloomberg.

All of this suggests two things.

First, if large firms are doing everything they can to reduce unnecessary overhead, then feel-good initiatives and other corporate baubles are likely to face the chopping block – even if quietly. ESG observance is one of those very costly trinkets, bringing as it does compliance costs, legal costs, measurement costs, and opportunity costs. The reporting requirements alone associated with upholding ESG standards are high, and rising. In 2022, two studies attempted to estimate those costs:

Corporate Issuers are currently spending an average of more than $675,000 per year on climate-related disclosures, and institutional investors are spending nearly $1.4 million on average to collect, analyze and report climate data, according to a new survey released by the SustainAbility Institute by ERM … The survey gathered data from 39 corporate issuers from across multiple U.S. sectors, with a market cap range of under $1 billion to over $200 billion, and 35 institutional investors representing a total of $7.2 trillion of AUM … The SEC has released its own estimates for complying with its proposed rules, predicting first year costs at $640,000, and annual ongoing costs for issuers at $530,000. The study explored the specific elements covered by the SEC requirements, and found that issuers on average spend $533,000 on these, in line with the SEC estimates. Elements not included in the SEC requirements included costs related to proxy responses to climate-related shareholder proposals, and costs for activities including developing and reporting on low-carbon transition plans, and for stakeholder engagement and government relations.

Difficulty measuring costs means difficulty budgeting for them. Another recent report commented:

Although it is inherently difficult to assess the costs [of ESG], it is fair to anticipate significant costs for ambitious ESG goals. In an article in The Economist, a specific cost estimate was made in relation to offset a company’s entire carbon footprint. This was estimated to cost about 0.4 percent of annual revenues. This could already be a huge component for many companies, but it is only one aspect of merely one ESG factor.

Yet that comment concludes with the kind of assurance that flows effortlessly from consultants well-positioned to, frankly, make a lot of money off of ESG compliance: “However, there is no real choice. The climate certainly cannot wait.” Given the recent backlash against ESG, whether driven by ideology or accounting, it’s clear that there is a real choice, and that choice is being invoked with increasing frequency throughout the commercial world.

Second, the recent explosion of ESG adoption may have been in the spirit, if not embodying a strictly theoretical manifestation, of malinvestment as predicted by Austrian Business Cycle Theory (ABCT). 

Without engaging in a lengthy discussion of ABCT, artificially-low interest rates (interest rates set by policymakers instead of markets) undercut the natural rate of interest, misleading entrepreneurs and business managers. Many years of negligible interest rates, indeed negative real rates, have given rise to bubble-like firms, projects, and I would argue, by extension, business concepts. The latter, which include but are not limited to ESG, seem feasible and arguably essential when the money spigots are open. When interest rates normalise and sobriety re-obtains, cost structures reassert themselves. It’s back to the business of business. 

Interest rates are now beginning to normalise. And, perhaps, business practices with them.

Gone are the salad days of easy money, and with it the schmaltzy wishlists of niceties which a decade of monetary expansion permitted activists to blithely force upon corporate executives. In the face of rising interest rates, an uncertain path for inflation, budget-constrained consumers, and rapidly deteriorating corporate earnings, shareholders are likely to take a closer look at how and where their money is being spent than they have in some time. 

Although it is unlikely to disappear completely, the ESG fad is probably past the crest of its popularity. It’s time again for firms to focus, singularly and completely, on the inestimable task of making money.

* * * * 

Peter C. Earle is an economist who joined the American Institute for Economic Research (AIER) in 2018. Prior to that he spent over 20 years as a trader and analyst at a number of securities firms and hedge funds in the New York metropolitan area. His research focuses on financial markets, monetary policy, and problems in economic measurement. He has been quoted by the Wall Street Journal, Bloomberg, Reuters, CNBC, Grant’s Interest Rate Observer, NPR, and in numerous other media outlets and publications. Pete holds an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point.

His post first appeared at the AIER blog.

