ESG Is Not About Ethical Standards And Ethical Values

Over the past year I’ve certainly had some fun banging on about those in the GOP who are ranting about ESG. Their flawed reasoning and fiery rhetoric made this an easy thing to do.

They say, quoting the immortal words of former Vice President Mike Pence in his May 26, 2022 letter to the Wall Street Journal, that “ESG is a pernicious strategy, because it allows the left to accomplish what it could never hope to achieve at the ballot box or through competition in the free market. ESG empowers an unelected cabal of bureaucrats, regulators and activist investors to rate companies based on their adherence to left-wing values.” I say, “Gosh, it’s nothing nearly as exciting as that. It’s simply about companies and investors managing material risk factors to ensure long-term value creation.”

But in the interest of being fair and balanced, I have an obligation to call out others whose politics are closer to mine when they are equally confused about ESG. My example is a January 26, 2022 essay “The Federal Government and the Ethical Value of ESG Policy” by John Pelissero, a political scientist and senior scholar for government ethics at the Markkula Center for Applied Ethics at Santa Clara University. The fundamental flaw in his thinking is revealed in the first paragraph:

“Although environmental, social, and governance (ESG) policies are most often associated with private sector and nonprofit sector decisions related to financial instruments and investments, the public sector has both an historical and expanding role in promoting the value of ESG in its policies and decisions. Governments’ adoption and implementation of ESG is an important ethical value.”

Strange as this may seem, I can understand GOP concerns about ESG when it is being defined as an “ethical value” and that the public sector is “promoting the value of ESG in its policies and decisions.” While there is broad agreement on some ethical values (i.e., it’s not okay to murder someone) there are also differences. Abortion would be a prime example in this country. Similarly, opinions differ how extensive the public sector should be. This is a perennial difference between the two parties. I obviously don’t like it when the Right is trying to make ESG a political issue. I don’t like it anymore when it’s coming from the Left. My good friend Dan Crowley (R) and I have written about how material risk disclosures must be distinguished from salient political issues. This is true across the political spectrum and now I have an example of this mistake on the other side.

The essay argues that ESG is important for promoting the public interest in its policy decisions in order to advance the common good of the nation. The link on “public interest” is a discussion about the ethical obligations of government officials to serve the public interest and not their own. Fair enough, but it is a political process that determines what the public interest is—and on this there are often raging debates.

Similarly, the link on “common good” is an excellent discussion about what this is and the barriers to achieving it such as “Different people have different ideas about what is worthwhile,” “And even if we agreed upon what we all valued, we would certainly disagree about the relative values things have for us,” and the American cultural commitment to “individualism.” Don’t get me wrong. I’m more in the camp of the common good crowd than some of my Republican friends, but this is a philosophical and political issue, not an ESG one.

The confounding of ESG and policies issues is rife throughout this essay. Professor Pelissero is as confused about what ESG is as the anti-ESG crowd is. The only difference is that he sees it as a good thing, and they see it as a bad thing. Pelissero argues that “There are three primary ways in which governments may promote ESG in their jurisdictions: (1) adopting ESG goals within government operations and services; (2) implementing ESG policies and regulations; and (3) incorporating ESG factors into decisions on government assets and liabilities.” The only one of these three where ESG is a valid concept is in the third one since it is from an investment perspective. But he rolls it into point (2) which is just one example of a weakly constructed argument.

For operations and services he states that “The history of the federal government enacting laws and issuing executive orders that value ESG is quite long.” One doesn’t “value ESG,” one manages material ESG risk factors to create value. Professor Pelissero lists various organizations that have been created by the government to address public policy issues regarding the environment (e.g., the National Forest Service, the Department of Agriculture, the Department of Energy, the Department of the Interior, and the Environmental Protection Agency (EPA). “Together, these federal departments and bureaus manage environmental policy and deliver services to protect the environment for the common good.” This is true but it isn’t ESG.

The existence of these departments and agencies has been decided by a political process and there is an ongoing debate about their scope of authority or even the merit of their existence. A recent example on scope is the recent Supreme Court decision, applauded on the right and derided on the left, limiting the authority of the EPA to regulate carbon emissions from power plants. Underlying this is the Major Questions Doctrine. Although I’m not a lawyer, this seems to me to have been invented out of thin air. Liberal lawyers feel the same way. Conservative lawyers don’t, illustrating the constant interaction between politics and law.

“The federal government also has a lengthy and extensive footprint in advancing social values in its operations and services.” Government entities created to address social issues are also discussed, such as the Department of Labor, the Department of Health and Human Services, the Social Security Commission, and the Equal Employment Opportunity Commission. “In each of these areas and more, the ethical standards of fairness and justice are paramount in the actions of the federal government.” Social values and ethical standards are obviously important. People can have strong (and differing) beliefs about them. But they aren’t ESG.

For policies and regulations he states that “Establishing and enforcing national standards that will serve the public interest is an important ethical role of the federal government.” I’ll put aside more sloppy thinking regarding executive orders since they are mentioned both here and above, although I should note that executive orders are always controversial. The Dems don’t like it when the GOP issues them and vice versa. Let me also put aside the notion of the “ethical role of the federal government,” an important concept to be debated, but not an ESG one.

