To mark PPE@10 this feature starts a series of posts to celebrate ten years of Progress in Political Economy (PPE) as a blog that has addressed the worldliness of critical political economy issues since 2014.
Last month, BlackRock, the world’s largest asset manager, made headlines as its support for shareholder proposals on environmental, social and governance (ESG) issues tanked at 4%, down from a peak of 47% in 2021.
This looks like an extraordinary pivot because in 2020 BlackRock became infamous as a posterchild for ESG investing. In his open letters to investors and companies that year, BlackRock CEO Larry Fink declared a ‘fundamental reshaping of finance’ whereby long term company profits would be dependent on ‘embracing purpose and considering the needs of a broad range of stakeholders’. He claimed this would involve putting sustainability at the heart of BlackRock’s investment strategy and integrating ESG factors into its investment decision making.
This is indicative of the chaos surrounding ESG investing in the last couple of years. Up to 2021, ESG investment funds enjoyed steady inflows as the politics of climate catastrophe, in particular, drove an interest in green investments and the alluring promise of resilience. Since then, the market has been rocked by a series of upsets including falling relative returns as fossil fuel stocks surged with the Russian offensive in Ukraine, widespread claims of greenwashing, and the US culture wars over ‘wokeness’. As a result, legislators around the world are tightening regulations on disclosure and investment standards with respect to ESG issues (see here and here, for example).
At stake in these machinations between global asset managers, the firms they invest in, and regulators is the core question of what ESG investing really does and its function at the frontiers of contemporary capital accumulation. This is the question addressed in my recent book, False profits of ethical capital.
ESG requires the integration of financially material environmental, social and governance issues into investment decisions. The practice is applied to corporate stocks and bonds as a way of measuring the extent to which investee firms are managing ESG risks or profiting from ESG opportunities. Its purpose is to maximise risk-adjusted returns. It has no explicit objective with respect to climate change, ecological impacts, social justice, or good governance.
Despite its lack of any clear commitment to sustainability or responsible corporate conduct, ESG investing comprises the lion’s share of what is typically counted as sustainable or responsible investment activity in the global economy today (see here for a further discussion).
So, how is it that a practice which makes no explicit claim to a sustainability objective has been presented (and indeed, often castigated!) as a vehicle for climate action and for building economic, social and ecological resilience?
There is an extraordinary dissociation between what ESG does in practice and the rhetoric that surrounds it. But this is not a consequence of responsible investing losing its heart or becoming disconnected from its core principles. The ambiguity was baked into the model from the early 2000s when organisations like the United Nations and the World Economic Forum began claiming that integrating ESG issues into investment and corporate management practice would ‘contribute to the sustainable development of societies’ (Global Compact, 2004, p. ii).
This sentiment is the basis of the ‘responsible capital imaginary’ that my work identifies. This imaginary suggests not only that capital can be responsible, but that responsible capital is more profitable, more efficient and can reduce systemic risk. In this way, ESG investing is a post-political project that assumes managing risks for capital will also be beneficial for other ‘stakeholders’. Tariq Fancy, former head of sustainable investing at BlackRock, highlighted the flaws in this assumption with his comments on the perverse priorities of ESG investing:
‘protecting an investment portfolio from the disastrous effects of climate change is not the same thing as preventing those disastrous effects from occurring’ (Fancy, see also Buller 2022).
Michael Jensen’s work on enlightened shareholder value in the early 2000s was a foundation for this responsible capital imaginary. Jensen argued that enlightened corporate managers should incorporate the interests of stakeholders. But he redefined stakeholders as those ‘all individuals or groups who can substantially affect the welfare of the firm’ (Jensen 2002 p236). Crucially, Jensen’s definition excluded those constituencies whose welfare the firm’s conduct would have an impact upon (cf. Freeman 1984).
