Congressional Republicans have made it clear that one of their primary oversight targets is the Environmental, Social, and Governance (ESG) approach to investing — and the efforts of Team Biden to accelerate and expand that approach — both of which Republicans have correctly identified as an effort by the left to defund certain industries and drive investors, wittingly or otherwise, toward favored industries.
Such attention is welcome, as the problem is that many passive investors simply turn their cash over to firms, especially Black Rock, Vanguard and State Street. Such investors are typically unaware that these funds routinely (and privately in many cases) coerce corporations into adopting policies that tilt decidedly left and that, in many cases, are contrary to the political preferences of the investors.
ESG poses two real and foundational problems.
First, it has become a quasi-regulatory mechanism operated by the federal government. Team Biden has used and plans to keep on using the considerable power of the regulatory state (the Securities and Exchange Commission, the Consumer Financial Protection Board, etc.) to further drive companies away from their own interests (and those of their shareholders) and towards the preferred interests of the regime.
Worse than that, however, Team Biden has looked the other way when ratings agencies — which rank companies’ ESG performance – have concluded that companies wholly controlled by the slaving and genocidal regime in communist China and companies that have supported Russia’s war on Ukraine have better ESG performance than American energy companies.
The federal government affects investments in all kinds of different ways. For example, there has been chronic underinvestment in the oil and gas industry primarily because investors believe that the federal government will eventually drive the entire economy away from oil and natural gas.
Think about President Joe Biden’s unfortunate and nonsensical comment in the State of the Union about how we will need the oil and gas industry for another decade. That is remarkably incorrect, and it gives a peek into the shallow and misguided thinking of those who make federal energy policy.
Oil and gas projects take years to build and years to pay off their investors. No one is going to invest in anything that might be gone in a decade. This underinvestment — driven by a very rational fear of the federal government’s intentions — is one of the reasons why gasoline is expensive.
Nevertheless, the federal government keeps steady downward pressure — through the quasi-regulatory mechanism of ESG — on those industries it wants to kill (like the oil and gas industry).
The second problem is that three large firms — Black Rock, Vanguard, and State Street — are using investor money in ways that almost certainly do not reflect the preferences of all of their investors. To give some scope of the problem, the three firms have about $20 trillion (depending on the day) under management. That’s almost as large as the annual GDP of the American economy.
Such a concentration of power makes it difficult for companies to resist instructions from these funds.
The Republicans’ desire to put the SEC and other financial regulators under a microscope is necessary and welcome first step. They should be clear about what can be achieved.
Investing has always been about values; people invest in companies and causes in which they believe. No government agency is going to prevent that. Nor should they.
Investors who have money stashed with BlackRock, State Street or Vanguard should probably rethink that decision. Federal financial regulators need to stop being accomplices in the use of investors dollars to advance political agendas.
The federal government should compel funds to build more transparency into their activities so investors can act on better, more complete information. Investors should be able to have the ability to approve or condition the actions of those with whom they invest their cash.
Finally, part of the solution should include consideration of breaking up the three largest funds and thinking about whether there should be size limits on funds. No one person or any one group of people should control that much money. It invites abuse. Which is exactly what has happened with ESG.
Michael McKenna is the president of MWR Strategies. He was most recently a deputy assistant to the president and deputy director of the Office of Legislative Affairs at the White House.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.
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