As Republicans take control of the House, many within their ranks have vowed to use their power to take on ESG (environmental, social, and governance) investing, seeing it as a form of activist driven “woke capitalism,” which has no place in an analysis of a company’s valuation or in making investment decisions. However, ESG is far from “woke.” In fact, ESG is best seen as a natural outgrowth of conservatism that has been rejected by Republicans out of pure partisanship, not ideological principle.
ESG gets its woke label because this sort of analytical framework also non-explicitly looks at financial data when deciding whether a company is worth investment. Qualities such as environmental and social impact are examined to determine the effect the company has on the world. Internally, this framework also looks at how the company is run, which turns on factors such as how inclusive and diverse it is and the degree of transparency it operates with. Taken together, these elements get evaluated and graded in much the same manner that a company’s creditworthiness gets rated based on its assets and liabilities.
What is often lost on Republicans as they attack ESG is that, while it may consider and reward corporate behaviors that the left often champions, it is also unequivocally a measure of what we can expect from a company in terms of its long-term value, which explains why so many financial experts expect it to remain a standard part of doing business going forward. This is because ignoring the features of a company that form its ESG score is ignoring pivotal data that tells us whether a company’s profit is sustainable.
Imagine a company that makes money today by creating excessive pollution and environmental degradation. How long could they operate this way before even the most sensible of government regulations tank their profits? Or what about a company that consistently leaves the communities it inhabits worse off than if they were not there at all? How long could that last before their reputation catches up to them? So too is a company’s balance sheet destined for red ink if they only operate via groupthink, or at the behest of an opaque megalomaniac. These factors matter when you wish to judge a company’s financial future. Succinctly put, a poor ESG score is a sure sign that a company’s future value is greatly imperiled.
As to how ESG is a natural bedfellow of modern conservatism, one must first understand that at the heart of said ideology is a deeply egoist ethical framework. Far from being an insult implying the narcissism of those who subscribe to it, egoism is a philosophy which holds that the right decision is always the one that maximizes one’s long-term self-interest. This consequence-focused philosophy applies whether we are dealing with a person or a company; it’s the long-term results of our decisions that matter and we ought to always choose whatever leaves us with the best possible outcome. In other words, egoism demands that we seek to maximize our own long-term self-interest.
Adam Smith’s concept of the invisible hand beautifully espouses an argument for a deeply egoist approach to business, one that modern conservatives are likely to treat with the reverence of scripture. It is Smith’s view that, by each of us always seeking to maximize our own self-interest, society as a whole will be better off than if we or the heavy hands of government were to guide our decisions in explicit pursuit of the common good. A more modern example of how conservatism and egoism go hand-in-hand can be seen with Ayn Rand’s rational egoist approach to politics, which overtly called for the naked pursuit of self-interest above all else.
One cannot fully evaluate the long-term prospects of a company without ESG data any more than you could predict a person’s future health if you were to willfully ignore readily available information that would reveal their blood pressure or cholesterol levels. While ESG, much like these health measures, aren’t by any means prefect predictors of what the future holds, they are nevertheless invaluable tools that any person hoping to maximize their own long-term self-interest would be foolish to ignore.
Nicholas Creel is an assistant professor of business law at Georgia College and State University.
The views expressed in this article are the writer’s own.