Most Americans have probably never heard of ESG, but it is the most recent battleground in the ongoing “woke/asleep” divisions in American life and politics. Corporations have impacts on society in many ways, particularly in environmental behavior (that’s the E) and the way they treat customers, workers, communities, and suppliers (that’s the S). The G is governance, which has to do with accountability, transparency, and self-serving behavior by management in collaboration with the board of directors, whose responsibility is to look after the best interest of their owners, the shareholders.
The Trump administration created a rule that forbade pension programs from allowing ESG to be a factor in decision-making. Biden’s Labor Department reversed that rule, not requiring ESG, just permitting it to be a factor in the decisions of pension fund managers. The House voted to restore the Trump administration rule, and the Senate, with three Democrats absent and two voting with the Republicans, agreed. Biden will veto the bill, which Congress clearly cannot override because it would require a 2/3 majority.
The underlying issue is whether corporations have any obligation to society other than to maximize shareholder wealth, according to the gospel of Milton Friedman, whose answer is a resounding NO. (For those of you unfamiliar with Friedman, he is the guru of free market economics and minimum government.). A secondary issue is whether good corporate behavior in these areas promotes or detracts from shareholder wealth. There is some evidence that firms that treat customers, workers, suppliers and communities well are more profitable in the long run, but that’s open to debate.
The people who manage pension funds control a substantial share of investment assets and have a fiduciary responsibility to manage them in the best interest of their beneficiaries, both present and future retirees. Many state attorneys general and legislatures in red states have been vocally opposed to having their pension fund managers take ESG into consideration. But there’s a problem. Many of these pension funds rely on large financial firms to manage their public equity investments for them based on an index. These large firms (Black Rock being the best known) hold the proxies for the pension funds and vote them on behalf of their clients, to save the pension fund managers the cost of having to scrutinize every proposal coming forth from every stock in which they have an investment. If the financial firm is into ESG, it will vote those shares accordingly. And Black Rock’s CEO has been vocally pro-ESG.
What’s a pension manager to do? They want to keep their costs down, and one way they have been able to do that is by outsourcing the voting of proxies. Many of them have turned to specialists in following, evaluating, and recommending how to vote those proxies, providing clear guidelines on their own criteria.
Most of you are in a pension program of some sort, whether retired or actively working. You might want to inquire as to how this is working out in your state. Stay tuned, in the meantime, from the next barrage of anti-woke ammunition.