Understanding why ESG Scores are Bad


By Justin HaskinsJack McPherrin with The Heartland Institute.

What are ESG scores, and why are so many advocates of liberty deeply concerned about them?

Key Terms and Issues

Klaus Schwab and a growing list of powerful global economic and political elites, including BlackRock CEO Larry Fink[1] and President Joe Biden,[2] have recently committed to a global “reset” of the prevailing school of economic thought. They seek to supplant the entrenched “shareholder doctrine” of capitalism, which—as Milton Friedman famously espoused over 50 years ago—holds that the only purpose of a corporate executive is to maximize profits on behalf of company shareholders.[3]

To replace shareholder capitalism, Schwab, Fink, Biden, and a legion of their peers have promulgated a nouveau “stakeholder doctrine,” commonly referred to as “stakeholder capitalism.” This approach, which aims to harness the growing clamor for more socially conscious corporate decision-making, authorizes, incentivizes, and even coerces corporate executives and directors to work on behalf of social objectives deemed by elites to be desirable for all corporate stakeholders—including communities, workers, executives, and suppliers.[4]

Environmental, social, and governance (ESG) scores—a social credit framework for sustainability reporting—are being used as the primary mechanism to achieve the shift to a stakeholder model. They measure both financial and non-financial impacts of investments and companies and serve to formally institutionalize corporate social responsibility in global economic infrastructure.[5]

Environment, social, and governance scores are theoretically supposed to incentivize “responsible investing” by “screening out” companies that do not possess high ESG scores while favorably rating those companies and funds that make positive contributions to ESG’s three overarching categories. A company’s ESG score has become a primary component of its risk profile.[6]

Who Are the Agents Responsible for this Shift, and What Have They Done to Bring It About?

Although there have been many ESG frameworks developed over the past decade, in the past three years alone, three major documents and compacts have been signed by a coalition of corporate governors, political elites, central bank directors, international organization representatives, and other powerful individuals. Together, they have had a substantial impact on the global economy and the shift to ESG.

In August 2019, The Business Roundtable (TBR)—comprised of 181 of the most powerful corporate executives in the United States—officially revised its conception of a corporation’s purpose to “promote an economy that serves all Americans.”[7] The companies these CEOs represent hail from nearly all sectors of the U.S. economy, including major financial institutions, media conglomerates, technology firms, defense contractors, pharmaceutical companies, and myriad others. Some of the signatories are listed below.

  • Jeff Bezos – Founder and former CEO of Amazon
  • Doug Parker – CEO of American Airlines
  • Tim Cook – CEO of Apple
  • Brian Moynihan – CEO of Bank of America
  • Larry Fink – Chairman and CEO of Blackrock
  • James Quincey – Chairman and CEO of Coca-Cola
  • Ed Bastian – CEO of Delta
  • Jim Fitterling – Chairman and CEO of Dow
  • Jim Farley – President and CEO of Ford Motor Company
  • Lachlan Murdoch – Executive Chairman and CEO of Fox
  • David Solomon – Chairman and CEO of Goldman Sachs
  • Alex Gorsky – Chairman and CEO of Johnson & Johnson
  • Jaime Dimon – Chairman and CEO of JP Morgan Chase
  • Marillyn Hewson – Chairman, President, and CEO of Lockheed Martin
  • James Gordman – Chairman and CEO of Morgan Stanley
  • Adena Friedman – President and CEO of Nasdaq
  • Kathy Warden – Chairman, CEO, and President of Northrop Grumman
  • Safra Catz – CEO of Oracle
  • Albert Bourla – CEO of Pfizer
  • Kevin Johnson – President and CEO of Starbucks
  • Doug McMillon – President and CEO of Walmart[8]

The international community quickly followed suit; the December 2019 summit of the World Economic Forum (WEF) in Davos formally announced that the new purpose of a corporation would be to “engage all of its stakeholders in shared and sustained value creation. … The best way to understand and harmonize the divergent interests of all stakeholders is through a shared commitment to policies and decisions.”[9] Members of the WEF’s leadership team include its founder and CEO Klaus Schwab, Blackrock CEO Larry Fink, International Monetary Fund Director Kristalina Georgieva, former IMF Director and current European Central Bank Director Christine Lagard, former U.S. Vice President Al Gore, European Commission President Ursula von der Leyen, and Alibaba CEO Jack Ma, among many others.[10]

