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The Controversy Surrounding ESG Investing

photograph of plant pollution blotting out sun

On March 20th, Biden used the first veto of his presidency to defend a labor department rule allowing for ESG or Environmental, Social, and Governance investing with managed retirement accounts. Bans on such investment with government-held assets (like government employee retirement funds) have been marching through the states. Kansas, on April 6th, became the eighth state to restrict ESG investing.

At its core, ESG investing is simple. Corporations release a number of metrics related to environmental, social, and corporate governance – everything from carbon emissions to the percentage of women in executive positions. ESG investing is nothing more than investing that takes ESG metrics into consideration when deciding where to invest. So what makes this practice so controversial that Biden had to use a presidential veto to defend it?

ESG is the latest in a long line of ostensibly more ethical, or at least more socially and environmentally aware, approaches to investing. Janet Prindle, for whom The Prindle Post is named, was a pioneer of ethical investing. She avoided investing in companies that produced alcohol, tobacco, or weapons, and sought to invest in companies that treated their employees well. ESG metrics can help to facilitate these kinds of investment decisions.

To be clear, the aim of ESG investing is not explicitly about achieving social or environmental goals. It exists on the conservative end of a spectrum of socially conscious investment approaches that include Socially Responsible Investing (SRI) and impact investing. ESG investing makes use of environmental, social, and corporate governance metrics; socially responsible investing invests specifically in companies or industries that meet certain ethical standards; impact investing seeks a specific social or environmental result. In public discussion, however, these different approaches are often blended together.

Progressive critics have argued that many companies are using ESG metrics to appear socially or environmentally responsible when they in fact are not. Others worry if investment is even a viable tool for solving major social and environmental problems (also see The Prindle Post’s discussion of “woke capitalism”).

However, the dominant concern about ESG investing in American politics has been whether it violates fiduciary responsibility – the ethical and legal principle that essentially says, if you are given money to invest on someone else’s behalf, then you need to act in their interests.

What precisely fiduciary responsibility entails is contentious. One influential, and radical, position was staked out by the conservative economist Milton Friedman, who argued that fiduciary responsibility meant maximizing returns for investors. Although fiduciary responsibility generally also requires other virtues of investors such as transparency (disclosure), loyalty, and good faith. (Technically, Friedman was discussing corporate governance and not investment management but the logic carries over.)

In actuality, fiduciary responsibility will vary with the interests of the investor. For example, an investor could choose to put money under the management of someone with the expectation that their priority will be to maximize positive environmental impact. Investors are obviously allowed to choose such investments. Republicans have focused their criticisms on certain managed assets, like retirement funds, where the person who actually owns the asset (the future retiree) does not have full control over how it is invested.

Let us grant for the moment the manager of a retirement fund has a fiduciary responsibility to maximize returns. If it were the case that ESG investing delivered lower returns, then it could be argued that ESG investment is an abdication of fiduciary responsibility. In a joint statement by 19 Republican governors, they sought to ensure  “corporations are focused on maximizing shareholder value, rather than the proliferation of woke ideology.”

However, ESG investments do not appear to deliver generally lower returns. BlackRock, the world’s largest investment management firm, contends that “climate risk is investment risk, and that integrating climate and sustainability considerations into investment processes can help investors build more resilient portfolios and achieve better long-term, risk adjusted returns.” Even the labor department rule (which Congress tried to strike down and Biden ultimately protected by veto) only allowed for retirement fund managers to consider ESG metrics to improve returns. While ESG metrics can be leveraged to all kinds of ends — someone could use the information to create a fund of only stocks with very high carbon emissions — in most cases, the aim of ESG investing practices is simply better return on investment.

One could of course object to ESG investment on the basis of the nature of the investments. If someone, for whatever reason, does not like alternative energy then they may not want environmental factors being considered for the management of their assets. This may make sense at the level of an individual investor, but it does not provide an easy principled basis on which a politician can restrict the use of ESG information. The cynical interpretation of at least some political opposition to ESG would be that it is ultimately about protecting certain industries, such as fossil fuels, that stand to lose in ESG investing approaches. And indeed, frequent backers of fossil fuel interests seem to be behind the opposition.

For advocates of a strict financial return approach to investment, ESG is no threat. For advocates of certain social and environmental goals, ESG is no panacea. ESG metrics simply provide more information, usually in the service of increasing investment returns. It does, however, raise one very interesting question: if it genuinely were the case that investments that considered such factors as environmental sustainability were unable to achieve equivalent return on investment, would that be an acceptable regulatory environment? Or should the legal landscape be such that the neglect of environmental and social factors always costs corporations (whether through fines or litigation) more in the long run?

Will climate divestment work?

Guest post by Rich Cameron, Associate Professor of Philosophy at DePauw University

Scott Wisor recently wrote a post titled “Why Climate Change Divestment Will Not Work” over at the blog for the journal Ethics & International Affairs (EIA).  The post is quite provocative.  Visit the EIA blog, here, to read it.

