An Insider View of ESG

By Robert H. Bork Jr.

June 14, 2023

The ESG cartel pushes liberal rhetoric in service of Democratic political success.

As I walked out of a recent conference, a Fortune 500 general counsel pulled me to the side. He didn’t exactly whisper, but he was careful not to be overheard. What he said tracked with what I have heard from many other senior corporate executives — a common narrative that explains what is really going on behind the scenes with ESG: the environmental, social, and governance standards enforced by a network of big funds and nongovernmental organizations.

Companies can enjoy years of spectacular returns boosted by their growing use of energy renewables and leadership in carbon-emission reductions. Naturally, they look forward to a positive score for “E” from rating agencies. As companies also diligently cultivate workforces that look more like the demographics of America, they understandably expect a positive rating for the “S” element. Senior executives and boards are therefore often shocked when they get slapped with poor ratings on these dimensions. Low “G” ratings follow, too, if businesses manage issues such as board diversity in ways that are deemed less than progressive. After some early confusion, corporate leaders are awakening to the fact that they signed on with a progressive cartel dedicated not to steady carbon reduction and social progress but to blinkered environmentalism and ideological — even, partisan — coercion.

This cartel has its roots in Ceres, a well-funded NGO that helped foster Climate Action 100+, the latter of which is composed of large investors who manage a total of $70 trillion in assets. The organization gained political and financial heft when CalPERS, the activist pension fund for California public employees, as well as the pension funds of New Jersey and New York became members.

The initial goals of the ESG movement were commendable — a long-term commitment to slash carbon emissions and support equality with strong corporate governance. From the start, however, there was an iron fist beneath the green-velvet glove — no one wants to be cut off from CalPERS and other large state investment funds, so, corporations signed up.

The bridle and reins of left-wing, ideological control of corporate boards were slowly draped and tightened as shareholder activist organizations like As You Sow and Mercy Investments began to become prominent, powerful ESG players. The bit was put in place when Investment Shareholder Services (ISS) and Glass Lewis, the duopoly that manage U.S. proxy-shareholder services, became enthusiastic proponents of ESG. For example, ISS has a unit that provides ESG ratings for companies.

Overnight, a commitment to steadily reduce carbon emissions became a demand to “align with Paris” and eliminate all such emissions by 2050, a practical impossibility. “You’d think they’d be happy with our ESG performance,” one executive told me. “But we’re besieged with proxy proposals and board fights.”

From these discussions, it has become clear to me that business and policy-makers need to understand three big truths about ESG.

First, the ESG movement begins by persuading companies to adopt its terminology. Then it reframes the plain meaning of the principles to which corporate leaders agreed when joining.

Example: A few years ago, many environmentalists welcomed the expanded use of natural gas, which emits about half the carbon as coal does when burned for electrical generation. This practice helped the United States recently emit a 1990s level of carbon despite having a much larger population and economy today. You would think an environmentalist would welcome America’s surfeit of natural gas as a better alternative than solar panels made by China’s electrical grid, almost 60 percent of which is powered by coal-fired generators. Instead, these environmentalist groups seek to enforce an International Energy Agency prescription that no natural gas projects after 2021 should be permitted. ClientEarth, one of the ESG cartel’s chief litigators, is suing the directors of the Shell oil company as individuals because they continue to produce oil and gas, which is their legal business. ClientEarth argues with a straight face that its lawyers are better than the directors at managing the risk that future decarbonization policies will strand oil and gas projects.

Second, the array of political stances that the ESG movement demands that boards take is expanding into a progressive, partisan wish list. This is especially pernicious, twisting social responsibility to mean controlling the First Amendment–protected speech and political leanings of private companies.

For example, progressive shareholder advocate As You Sow filed a proposal in November with the Coca-Cola Company seeking information on how laws restricting abortion would negatively impact the company. This is one of 31 shareholder proposals this year involving abortion and reproductive freedom. Regardless of one’s views on abortion, corporate leaders are scratching their heads asking what it has to do with the management of their companies and future risks and returns. (Coca-Cola shareholders agreed, recently voting down this proposal.) The cartel’s tenuous link between abortion and corporate earnings is that “companies succeed when employees thrive.”

Many ESG initiatives originate with SEIU, the service employees’ labor union that for many years has been the nation’s largest funder of Democratic campaigns. More muscle comes from the large pension funds of big blue states that are dedicated to advancing progressive policies. No surprise, then, that progressive shareholder advocates have so far this year filed ten proposals involving criticism of a company’s decision to donate to pro-life candidates (i.e., Republicans).

Sometimes, even that fig leaf falls off.

On the “S” side, one executive touts his company’s stellar record for diversity and for providing jobs in low-income communities. But his company’s rating was severely downgraded because it donates money to free-market, business-oriented nonprofits. He was told by an NGO that “we disagree with your alignment” in political donations. As 21 Republican state attorneys general noted in a recent open letter to asset managers, some proposals would force companies to vet their donations through approved third parties. Such proposals “are focused on denying donations to Republicans.” The reasoning behind this effort is that donated funds given to Republicans are the same as “attacks on voting rights, efforts to deny climate change, and efforts to impose extreme restrictions on abortions.”

In other words, the ESG cartel pushes liberal rhetoric in service of Democratic political success and to get progressive policies enacted. The cartel is veering ever deeper toward acting like one giant political-action committee.

Third, Climate Action 100+, the public-employee unions, and blue-state pension funds are not a loose network of aligned organizations. They are an organized cartel. An analysis of the boards of these organizations shows an extraordinary degree of interlocking directorships, with many leaders of ESG organizations having worked in or even founded other groups in the network. It’s little wonder that Alabama attorney general Steve Marshall wrote in the Wall Street Journal that “these groups intend to corner the market through potentially illegal horizontal agreements and force preferred social and political objectives on American companies and consumers.”

Executives have noticed that NGOs in this network change their talking points and proxy demands all at once. A key element in this coordinated control is flagging: signals that provide proxies with directions updated each season on what they are supposed to say in board meetings and what positions they are to approve or disapprove. Majority Action, an NGO that rides herd on the movement, plays the role of ideological whip, for example chiding Climate Action for not securing successful votes on all “flagged” shareholder resolutions. Another telltale sign of deep coordination: One executive told me that when he corresponded with a large fund over a policy disagreement, he received a response from Ceres.

While much has been made of the role of BlackRock and other large investment funds, some corporate insiders see big asset managers as often acting as followers, perhaps even victims, of the ESG movement, at the center of which is always Ceres.

Herein lies the problem for ESG.

None other than the ultraprogressive chairwoman of the Federal Trade Commission, Lina Khan, has said that purported social goals don’t allow the agency to “turn a blind eye” to antitrust violations. While no one expects the progressive leaders of the FTC to take on the climate cartel, state attorneys general, alarmed at the declining returns ESG is bringing to state pension funds, are beginning to investigate the possible violations of the Sherman Act that a coordinated conspiracy against a legal industry would constitute.

Perhaps this explains what one executive meant when he told me: “That distant grinding noise you hear is the sound of shredders at work.”

Originally published at the National Review.