The third effort—the United Nations Global Compact—officially incorporates ESG scores into all firm-level investment and decision-making processes. As of January 25, 2022, the Principles of Responsible Investment (PRI), a group supported and promoted by the United Nations, reported 4,721 signatories from more than 135 countries had signed PRI. Collectively, these businesses, investors, investment management firms control more than $100 trillion in assets.[11] The PRI pact emphasizes the importance of ESG disclosures and sponsors pressuring companies into ESG implementation.[12]

How Widespread Have ESG Disclosures Become?

To put it mildly, ESG scores have spread like wildfire.

In the United States, 98 percent of the country’s top financial companies now disclose ESG scores, and 82 percent include the information in their annual reports, as of the end of 2020. As one analyst remarks, “Investors and regulators are increasingly demanding information on the non-financial performance of all investments. … For companies, the stakes are real. ESG reporting can impact access to capital and the ability to attract new investors.”[13]

Internationally, more than 15,000 companies have signed on to the U.N. Global Compact, which uses ESG to track a company’s progress toward its determined Sustainable Development Goals (SDGs).[14]

How Are ESG Scores Determined?

There is no uniform approach to specific benchmarks, measurement, or ratings; instead, there are multiple overlapping systems, each sponsored by different international governmental organizations and financial institutions.

A recent paper aggregating evidence from more than 1,000 studies on ESG performance found “studies use different scores for different companies by different data providers.”[15]

One study analyzing six prominent ESG ratings agencies noted that each of the six companies employs different category scopes, different measurement of those categories, and different assigned weights to those categories. Additionally, a rater’s overall subjective view of a firm was found to influence the rater’s assessment.[16]

The system promoted by the International Business Council (IBC), which incorporates 45 metrics, combine completely different types of data. The IBC’s method mixes quantitatively determined metrics such as “Total R&D Expenses” and “Total Social Investment” with qualitative metrics such as “Purpose-Led Management.” These metrics are then subjectively weighted according to the preferences of corporate directors, and then aggregated into a number that is supposed to resemble a risk profile.[17]

There truly is no objective, uniform ESG model. ESG scores are often subjectively determined and typically depend on potentially biased self-reporting from large corporations.

What Are Some of the Most Important Concerns with ESG Models?

1. Corporations, Banks, and Financial Institutions Are in Control

Under a free-market economic model, businesses respond to the demands and preferences of customers, who effectively vote with their dollars for the products and services they want businesses to provide.

A stakeholder capitalism model, which relies on ESG, is designed to ignore consumers and put corporations, banks, and investors in the driver’s seat. In fact, this is primary purpose of ESG. According to advocates of stakeholder capitalism, their proposed shift is needed to tackle the biggest problems of today and tomorrow, including climate change and economic inequality. But, in reality, ESG models do very little to address these issues. They do, however, make some investors and corporations exceptionally wealthy, often at the expense of others.

ESG systems also limit opportunities and, in some cases, the rights of individuals. And because in the United States ESG frameworks are not operated by government agencies, individuals and families have no constitutional protections guarding against such actions.

For example, an ESG model targeting “misinformation” online coerces social media companies to ban speech they might otherwise allow. Similarly, a consumer who wants to purchase a gasoline-powered car will under most ESG models eventually be forced to purchase an electric vehicle instead. Likewise, future ESG frameworks could include mandates for restaurants to provide or restrict certain kinds of foods, or even encourage vaccine requirements for employees and customers.

Because ESG systems can be adjusted at virtually any time, and without any say by the public, there are no limits to the impacts ESG could have on society, raising serious ethical questions about the power ESG models give to a relatively small number of corporate, banking, and investment leaders.