I’m okay with citing things like the Clean Air Act (1970) and the Clean Water Act (1972). I think clean air and clean water are good and probably most Republicans would agree with me on this. But I freaked out 😱 when I read “A federal regulatory role in recent years has been the implementation of ethical standards on the use of ESG factors in investment and retirement plans.” I mean, this is like my worst nightmare of someone providing ammunition to the ESG Haters by calling ESG factors “ethical standards.” It’s as fundamentally wrong as calling ESG a “pernicious strategy” of lefty folks like me (although I’m not as lefty as you might think).

Then I read: “The Biden administration (2021-) is renewing the ethical commitment of the federal government to ESG practices. For example, the Securities and Exchange Commission is planning to require greater ESG disclosure requirements for corporations (SEC, 2021).“ This put me into such a mental shock I became unconscious for an indeterminate period of time. I mean, it’s hard enough arguing, as I have done in a letter to the SEC with a distinguished group of lawyers and head of a business association, against those who maintain the SEC doesn’t have the authority to issue standards for companies to report on climate information investors need for making their decisions. But, for the life of me, please don’t call this an ethical commitment! Now I have a well-intentioned but uninformed ESG neophyte calling disclosure for investment decisions an “ethical commitment?” Quoting Shakespeare and channeling Sting, “Be Still My Beating Heart.”

Had SEC Commissioner Hester M. Peirce (who I’ve written about before in “SEC Commissioner Hester M. Peirce’s Chocolate-Covered Ideological Screed”) read this she would be chortling with glee to add this to her cute but strained “Securities and Environment Commission” riff. If was a conspiracy theorist type, I’d say someone in the GOP paid this guy to write his essay.

Ironically, one issue the essay doesn’t address is ESG in the government’s own operations, a place where it could be justified. What the Professor calls “operations and services” is what the government is doing, not how it is doing it. In a private sector context, the latter is about ESG, and the former is about impact. Something that people across the political spectrum are confused about as I’ve explained here.

In fact, it was an e-mail exchange with a new Republican friend (Yes, I’m really serious about making friends with Republicans 🐥) that led me to finding this essay. He raised the good question about how ESG issues were being managed by the government itself regardless of the party in power. He wondered how the scope of the government’s activities compared to, say, the S&P 500 companies.

Forever being in an academic state of mind, I felt the need to do a bit of research. I found this calculator that shows federal government spending year-to-date. As I write, it’s around $907 billion. By comparison, the revenue of the largest country in the world is Wal-Mart at around $600 billion. Since revenues and costs in the public sector are, at least in theory, the same thing, let’s call the U.S. federal government the largest company in the world. Fair enough to ask how ESG is being managed. To do this, we need the right analogy to “material risk factors” in the private sector.

It’s obviously not shareholder value creation. Rather, it would have to do with the efficiency and effectiveness with which tax dollars are being used, something on which both the Dems and GOP would agree. These metrics would vary by department, being different for Defense than for Treasury. Presumably these could be determined, just as the Sustainability Accounting Standards Board (SASB) did for the private sector for 11 sectors subdivided into 77 industries. But this is operational ESG, not ESG as a policy or mission.

Taking the Department of Defense (DoD) as an example, it has stated that “The planet’s changing climate has a significant effect on Defense Department missions, plans and installations. DOD is elevating climate change as a national security priority, integrating climate considerations into policies, strategies and partner engagements.”

It also has a “Diversity, Equity, and Inclusion Statement”:

We are committed to making the DoD a workplace of choice that is characterized by diversity, equality, and inclusion. We remain steadfast in our commitment to promote an environment free from barriers that may prevent personnel from realizing their potential and rising to the highest levels of responsibility within the Department. To that end, the Department continues to strengthen policies and procedures that promulgate the Diversity and Inclusion and Equal Opportunity missions. We continue to enhance diversity and ensure equality across our entire workforce. We believe diversity is the key to innovation, inclusion is imperative for cohesive teamwork, and equality is critical to Total Force readiness.”

In its professional judgement, the leaders of the DoD clearly believe that climate change and DE&I are material to its mission which “is to provide the military forces needed to deter war and ensure our nation’s security.” Let me also state that obvious which is that it’s pretty hard to classify the DoD as some kind of “Woke” organization. Backing that up, not surprisingly the miltary has a distinctive skew to more conservative political beliefs, although there was a significant drop in support for the GOP when Trump ran for re-election. Think about that Election Deniers.

Oh, and here’s a suggestion for the Brain 🧠 Trust, like Rep. Jim Jordan (R-OH-4), who will be holding the House Hearings on ESG. How about hauling in the top officials in the DoD and the brave men and women in all branches of the military who are protecting our great country and berate them on ESG? I’d pay money 💰 to watch this. Fortunately, since I’m a U.S. citizen I would be able to see this for free!

Since I opened this piece by citing Mr. Pence, I’d like to wrap it up with a little message to him. For that I need to invoke the last sentence in his heartfelt letter: “Most important, the next Republican president and GOP Congress should work to end the use of ESG principles nationwide. For the free market to thrive, it must be truly free.”

Mr. Pence, it is fair enough to have a debate about the role of the government in addressing environmental and social issues, but don’t confuse this with the role of material ESG risk factors in improving capital allocation. The threat to our thriving and free capital markets is the confusion you and Professor Pelissero have about ESG. Kinda funny and telling that I can call out both of you in the same sentence, isn’t it? Think about it.


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