Wisor presents himself as convinced that climate change is happening, poses a grave threat, and makes ethical demands on us all.  Nevertheless, as his title suggests, he believes that one prominent strategy for generating mass action on climate change is destined for failure:  the movement – led by Bill McKibben and his 350.org – to get large universities and investment funds to divest from fossil fuel companies.  If fossil-fuel divestment efforts are doomed to fail, then McKibben’s movement functions as a costly distraction from our pressing ethical obligation not just to act but to act effectively.  As Wisor puts it, “why spend half a decade or more on a tactic that at best won’t make a difference? Why not direct attention to the more urgent and effective task of placing a price on carbon?”

I have a number of responses to Wisor’s specific arguments, but in this post I’d like to offer two more general reflections aimed at tempering his conclusions.  The line of criticism I’ll be pursuing in this post is an odd one – that Wisor’s arguments and conclusions are all too plausible.  More specifically, his argumentative target is ill-defined and appears too easily established.  When looked at more closely, the real difficulties movements face in achieving success also require more nuanced arguments that a particular movement will fail.

My first point begins by noting that a sober look at the evidence certainly suggests that Wisor’s conclusion is likely to be true.  Pick any successful social movement from the past – the civil rights movement, the movement for India’s independence from England, etc.  Scholars of social change frequently note that while those movements were in process the odds seemed stacked against them.  Moreover, even movements we know (with hindsight) to have been successful seemed destined to fail almost right up until they managed – somehow – to succeed.  Indeed, all large scale and eventually successful movements for social change have faced armies of naysayers claiming that the tactics they employed (e.g., non-violent resistance in the cases I’ve mentioned) would not work and that those movements’ efforts served as distractions from other, allegedly more effective measures that people genuinely devoted to the cause should be supporting instead.  Perhaps the most eloquent response to this kind of criticism comes in Martin Luther King Jr.’s justly famous “Letter from the Birmingham Jail.”  We’re on your side, his critics said, but your tactics are wrong and will backfire.

Antonio Gramsci made a similar point in saying, “I’m a pessimist because of intellect, but an optimist because of will.”  The idea in Gramsci’s quote is that rational reflection on the odds of social change will almost always result in a thoroughly justified pessimism.  If you’re aware of the obstacles and think about the circumstances carefully you’re sure to come up with a thousand reasons why social change just doesn’t stand a chance.  Gramsci acknowledges that effective advocates for social change need to face up to this grim fact.  They need the “pessimism of the intellect” so that they know what they’re up against – without this they will be ineffective idealists tilting at windmills.  But social change movements do sometimes succeed, and without the benefit of hindsight it’s extremely difficult to tell which movement, if any, is going to pull off a major victory.  And that means that people devoted to the hard work of social change need more than just the pessimism that comes from clear-sightedness of the long odds we face.  They also need the “optimism of the will,” the willingness to work against long odds with the hope and confidence that some apparently doomed strategy will eventually succeed.  To quote Margaret Mead, “Never doubt that a small group of thoughtful, committed, citizens can change the world.  Indeed, it is the only thing that ever has.”  Without the benefit of hindsight, a strong case can be made that all social movements are doomed to failure, and if that is all Wisor is arguing in the case of the fossil fuel divestment movement then his arguments are both unsurprising and should be of little interest to committed and thoughtful activists.  If Wisor is arguing for an interesting claim, it must be not just that we’re justifiably pessimistic about the divestment movement’s odds of success.  He must argue for the stronger claim that the movement is actually tilting at windmills, that it is so clearly out of line with reality that it should be viewed as a waste of time even by those with intimate knowledge of the challenges all social movements face.

My second response to Wisor’s argument is generated by asking a simple question:  when can we say that a movement has succeeded, that its efforts have “worked”?  Wisor’s blog post seems to imply a very demanding standard for movement success – a movement must solve the problem it’s designed to address (in this case climate change).  And if this is what success requires then once again Wisor is arguing for a conclusion that is simply too easy.  It is widely acknowledged that there are no silver bullets with regard to large problems like this, and in the case of climate change it is also widely acknowledged that it’s too late to “solve” the problem anyway:  what we’ve already done commits us to enough warming that dangerous impacts are already unavoidable.  Of course, that doesn’t mean we can’t still succeed in mitigating climate change and heading off even more catastrophic impacts, but no one heading up the fossil fuel divestment movement is under the illusion that their efforts will “solve” the problem in this sense.

Still, this isn’t the only metric for success.  Activists often view movement success not in these all-or-nothing terms but as, instead, accruing piecemeal, slowly, and building over time.  A social movement that doesn’t “solve” its intended problem in the first sense may nevertheless raise awareness (and so make future solutions easier to institute).  Movements may build networks of effective and motivated actors (who may work better together in the future because of their present experience).  They may convert major institutions and groups to take stands that they otherwise would not have taken (and so, again, make future change more likely).  And so on.