As one article published by the Global Financial Markets Center at Duke University’s School of Law rightly questions, “Is it appropriate for company executives, who have been neither elected nor empowered to make social decisions, to decide that the prices set in the economy are not appropriate indicators for making corporate decisions. … are corporate executives qualified to evaluate these social policies? More importantly, what gives them the right to evaluate such policies on behalf of their shareholders and other stakeholders such as employees?”[18]

2. ESG’s Tenuous Links to Financial Welfare

Though many studies show a slight positive relationship between ESG activities and financial performance, this relationship is weak, at best, and levels off in the long-term.[19],[20],[21] This leveling occurs because firm value receives an initial spike when corporate leaders publicly come out in support of ESG principles, such as what occurred with many PRI signatories.[22]

Firm value can also be jeopardized when engagement in ESG issues is forced. For example, if unqualified candidates are chosen to sit on a board simply because they fulfill an ESG diversity quota, or if unqualified managers are chosen to meet similar ESG benchmarks, this will over time result in non-optimal firm performance.[23] Additionally, many companies that have been coerced into adopting ESG have abandoned proven business practices and profitable products and services to ensure they meet ESG guidelines, even though these decisions might have a remarkably negative long-term effect on a business’s ability to earn a profit.

3. Stakeholder Interests, Power concentration, and Wealth Accumulation

Though the effect of ESG scores upon a company’s overall financial health is indeterminate, there is no doubt that investment in ESG funds has soared. In 2020, investment into “sustainable funds” surpassed $50 billion, 10 times that of 2018.[24]

Cui bono?

ESG funds have been tremendously lucrative to the financial institutions and their corporate stakeholders at the heart of this radical shift in corporate governance. ESG’s novelty has justified higher management fees, and the system “gives a pass to a large number of harmful actors, driving large funds flows to them and lowering their cost of capital, while CEO’s and Wall Street executives celebrate a lucrative movement that they hope will improve their public image.”[25]

And it is BlackRock, the world’s largest private asset manager, that has stood to gain the most. BlackRock holds a stake in almost every public company with its $7.4 trillion in assets under management, and it has leveraged its size and diversification to fully reap the benefits of ESG investment.[26] BlackRock’s iShares Global Clean Energy ETF is one of the largest ESG funds in the world.[27]

Is it a coincidence that BlackRock is run by Larry Fink, who has largely spearheaded the stakeholder takeover and is a board member of the World Economic Forum, one of the leading advocates of ESG?Fink and his fellow corporate executives at other firms are more protected from accountability than ever under this new paradigm.[28] BlackRock, which has become a top-five shareholder in the vast majority of important global companies, is perfectly situated to influence ESG decisions via its considerable voting blocs, giving this one financial firm a massive amount of power to shape society.[29] When combined with other large investment firms, such as State Street Global Advisors, the demands of the wealthiest Wall Street investors become virtually impossible to ignore for corporations and the smaller businesses they often work with. 

The above primer was originally published by The Heartland Institute.


[1] “A company’s ability to manage environmental, social, and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process.”[1] – Larry Fink. Citation: Larry Fink, “Dear CEO Letter,” Blackrock, 2018, https://www.blackrock.com/corporate/investor-relations/2018-larry-fink-ceo-letter

[2] “It’s way past time we put an end to the era of shareholder capitalism. The idea the only responsibility a corporation has is with shareholders, that’s simply not true, it’s an absolute farce.”[2] – Joe Biden. Citation: Joe Biden, “Joe Biden Speech Transcript on Economic Recovery Plan July 9,” Rev.com, accessed Jan. 24, 2022, https://www.rev.com/blog/transcripts/joe-biden-speech-transcript-on-economic-recovery-plan-july-9

[3] Milton Friedman, “The Social Responsibility of Business is to Increase its Profits,” New York Times, Sep. 13, 1970.

[4] Lucian Bebchuk and Roberto Tallarita, “The Illusory Promise of Stakeholder Governance,” Cornell Law Review, Vol. 106, December 2020, https://cornelllawreview.org/2020/12/01/the-illusory-promise-of-stakeholder-governance-2

[5] Mark Bergman, Ariel Deckelbaum, and Brad Karp, “Introduction to ESG,” Harvard Law School Forum on Corporate Governance, Aug. 1, 2020, https://corpgov.law.harvard.edu/2020/08/01/introduction-to-esg

[6] Christopher Johnson, John Stout, and Ashley Walter, “Profound Change: The Evolution of ESG,” The Business Lawyer, Vol. 75, Fall 2020.

