Donald Trump’s victory in the 2024 election was driven to a considerable extent by his championing of the fight against so-called “diversity, equity, and inclusion” (DEI) policies, which voters of all backgrounds had come to recognize as a front for programs of arbitrary race- and gender-based favoritism and discrimination in academia, government, and business. But even as the backlash against DEI continues to grow, relatively less attention has been paid to DEI’s equally dangerous cousin, ESG.
The “environmental, social, and governance,” or ESG movement, championed in the world of business and investing for the past decade, is a standard for measuring corporate performance according to a company’s adherence to a left-wing agenda, rather than according to financial success.
Judgments of corporate behavior based on these standards are inevitably subjective. “Environmental” criteria include mitigating carbon emissions as well as air and water pollution and promoting “sustainability.” “Social” measurements cover paying “fair” wages and otherwise benefiting local communities. “Governance” highlights racial and gender “diversity” in corporate boards (thus incorporating DEI).
Among the programs incorporating ESG was the Paris Climate Agreement of 2015, from which Donald Trump withdrew the United States during his first term. While Joe Biden reentered the agreement upon his election, Trump has just removed the U.S. from it for a second time.
Doubtless influenced by the desire to enhance their reputations as well as their managers’ desire to be “responsible” corporate citizens, major American investment firms like BlackRock and Vanguard – managing trillions of dollars in assets, including public pension funds – signed on to the ESG movement. This commitment included the Net Zero Asset Managers Initiative, which aimed at achieving zero net emissions in all investments (although Vanguard withdrew from the initiative in 2022).
While promoting “equity” is a major stated goal of the ESG movement, its proponents also make the unlikely claim, advanced in leading academic finance journals, that ESG is inherently profitable – in other words, that corporations will “do well by doing good,” in the sense of “goodness” defined by ESG advocates.
A recent article by James Mackintosh in The Wall Street Journal illuminates how that assertion was increasingly espoused in papers published by the leading five finance journals until very recently. As he explains, citing a study by Emory finance professor Wei Jiang, between 2011 and 2020, “all the published papers” on the issue were either positive or neutral about the effect on investors of ESG initiatives by companies.” These papers “showing a link between investment returns and ESG” were “easy to get published,” while “anti-ESG papers” rarely appeared in the top journals.
It was only after 2021, when the post-pandemic “bubble” in so-called “green” stocks burst, that “negative papers [on ESG] started to be published, and now most papers find there is a trade-off” between companies doing what are considered good things by ESG criteria“and investors making money.”
The problem isn’t merely that market conditions have changed, however. As finance professor Alex Edmans of the London Business School explains in his book May Contain Lies, editors’ desire to believe that it would be profitable to do what they regarded as “the right thing” caused them to “overlook flaws” in the research they chose to publish.
Of course, common sense would have led most investors who thought about the matter to doubt that mandating diversity quotas for corporate boards, reducing the use of carbon-based fuels, or paying higher wages than market conditions dictated would be likely to enhance a company’s profits.
This is not to deny that corporate managers had a right to “sell” their products to investors as contributing to the causes of social justice (however defined), environmental improvement, or staving off climate disaster. Nor is it wrong to wish that companies conform to basic ethical standards when investing in less developed countries where environmental standards are less strict, or when considering investing in a nation like Russia that is engaged in aggressive warfare or (at the extreme) in a country like China, where goods are produced by enslaved Uyghurs.
But what the findings from Professors Wei Jiang and Edmans expose is something more alarming, even if all too familiar: the willingness of supposedly nonbiased academic journal editors to use their positions to advance their own favored partisan causes by publishing flawed research that supports those causes and blocking or minimizing findings that contradict their personal political agendas.
As Mackintosh notes, one of the leading original sponsors of imposing ESG standards was the wealthy and socially prominent American-British businesswoman Lynn Forester de Rothschild, a friend of the Clintons who helped finance Hillary’s 2016 presidential campaign. Rothschild “gathered together investors and CEOs overseeing $25 trillion,” along with Hillary’s ex-President husband, to advance the cause, literally claiming in a Wall Street Journal column that by adopting the policy companies could “both do well and do good.”
“Finance academics” soon joined the cause. But now Lady de Rothschild, as Mackintosh reports, has backtracked, regretting that her “obvious” point that “companies ought to treat their workers and customers well” (as if that point needed to be discovered!) “slid down into an alphabet soup” (meaning DEI and ESG). Instead, she now hopes that Donald Trump can “support the working class by increasing the minimum wage and opportunities.” (Of course, a mountain of economic research refutes the notion that minimum wage laws promote the well-being of workers as a whole, but evidently a woman who “got rich investing in telecoms” isn’t required to possess that sort of knowledge.)
It is somewhat surprising to learn that even a field like finance, presumably more focused on the bottom line than other academic pursuits, has become a victim to the politicization of the scientific enterprise. One would have hoped that journal editors in that discipline would not have fallen so heavily for fads promoted by the wealthy and socially prestigious as to apparently suppress the presentation of opposing (and it turns out, sounder) views.
David Lewis Schaefer is a Professor Emeritus of Political Science at College of the Holy Cross.