ESG creates a new rent-seeking class

“How many environmental justice majors does it take to calculate the CO2 emissions of a light bulb? This isn’t a joke. Businesses now employ scads of college grads to do this. For years America’s political class has lamented that too many college grads are working in low-paying jobs that don’t require post-secondary degrees. The diversity, equity and inclusion and environmental, social and governance industries—DEI and ESG, respectively—are solving for this problem while creating many others. In the modern progressive era, young graduates are finding remunerative employment as sustainability coordinators, DEI officers and 'people partners.' Instead of serving up pumpkin soy lattes, they’re quantifying corporate greenhouse gas emissions and ensuring employers don’t transgress progressive cultural orthodoxies.”

~ Allysia Finley, from her article 'Bidenomics and the Boom in DEI and ESG Jobs' [hat tip Samizdata]

"Competition Is the Antidote to Big Tech's Bad Behaviour, Not Politicians"

"Big Tech is a hot button issue, and prohibiting access is a big deal. But these companies have the right to do so ...
    "As long as a company isn’t physically or forcefully harming another individual or their property, the ability to intervene is limited until new legislation is enacted, and we should be wary of calling for further government interference and be mindful that new laws can backfire....
    “The best regulator of technology… is simply more technology. And despite fears that ... gatekeepers have closed networks that the next generation of entrepreneurs need to reach their audience, somehow they do it anyway — often embarrassingly fast, whether the presumed tyrant being deposed is a long-time incumbent or last year’s startup darling.”
    "[L]ike any vice that is in our life, individuals need to take on some personal accountability for what has transpired in the online and trading realms.
    "The power players didn’t achieve their status by force, and most allowed us access to their services for free (whether for tweeting our thoughts or jumping on a bandwagon for buying stock). It is the producers and users (composed of individuals) who have furthered such ventures....
    "If given a chance, the market will eventually provide solutions to many of the grievances stemming from Big Tech's clumsy efforts to control user content. Creative destruction will bring better processes. And Henry Hazlitt’s succinct words of wisdom are important to remember in situations such as this—'The 'private sector' of the economy is, in fact, the voluntary sector; and the 'public sector' is, in fact, the coercive sector.'
    "Solutions will arise as long as regulatory bodies are kept at bay and rational ethical entrepreneurs and innovators are left unbridled. What is needed now is true economic freedom (removing the incentive of cronyism and political policing) and the welcoming of enterprising individuals."

~ Kimberlee Josephson, from her article 'Why Competition Is the Antidote to Big Tech's Bad Behaviour, Not Politicians'

 

State Investing, Not ESG, Is the Problem

"[What's the problem with] the left wing policy fad/clever corporate power grab once known as 'corporate responsibility' and now known — for the moment, at least — as environmental, social and governance (ESG)? ...
    "[T]he problem isn’t so much that a company takes ideological considerations into account in its business practices so much as that governments — such as state-run pension funds — are imposing ideological agendas on businesses via this financial control. ...
    "[And] government has no business forcing an ideology ... on anyone.
    "Let’s consider how this applies to ESG....
    "[W]hen state pension plans ... start making or 'encouraging' companies to change how they operate based on ideological issues (such as causing oil companies to get behind green anti-fossil fuel initiatives), this amounts to the state adding the further injury of lower profitability for such companies to the original one of what amounts to nationalisation by stealth.
    "These are both bad, but they are not the essence of what is wrong with ESG, which is a further wrong than state ownership and mismanagement.
    "State interference in ideology is the real problem with ESG. A truly free market would allow investors to make clear-eyed decisions about where to place their money and whether they want to earn higher returns or support political causes with their money.
    "But when the state sets up a retirement fund with the supposed purpose of reducing taxpayer costs of a pension plan by high returns, it should not then use that money to support causes the retirees may or may not outright oppose, and finance the shortfall by taxes on others (wrong to begin with!) whose opinions also aren’t being consulted.
    "Of course, any investment strategy has to have an implicit basis, so there is no way for a state to run a pension plan without running afoul of separation of ideology and state.
    "The proper response by lovers of liberty is not ... merely object to the particular ideas that underly some state investment strategies, but to work towards the real solution, namely to privatise the investment sector.
    "This won’t eliminate ideologically-driven companies from the marketplace (although a free market would cull unprofitable ones), but it will end the gross abuse of government officials improperly forcing their political beliefs into corporate boardrooms throughout the economy all at once, as we see them doing today."

