The Real Force Behind “Woke” Corporations

AMAC Exclusive – By David P. Deavel

Things are tough in the land of the free under Joe Biden. The Heritage Foundation’s 2021 Index of Economic Freedom gave the U. S. the lowest ranking it has ever had. The U. S. is number 20 in the world and third in the Americas. It is only in Heritage’s “mostly free” category. Thanks to the Biden SEC, a number of big-time investors, and some activist board members, our freedom may continue to slide—all in the name of doing good, or more precisely, all in the name of doing ESG. The ESG—that’s Environmental, Social and Governance—investing movement has been gaining ground now over the years. In so far as investors can invest in any kind of company they want to, many see the movement as beneficial. Yet because the ESG movement’s goals are now becoming reality through the power of big capital and the government, it poses a distinct danger to American self-government and prosperity.

The premise of the advocacy sounds benign. Corporations, say the ESG advocates, need to provide information on how much they are doing for the environment and for social issues. Supposedly, all they are asking for is information about how the company operates. But what specifically are they asking?

An article at the financial services firm Morningstar summarizes what the terms mean: “Environmental factors include company behavior and policies on issues like climate, pollution, energy efficiency, and renewable energy. The social factor evaluates things like a company’s commitment to inclusion and diversity in the workplace, fair wages, [opposing] forced labor, supporting the local community, customer privacy, and product safety. Finally, the governance factor measures things like executive pay, political donations and lobbying, bribery and corruption, and board-level attention to sustainability and climate issues.” 

 No doubt almost every investor wants a company that is not committing bribery or corruption, that pays a fair wage, supports the local community, customer privacy, and product safety. But what of all the other stuff? It’s pretty clear that left-wing positions on environmentalism and on “inclusion and diversity” are central to this endeavor. In other words, ESG is yet another vehicle, much like the previous movement for Corporate Social Responsibility and the current devotion to Stakeholder Capitalism, for making businesses do the bidding and serve left-wing interests.

Again, some might question the depiction of “making” businesses do things. How does that work? The first part of the equation is corporate boards themselves, which often have a cohort of ESG advocates. These can push the corporation one way or another if they have the numbers. But even if they don’t, they have allies in the financial world.

One of the ways the ESG movement has spread is through third-party agencies that give ratings to companies based on whether the companies hew to these concerns. An article at the Harvard Law School Forum on Corporate Governance site from 2017 noted that there were too many such agencies to name, but gave snapshots of the most influential groups providing such ratings: Bloomberg ESG Data Service, Corporate Knights Global 100, DowJones Sustainability Index (DJSI), Institutional Shareholder Services (ISS), MSCI ESG Research, RepRisk, Sustainalytics Company ESG Reports, and Thomson Reuters ESG Research Data. A poor rating by such groups can truly damage a company with investors. Thus, the impetus for companies to turn left even when doing so doesn’t really give them much return on investment. The fear of the corporate version of cancellation is itself too much of a risk to ignore for most corporations.

Yet it is not just the ratings agencies themselves that pose the risks. It is large investment firms that can threaten corporations. Chief among them is BlackRock, one of the world’s largest investment managers. BlackRock’s CEO Larry Fink announced earlier this year in his annual letter to shareholder that companies that take BlackRock money must “disclose a plan for how their business model will be compatible with a net-zero economy” or he will pull his money. There is perhaps good reason to ask how serious Fink is, given that this will apply only to actively managed funds, which account for a quarter of his portfolio. Mr. Fink has environmental principles—and if they don’t generate enough income, he also has other principles that can apply to the other three quarters of his portfolio.

But such power in the meantime is again somewhat overwhelming for smaller corporations or those that have been surviving but not thriving. What is more worrisome is that, in addition to the ratings agencies and some of the big investment firms, the government itself is now pushing such measures—not, of course, through legislation, but through the administrative state. The SEC announced in March, with predictable lines about how “climate related events” have “become more frequent and intense,” that they would make disclosures about “climate” one of the main focuses of their work. In May, a Biden executive order told agencies to do all they could to safeguard the financial security of Americans in the face of climate dangers, which was followed up by the Department of Labor in a proposed rule that seemingly allows fiduciaries to take into account these environmental concerns in picking investment plans.

Will the Biden Administration go further than these measures and take up something like their Operation Chokepoint, the Obama-era use of the FDIC to cut off finances for companies such as firearms dealers and payday lenders by investigating the banks that did business with them? Will they go beyond mandating disclosures and actually regulate companies based on their climate and diversity practices? It depends on what’s going on at the other agencies—I think it quite likely that no conversions to freedom are happening among Biden appointees. It’s discomforting to know that several executives from BlackRock, one of ESG’s most zealous corporate backers, landed in the Treasury Department and at the top of the National Economic Council. As Charles Gasparino noted, “the appearance of a revolving door between BlackRock and the White House deserves more scrutiny.” The nexus of the government left and the world of BlackRock and other woke capital outfits—no matter how pure their ideological fervor may be—is a frightening one.

What we have right now is frightening enough. Operation Choke Point was an official government project and was eventually stopped. In the current situation, the power to cut off businesses not operating according to woke standards is being exercised by non-government actors. Woke capital is winning a great deal of the time through these methods.

Yet there is much hope. If the Biden Administration does start to use its power, there will be repercussions. Resistance to woke capital is already growing, especially in the form of alliances such as those being built by groups such as New Founding, and such resistance would probably grow exponentially if ESG were enforced by regulations. Even if ESG is not enforced administratively, it is not clear how far corporations will go, especially if their bottom lines start to sag. If Larry Fink is not putting all his eggs in the ESG basket, it’s a safe bet that even he might consider that going fully woke just might entail going fully broke.

David P. Deavel is editor of Logos: A Journal of Catholic Thought and Culture, co-director of the Terrence J. Murphy Institute for Catholic Thought, Law, and Public Policy, and a visiting professor at the University of St. Thomas (MN). He is the co-host of the Deep Down Things podcast.