All of these things plausibly constitute social movements succeeding, but none of Wisor’s specific arguments for why the fossil fuel divestment strategy “will not work” undermine the idea that the movement has already succeeded – that it has “worked” far beyond the dreams of most movements.  According to a report by Arabela Advisors, “181 institutions and local governments and 656 individuals representing over $50 billion dollars have pledged to divest to-date.”  Think too of the marches, meetings, media attention, position papers, etc. the movement has generated, and what they mean for better advocacy for policies of all sorts in the future.  The point is just that by reasonable standards the divestment movement is already a success, and nothing in Wisor’s piece suggests this movement (and others) can’t build (piecemeal, and bit by bit) on their successes in the future.

Moreover, it is important to note that when Wisor suggests alternative efforts that he thinks stand a greater chance of succeeding he mentions only a “price on carbon” and unspecified “regulatory efforts” to combat climate change.  The problem here is that Wisor’s suggested solutions do not constitute ideas for building a movement.  To generate a movement you need to mobilize masses of people and institutions and organize them around applying political pressure for change.  Of course we should put a price on carbon – but how exactly does Wisor propose that we build the political movement to get that done?  When Wisor has an idea for building a powerful movement around putting a price on carbon (or his favorite regulations) and he can show, further, that his new strategy is likely to generate more traction, enthusiasm, and support from grassroots activists and major institutions than the divestment movement has already succeeded in generating then will he have a strong real case for saying that there are more effective strategies we should be pursuing.  Saying simply that we should put a price on carbon isn’t even in the same ballpark as building the movement to divest from fossil fuels, however.  McKibben’s fossil fuel divestment strategy may not be a silver bullet guaranteed to succeed (no social movement in history ever has been, of course), but it has been a concrete and already effective strategy for bringing together a new, strong, and powerful coalition on climate.

I realize that my fairly general criticisms of Wisor’s post don’t address the specifics of his arguments.  For all I’ve said here it remains possible that his specific objections to the fossil fuel divestment movement’s strategies are indeed damning.  That is, I have not argued that the fossil fuel divestment movement is not tilting at windmills in a way that anyone who cares about climate action should shun, nor have I argued that it is only beset by the perfectly ordinary sort of “pessimism of the intellect” that beset all social movements (even ones that have succeeded).  Still, I hope I’ve clarified the way in which Wisor’s argument seems to aim at a conclusion that is both too easy and too unsurprising.  If his arguments are to be of service to his claimed allies in the incipient climate movement they will need to show more than just that there are good reasons for pessimism.  He’ll need to show that the divestment movement tilts at windmills.  With regard to the former task Wisor’s arguments (unsurprisingly) succeed.  With regard to the latter task I’m much less sure.

Fossil Fuel Divestment is a Moral Issue

Over the last year or so, the word divestment has taken on new meaning. Until recently, this term popularly referred to the movement in the 1970s and 80s to remove all investments from South Africa. The goal was to retract financial support for companies participating in Apartheid. Divestment now refers primarily to fossil fuel divestment: freezing and removing all investments in fossil fuel companies.

Why would the DePauw Community ask our Board of Trustees to divest from fossil fuels, and how is this issue related to ethics? In my eyes, the number one reason for divestment is to align the values and actions of an institution that I financially support (DePauw) with my own. Since the burning of fossil fuels is the number one source of greenhouse gas emissions, fossil fuel companies are culpable of driving the increased concentrations of GHGs in the atmosphere, and thus, climate change. Their crimes against the climate are becoming even more atrocious as they continue to drill for oil in remote and fragile places and as they resort to unconventional sources such as tar sands. While I fully understand that it is our demand for fossil fuels that is driving these actions, I think that we must look for ways to remove our support from this industry. This is only the first of many steps in the journey to move away from our carbon-central society and economy.

Some may argue against divestment saying that it will have no impact on fossil fuel companies. They argue that other people will buy up the stocks that DePauw sells. I agree that this is the case, but I don’t think that it is an argument against divesting. Divestment is a moral issue. It’s about acting in a way that is consistent with our values. In addition, through the process of divestment, we can educate the community about climate change and engage in open discourse about the issue. This is perhaps the most valuable part of the divestment movement.

We have made great headway on our divestment campaign at DePauw in the last month. We wrote President Casey a letter requesting divestment, which he promptly shared with the entire faculty. He even mentioned his intention to share it with the Board of Trustees. Additionally, we have two events in the next week. The first is a Divestment Rally in MeHarry Hall at 3pm on April 13th. Tricia Shapiro, author of “Mountain Justice”, will be joining us to talk about the coal industry’s impacts in Appalachia. Bill McKibben will also be skyping in to talk about his work with 350.org. The second event is a forum on Monday, April 15th in the Watson Forum. Joining us for a panel discussion will be Michelle Villinski from the Economics Department, Jen Everett from the Philosophy Department, and Jim Mills from the Geology Department. Divest DePauw, the group of students involved in this campaign, is immensely excited to engage in discourse with faculty and students on this topic.