~ Gus Van Horn from his op-ed 'State Investing, Not ESG, Is the Problem'

Sri Lanka Crisis Reveals the Dangers of Green Utopianism

President Rajapaksa’s fertiliser ban wasn't the only factor behind Sri Lanka’s economic crash. But as Chelsea Follett and Malcolm Cochran explain in this guest post it's definitely part of this story -- and a a grim preview of what can result from distorting markets in the name of utopian priorities. 

Sri Lanka Crisis Reveals the Dangers of Green Utopianism

by Chelsea Follett and Malcolm Cochran

Last week, a group of Sri Lankan protestors took a refreshing dip in President Gotabaya Rajapaksa’s pool. It was probably a welcome respite from the steamy eighty-degree day in Colombo, as well from the unprecedented economic crisis currently devastating the country. Over the last year, Sri Lanka has experienced an annual inflation rate of more than 50 percent, with food prices rising 80 percent and transport costs a staggering 128 percent. Faced with fierce protests, the Sri Lankan government declared a state of emergency and deployed troops around the country to maintain order.

On Thursday morning, the New York Times published an episode of The Daily podcast discussing some of the forces behind the collapse. They outlined how years of irresponsible borrowing by the Rajapaksa political dynasty, combined with the damage caused by Covid lockdowns to Sri Lanka’s tourism industry, drained the country’s foreign exchange reserves. Soon, the country was unable to make payments on its debt or import essential goods like food and gasoline. Strangely, the hosts of the podcast, which reaches over 20 million monthly listeners, didn’t mention President Rajapaksa’s infamous fertiliser ban once during the entire thirty-minute episode.

Yet the fertiliser ban was, in fact, a major factor in the unrest. Agriculture is an essential economic sector in Sri Lanka. Around 10 percent of the population works on farms, and fully 70 percent of Sri Lankans are directly or indirectly dependent on agriculture. Tea production is especially important, consistently responsible for over ten percent of Sri Lanka’s export revenue. To support that vital industry, the country -- until recently -- was spending hundreds of millions of dollars every year to import synthetic fertilisers. But that was "until recently."

Because during his election campaign in 2019, Rajapaksa promised to wean the country off these fertilisers with what he said would be a ten-year transition to organic farming. He expedited his plan in April 2021 with a sudden ban on synthetic fertilisers and pesticides. He was so confident in his policies that he declared in a (since stealthily deleted and memory-holed) article for the World Economic Forum in 2018, “This is how I will make my country rich again by 2025.” It didn't. As the eco-modernist author Michael Shellenberger writes, the results of the experiment with primitive agricultural techniques were “shocking:”

Over 90 percent of Sri Lanka’s farmers had used chemical fertilisers before they were banned. After they were banned, an astonishing 85 percent experienced crop losses. Rice production fell 20 percent and prices skyrocketed 50 percent in just six months. Sri Lanka had to import $450 million worth of rice despite having been self-sufficient just months earlier. The price of carrots and tomatoes rose fivefold. … [Tea exports crashed] 18 percent between November 2021 and February 2022 — reaching their lowest level in more than two decades.

Of course, Rajapaksa’s foolish policy wasn’t revealed to him in a dream. As Shellenberger points out, the ban was inspired by an increasingly Malthusian environmentalism led by figures like the Indian activist Vandana Shiva, who cheered the ban last summer. Foreign investors beholden to the same ideology also praised and rewarded Sri Lanka for “taking up sustainability and ESG (environmental, social and corporate governance) issues on its top priority.” ESG represents a trend (or lasting shift, depending on who you ask) in some investors’ priorities. Put simply, it is an attempt to move capital toward organisations that further a set of amorphous environmental and social justice goals instead of toward the enterprises most likely to succeed and turn a profit.

Proponents of ESG have been pushing for government mandates requiring enterprises to disclose detailed information related to environmentalism and other social goals. That distorts and harms the smooth functioning of the capital markets that keep modern economies running and, in some cases, incentivises nice-sounding but economically inefficient projects, like a return to primitive agriculture. “The nation of Sri Lanka has an almost perfect ESG rating of 98.1 on a scale of 100,” notes David Blackmon in Forbes, and “the government which had forced the nation to achieve that virtue-signaling target in recent years [has as a result] collapsed.” 

