ESG is unnecessary and harmful

The ESG movement — the acronym stands for Environmental, Social, and Governance — purports to improve the market economy by making corporate activity kinder, gentler, more compassionate, and otherwise better for society by redistributing the economic gains generated by corporations from shareholders to various “stakeholders.” But, as the ESG movement gathers force, it has become evident that the ESG model is contrary to the principles of a free society and that imposing it onto businesses would destroy many of the most admirable virtues of commercial life.

Richard Epstein, writing last month in the Hoover Institution’s Defining Ideas journal, decried the “creeping coercion” advanced by the ESG movement. He took aim at the Business Roundtable, a non-profit organization whose members are CEOS of major American corporations, which famously issued a statement in 2019 eschewing shareholder primacy in favour of a “commitment to all stakeholders.” According to Epstein, stakeholder logic is not only mistaken but invites more government control of corporate activity.

Another excellent essay, by the National Review’s Andrew Stuttaford, described the Business Roundtable’s commitment to stakeholder capitalism as “sinister.” As Stuttaford put it, “Stakeholder capitalism, which is increasingly intertwined with ESG, is an expression of corporatism, an ideology that can be relatively benign (such as in post-war West Germany), but which also, rather less benignly, provided some of the intellectual underpinning for fascism.” Nobody is accusing the business community of trying to advance fascism, but the point is that the ESG movement expands political control over capital and for that reason is overwhelmingly destructive.

One thing the ESG movement looks to destroy is business diversity, which it does by seeking to impose uniform views on a wide range of social issues onto all businesses. Under the ESG movement’s vision of stakeholder capitalism, corporations are all supposed to affirm that anthropogenic global warming is catastrophic and that various kinds of unfair discrimination are pervasive and systemic. Corporations are then supposed to reorganize their operations to deal with global warming and discrimination, while promoting equity, inclusion, and workers’ rights — not as these things really are, but as they are misunderstood by university administrators and Liberal and NDP activists.

The reality ignored by the ESG movement is that under Milton Friedman’s shareholder capitalism model of profit maximization, businesses are already accountable to stakeholders. A business that deals unfairly with suppliers, mistreats employees, cheats customers, unfairly discriminates against certain people, afflicts the community with pollution, promotes social harm, or otherwise behaves badly would not be a successful one. Such a business would be unable to find willing suppliers, employees, and customers and would have to shut down.

Apart from being duplicative, the ESG model introduces conflicts of interest to, and reduces accountability in, corporate decision-making: anybody who squanders company resources has the excuse that they achieved some sort of social improvement or fulfilled obligations to some group of stakeholders. Even worse, imposing ESG principles abrogates shareholders’ rights by redistributing their assets to whoever claims to be a business stakeholder. This effective change in ownership results in capital allocations based increasingly on political interests instead of financial considerations — a recipe for economic harm.

The ESG movement also runs contrary to one of the greatest aspects of commercial life: its voluntary nature. Having adopted all sorts of mistaken ideas about economics and dubious stances on social questions, the ESG movement often calls on government to enforce and promote its values. In Canada, it has been astonishingly successful, not only with Liberal and NDP politicians always looking to increase union power, more closely regulate business, and enforce socially progressive doctrines, but now even with Conservatives.

In Alberta, the United Conservative government is using its provincial corporation, the Canadian Energy Centre, to essentially dictate the oil and gas industry’s public relations agenda. The centre enthusiastically promotes ESG and last month drew headlines for its $240,000 billboard campaign touting the Alberta energy industry’s commitment to net-zero carbon emissions. Meanwhile, the most recent federal Conservative election platform proposed, appallingly, that large federally regulated corporations be forced to have employee representation on their boards. It may not be long before the ESG movement demands that other stakeholders — government officials and climate activists, perhaps — also get board seats.

The reality is that different things work for different people and different businesses. When the ESG movement tries to impose a uniform way of doing business by prescribing a uniform set of views about global warming, social issues, policies for employee relations, and so on, it squashes business diversity and invites government control. The ESG model does not improve the market economy, it attacks it, and it threatens the prosperity markets have created.

ESG ... RUNS CONTRARY TO ONE OF THE GREATEST ASPECTS OF COMMERCIAL LIFE: ITS VOLUNTARY NATURE.