[7] Business Roundtable, “Statement on the Purpose of a Corporation,” Aug. 19, 2019, https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans

[8] Business Roundtable, “Opportunity Agenda,” accessed Jan. 24, 2022, https://opportunity.businessroundtable.org/ourcommitment

[9] World Economic Forum, “Davos Manifesto 2020: The Universal Purpose of a Company in the Fourth Industrial Revolution,” Dec. 2, 2019, https://www.weforum.org/agenda/2019/12/davos-manifesto-2020-the-universal-purpose-of-a-company-in-the-fourth-industrial-revolution

[10] World Economic Forum, “Leadership and Governance,” weforum.org, accessed January 24, 2022, https://www.weforum.org/about/leadership-and-governance

[11] Principles for Responsible Investment, “About the PRI,” unpri.org, accessed January 24, 2022, https://www.unpri.org/pri/about-the-pri

[12] Ibid.

[13] Richard Threlfall et al., The Time Has Come: The KPMG Survey of Sustainability Reporting 2020, KPMG, December 2020, https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/11/the-time-has-come.pdf

[14] U.N. Global Compact, “Participation,” accessed January 24, 2022, https://www.unglobalcompact.org/participation

[15] Tensie Whelan et al., “ESG and Financial Performance: Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015–2020,” NYU Stern Center for Sustainable Business and Rockefeller Asset Management, 2021, https://www.stern.nyu.edu/sites/default/files/assets/documents/NYU-RAM_ESG-Paper_2021 Rev_0.pdf

[16] Florian Berg, Julian Koelbel, and Roberto Rigobon, “Aggregate Confusion: The Divergence of ESG Ratings,” MIT Sloan and the University of Zurich, Joint Working Paper, May 17, 2020, https://mitsloan.mit.edu/sustainability-initiative/aggregate-confusion-project

[17] Jonathan Walter, lead author, Toward Common Metrics and Consistent Reporting of Sustainable Value Creation, World Economic Forum, Sept. 2020, http://www3.weforum.org/docs/WEF_IBC_Measuring_Stakeholder_Capitalism_Report_2020.pdf

[18] Bradford Cornell and Aswath Damodaran, “Valuing ESG: Doing Good or Sounding Good?” Duke University School of Law, April 8, 2020, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3557432

[19] Jun Xie et al., “Do Environmental, Social, and Governance Activities Improve Corporate Financial Performance?” Business Strategy and the Environment, July 2018, pp. 286–300.

[20] Tamas Barko, Martijn Cremers, and Luc Renneboog, “Shareholder Engagement on Environmental, Social, and Governance Performance,” Journal of Business Ethics, July 2021, https://link.springer.com/article/10.1007/s10551-021-04850-z

[21] Haitian Lu, “The ‘Legalisation’ of Corporate Social Responsibility,” Asia Pacific Law Review, Vol. 24, No. 2, pp. 123–148.

[22] Stuart Gillan, Andrew Koch, and Laura Starks, “Firms and Social Responsibility: A Review of ESG and CSR Research in Corporate Finance,” Journal of Corporate Finance 66, 2021.

[23] Lisa Persson, “A Firm’s Engagement in Environmental, Social, and Governance (ESG) Issues and its Effect on Portfolio Returns,” University of Gothenburg School of Business, Economics, and Law, master’s thesis, February 2017.

[24] Jon Hale, “A Broken Record: Flows for U.S. Sustainable Funds Again Reach New Heights,” Morningstar, Jan. 28, 2021, https://www.morningstar.com/articles/1019195/a-broken-record-flows-for-us-sustainable-funds-again-reach-new-heights

[25] Hans Taparia, “The World May be Better Off Without ESG Investing,” Stanford Social Innovation Review, July 14, 2021, https://ssir.org/articles/entry/the_world_may_be_better_off_without_esg_investing

[26] Richard Morrison, “Environmental, Social, and Governance Theory: Defusing a Major Threat to Shareholder Rights,” Competitive Enterprise Institute, May 2021.

[27] Institute for Pension Fund Integrity, “Behind BlackRock’s ESG Shift,” May 2020, https://ipfiusa.org/wp-content/uploads/2020/05/Behind-BlackRocks-ESG-Shift.pdf

[28] Bebchuk and Tallartia, 2020.

[29] Ibid.

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