Sri Lanka, in other words, offers a grim preview of what can result from distorting markets in the name of utopian priorities.

Consider a long-run perspective. Throughout most of human history, farmers produced only organic food—and food was so scarce that, despite the much lower population in the past, malnutrition was widespread. The long-term, global decline in undernourishment is one of humanity’s proudest achievements. Lacking any sense of history and taking abundant food for granted however, some environmentalists want to transform the global food system into an organic model. They see modern agriculture as environmentally harmful and would like to see a transition to natural fertilisers that would be familiar to our distant ancestors, such as compost and manure.

However, conventional farming is not only necessary to produce a sufficient amount of food to feed humanity (a point that cannot be emphasized enough—as the writer Alfred Henry Lewis once observed, “There are only nine meals between mankind and anarchy”) but in many ways it is also better for the environment. According to a massive meta-analysis by the ecologists Michael Clark and David Tilman, the natural fertilisers used in organic agriculture actually lead to more pollution than conventional synthetic products.This is partly because fertilisers and pesticides also allow farmers to farm their land more intensively, leading to ever-higher crop yields, which allows them to grow more food on less land. According to HumanProgress board member Matt Ridley, if we tried to feed the world with the organic yields of 1960, we would have to farm twice as much land as we do today. 

Despite successfully feeding more people than every before, the amount of land used globally for agricultural has peaked and is now in decline. So long as crop yields continue to increase, more and more land can be returned to natural ecosystems, which are far more biodiverse than any farm. Smart agriculture allows nature to rebound.

In wealthy countries, conventional farming is becoming ever-more efficient, using fewer inputs to grow more food. In the United States, despite a 44 percent increase in food production since 1981, fertiliser use barely increased at all, and pesticide use fell by 18 percent. As the esteemed Rockefeller University environmental scientist Jesse Ausubel noted, if farmers everywhere adopted the modern and efficient techniques of U.S. farmers, “an area the size of India or the USA east of the Mississippi could be released globally from agriculture.”

Most importantly, it must be re-stated, conventional agriculture feeds the world. Since the Green Revolution of the 1950s and 60s, world agricultural production has exploded, causing the per-capita global food supply to rise from barely over over 2,000 kcal per day in 1961, to reach nearly 3,000 in 2017. And this even as the world population itself exploded. While hunger is now making a comeback, that is not any lack of the ability to produce enough food -- it is wholly due to war, export restrictions, and the misguided policies of leaders like Rajapaksa his environmental (and "ethical investment") mentors.

To be sure, the fertiliser ban itself was not the only factor behind Sri Lanka’s economic crash. Much of the damage was also caused by the hastiness of the ban, and the difficulty of obtaining enough organic alternatives. However, the idea that organic farming can produce enough food for the world is an unreachable fantasy based on the naturalistic fallacy — the baseless notion that anything modern, such as agriculture incorporating non-natural components produced by the ingenuity of man, must be inferior to the all-natural precursor.

As Ted Nordhaus and Saloni Shah from the Breakthrough Institute point out, “there is literally no example of a major agriculture-producing nation successfully transitioning to fully organic or agroecological production.” We must never take the relative rarity of starvation in modern times as a given, nor romanticise and seek to return to farming’s all-organic past. Unfortunately, the delusion seems to be spreading, helped along by the global shift toward ESG. Last Sunday, Narendra Modi, the prime minister of India, praised “natural farming” during a speech in Gujarat, calling it a way to “serve mother earth” and promising that India will “move forward on the path of natural farming.” 

Let’s hope not.

* * * * * 

Chelsea Follett
Chelsea Follet works at the Cato Institute as a Researcher and Managing Editor of HumanProgress.org.

Malcolm Cochran
Malcolm Cochran is a research associate at HumanProgress.org.

Their Human Progress article also appeared at the Foundation of Economic Education.

Green dogma behind Sri Lankan collapse

"But the underlying reason for the fall of Sri Lanka is that its leaders fell under the spell of Western green elites peddling organic agriculture and 'ESG,' which refers to investments made following supposedly higher Environmental, Social, and Governance criteria. Sri Lanka has a near-perfect ESG score (98) which is higher than Sweden (96) or the United States (51)."