The second essential feature of Jensen’s rapprochement between shareholder value and stakeholder interests was the insistence on a financial criterion: corporate managers should ‘[s]pend an additional dollar on any constituency to the extent that the long-term value added to the firm from such expenditure is a dollar or more’ (Jensen 2002 p242). Here is the basis of ESG investing’s insistence on financial materiality as a precondition for the issues it will consider in making investment decisions.
With the application of these two principles, financial risk became the fissure through which ethical issues were squeezed into corporate governance models and framed as a path to ‘enlightened’ management practice.
Analysts typically claim that their decisions about ESG investing are not guided by ethics.
But a detailed analysis of the architecture of ESG investing reveals how investment analysts translate popular debate and contest over ESG issues (which are imbued with ethical dimensions) into a financial decision making framework. Risk is the organising principle that translates popular demands for sustainability into the language of financial markets, connecting seemingly disparate phenomena and subjecting them to an investment logic. Ethical questions about labour rights, ecological destruction and corruption are framed in terms of operational, legal, credit or reputational risks. These are assessed depending on the particular industry and / or firm to determine the likely impact on metrics of profitability. In this way, ESG investing produces a particular form of ethics: a derivative ethics which enables investors to speculate about the market implications of particular ethical issues and take a position on those issues through their portfolio. The point of ESG analysis is not to determine which choice is more ethical but which configuration of exposure to ethical risk will deliver the highest risk-adjusted returns.
ESG investing, then, operates through a dynamic and contingent form of ethics. Investors are speculating on the manifestation of ethical issues, on the extent to which the regulatory environment will change or the anticipated stringency of enforcement regimes; on the incentives for renewable energy production or the imposition of penalties for pollution. The social, ecological and political contingency of ESG risk reveals the absence of any consistent ethical foundation, and also presents some potentially interesting angles for political action.
While the proposition that ‘better’ management of ESG risk will render the global economy more resilient and stable is fanciful, political activity that creates or increases ESG risks to investors has some prospects for instigating social change. The work of NGOs such as the ClientEarth and Global Witness uses the opportunities presented by accountability and sustainability standards for investors to increase the risks associated with certain forms of investment. ClientEarth advocates more stringent regulation around a wide variety of ecological and social justice issues, and provides support to civil society organisations to enable them to hold firms accountable to those regulations. In doing so, they put upward pressure on the ESG risks to which firms and investors are exposed. Global Witness recently brought a complaint at the US Securities and Exchange Commission against Shell. The NGO relied on discrepancies in Shell’s reporting between the US and the EU jurisdictions, where different standards of disclosure apply, to allege that the company had exaggerated its investment in renewables in US filings.
Even outside the realm of corporate boardrooms and stock exchanges, political action that puts pressure on states to regulate and enforce environmental and social standards, or that holds corporations to account, can contribute to an escalation of ESG risk. While it is important to remain sceptical of the prospects for change via financial markets, the dynamic character of ESG risk reveals the inescapably political nature of the ethical questions that it generates.
Indeed, this tension is central to the current right-wing backlash against ESG investing, which correctly identifies these underlying political dynamics.
Fink has stopped using the term ESG, on the grounds that it has become too divisive, but continues to foreground the interests of ‘stakeholders’. In 2022, he posited that ‘stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not ‘woke.’ It is capitalism, driven by mutually beneficial relationships…’
ESG investing and stakeholder capitalism have emerged in response to capital’s escalating and overlapping crises and contradictions. Engineered by financial institutions and bureaucrats, they are not designed as a vehicle for resolving those crises and contradictions in the interests of workers or non-human nature. Rather, these practices generate what I characterise as “ethical capital”: a process through which political challenges to accumulation on social and environmental grounds are transformed into opportunities for profit. For workers and social movements, the most interesting question is not whether capital can be ethical or whether ESG is ‘woke’. It is instead whether, and if so, how increasing ESG risks to accumulation can force a reorganisation of production relations that prioritises human and ecological needs.
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