~ Michael Shellenberger, from his article 'Green Dogma Behind Fall Of Sri Lanka'

World-class surfer of central banks' tidal wave of counterfeit capital,

Klaus Schwab, speaking to fellow surfers at his absurdly influential World 

Economic Forum. [Image credit: World Economic Forum, CC BY 2.0, via Wikimedia Commons]

Vladimir Lenin once boasted that capitalists would sell the rope to hang themselves -- and then set about organising things to make that happen. He failed, but so-called capitalists still line up to keep trying: one latest attempt being something they call 'stakeholder capitalism,' characterised by so-called 'responsible investing.' As Dan Sanchez explains in this Guest Post, it's anything but...

"ESG" -- Capitalism's 'Great Reset'?

Guest Post by Dan Sanchez

Capitalism needs few descriptive adjectives beyond the words "laissez-faire" or "unhampered." In recent years however, so-called "stakeholder capitalism" has taken the global economy by storm. Its champions proclaim that it will save—and remake—the world. Will it live up to its hype or will it destroy capitalism in the name of reforming it?

Proponents pitch their "stakeholder capitalism" as an antidote to the excesses of so-called “shareholder capitalism,” which they condemn as too narrowly focused on maximising profits (especially short-term profits) for corporate shareholders. This, they argue, is socially irresponsible and destructive, because it disregards the interests of other stakeholders, including customers, suppliers, employees, local communities, and society in general.

"Stakeholder capitalism" [which earns every inverted comma we can muster - Ed.] is ostensibly about offering business leaders incentives to take these wider considerations into account and thus make more “sustainable” decisions. This, it is argued, is also better in the long run for businesses’ bottom lines.

The Rise and Reign of ESG

Today’s dominant strain of "stakeholder capitalism" is the doctrine known as ESG, which stands for “environmental, social, and corporate governance.” Got that? The acronym was coined in the 2004 report of Who Cares Wins, a joint initiative of elite financial institutions invited by no less than the United Nations “to develop guidelines and recommendations on how to better integrate environmental, social and corporate governance issues in asset management, securities brokerage services, and associated research functions.”

In other words, how best to make businesses throw themselves under the bus before governments do it for them.

Who Cares Wins operated under the auspices of the UN’s Global Compact, which, according to the report, “is a corporate responsibility initiative launched by Secretary-General Kofi Annan in 2000 with the primary goal of implementing universal principles in business.” For "universal" read "the UN's."

Much "progress" has been made toward that goal. Since 2004, ESG has evolved from talk of “guidelines and recommendations” to hard, explicit standards that hold sway over huge swathes of the global economy and billions of dollars worth of investment decisions. ESG has begun to move the world.

These standards to which businesses are all-but required to dance are set by ESG rating agencies like the Sustainability Accounting Standards Board (SASB) and enforced by investment firms that manage ESG funds. One such firm is Blackrock, whose CEO Larry Fink is a leading champion of both ESG and SASB.

In December, Reuters published a report titled “How 2021 became the year of ESG investing” which stated that, “ESG funds now account for 10% of worldwide fund assets.”

And in April, Bloomberg reported that ESG, “by some estimates represents more than $40 trillion in assets. According to Morningstar, genuine ESG funds held about $2.7 trillion in managed assets at the end of the fourth quarter.”

To access any of that capital, it is no longer enough for a business to offer a good return on investment (or, sometimes, any at all). It must also report “environmental” and “social” metrics that meet ESG standards.

Is that a welcome development? Will the general public as non-owning “stakeholders” of these businesses be better off thanks to the implementation of ESG standards? Is stakeholder capitalism beginning to reform shareholder capitalism by widening its perspective and curing it of its narrow-minded fixation on profit uber alles?

Capitalism Is for Consumers

To answer that, some clarification is in order. First of all, “shareholder capitalism” is a misleading term for laissez-faire capitalism. It is true that, as Milton Friedman wrote in his 1970 critique of the “social responsibility of business” rhetoric of the time:

In a free‐enterprise, private‐property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.

Since the owners of a publicly traded corporation are its shareholders, it is true that they are and ought to be the “bosses” of a corporation’s employees—including its management. It is also true that corporate executives properly have a fiduciary responsibility to maximise profits for their shareholders.

But that does not mean that shareholders reign supreme under capitalism. As the great economist Ludwig von Mises explained in his book Human Action:

The direction of all economic affairs is in the market society a task of the entrepreneurs [which, according to Mises’s technical definition includes shareholding investors]. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain's orders. The captain is the consumer.

The “sovereign consumers,” as Mises calls them, issue their orders through “their buying and their abstention from buying.” Those orders are transmitted throughout the entire economy via the price system. Entrepreneurs and investors who correctly anticipate those orders and direct production accordingly are rewarded with profits. But if one, as Mises says, “does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him.”

Under laissez-faire capitalism therefore, the principal "stakeholders" whose preferences reign supreme are not not shareholders, but consumers. And (as Mises wrote in his paper “Profit and Loss”) shareholder profit is a measure of—and motivating reward for—success “in adjusting the course of production activities to the most urgent demand of the consumers.” 

What this means for the “stakeholder capitalism” discussion is that, to the extent that the profit-and-loss metric is discounted for the sake of competing objectives (like serving other “stakeholders”), the sovereign consumers are dethroned, disregarded, and relatively impoverished.

Now it’s at least conceivable that ESG standards are not competing, but rather complementary to the profit-and-loss metric and thus serving consumers. In fact, that’s a big part of the ESG sales pitch: that corporations who adopt and adhere to ESG standards will enjoy higher long-term profits, because breaking free of their fixation on short-term shareholder returns will enable them to embrace more “sustainable” business practices.

In a free unhampered market, whether that promise would be fulfilled or not would be for the sovereign consumers to decide, and ESG would rise or fall on its own merits.

Who Complies Wins

Unfortunately, our market economy is far from free or unhampered. The State has instead rigged capital markets for the benefit of its elite lackeys in the financial industry: like those “Who Cares Wins” fat cats who started the ESG ball rolling in 2004 under the auspices of the United Nations.

One of the prime ways the State rigs markets is through central bank policy.

The prodigious amount of newly created money that the Federal Reserve and other central banks have pumped into financial institutions in recent years has transferred vast amounts of real wealth to those institutions from the general public. As a result, those institutions—big banks and investment companies—are now much more beholden to the State and much less beholden to consumers for their wealth.

As they say, “he who pays the piper calls the tune.” So it’s no surprise that these institutions are stumbling over themselves to get on board the State’s ESG bandwagon. 

And that means that if non-financial corporations want access to the Fed’s money tap, and thus to the stream of counterfeit capital gushing out, they too have to get with the ESG program. Especially as the average consumer becomes increasingly impoverished by disastrous economic policies, the incentive for corporations to earn market profit by pleasing consumers is being progressively superseded by the incentive to gain access to the Fed’s flow of loot by meeting the State’s “social” standards.

By increasingly controlling capital flows, the State is gaining ever more control over the entire economy.

This may explain the recent willingness of so many corporations to alienate customers and sacrifice profits on the altar of “green” and “woke” politics. It's not necessarily that they embrace the nonsense themselves (though many do); it's that the governments and their well-rewarded agents have rigged businesses' financial incentives that way.

It is no coincidence that Klaus Schaub, the preeminent champion of the “Great Reset” also co-authored a book titled Stakeholder Capitalism. The upshot of "stakeholder capitalism" is that consumer is supplanted as the economy's supreme stakeholder by The State. The sick joke of stakeholder capitalism therefore is that it “reforms” capitalism by transforming it into a form of socialism. Lenin would be laughing up his sleeve.

Dan Sanchez is the Director of Content at the Foundation for Economic Education (FEE), editor-in-chief of FEE.org, and writer for (among others) The Mission, the Ron Paul Institute for Peace and Prosperity, David Stockman’s Contra Corner, and many other popular web sites. He wrote a weekly column for Antiwar.com.
At the Mises Institute, Dan was editor of Mises.org and launched the Mises Academy, the first ever free-market economics online learning platform.
Dan has delivered speeches for FEE, Praxis, the Mises Institute, Liberty on the Rocks, America’s Future Foundation, and more.

A version of his post first appeared at FEE.Org.