ESG investing and woke capitalism

ESG investing is today the fastest growing segment of the asset management industry, clocking 53% growth in 2021 to $2.7 trillion. Underlining its importance, a recent FT report indicated that while ESG was mentioned in fewer than 1% of earning calls in 2005-18, by May 2021 it was mentioned in almost a fifth of earnings calls. 

But with this rise has come disturbing concerns, especially of greenwashing or impact washing. Another one is whether ESG investing becoming woke capitalism. After Tesla was removed from the S&P's ESG Index, Elon Musk described ESG investing as a "scam",

Exxon is rated top ten best in world for environment, social & governance (ESG) by S&P 500, while Tesla didn’t make the list! ESG is a scam. It has been weaponized by phony social justice warriors.

He also described the decision "a clear case of wacktivism" and claimed that ESG scores measure "how compliant your business is with the leftist agenda". This resonates with an increasingly growing chorus describing ESG as woke capitalism.

FT has a long read on ESG investing here. The article points to the reversal in opinions about big corporations among Republican (conservative) and Democratic (liberal) voters. 

It also points to the rise of a conservative movement to save corporate America from perceived excessive wokeism. 

CEOs who took a stance on the issue left employees who disagreed with them feeling demotivated, Vanessa Burbano, a Columbia Business School professor found, while not meaningfully motivating employees who agreed with them. Weighing in on politically divisive issues, she concludes, is in fact “a riskier proposition than a lot of people realise”. Some companies already appear to be considering such risks when deciding on their own political interventions. Swarnodeep Homroy, associate professor of finance at the University of Groningen, found that companies were more likely to suspend donations to Republicans aligned with the effort to deny Joe Biden’s 2020 election victory if they were based in states with highly polarised electorates. They were less likely to do so if they faced political risks such as the chance of losing government contracts. “They tend to [take political positions] when there is no shareholder/stakeholder trade-off,” Homroy says... 

Political polarisation is likely to turn more CEOs into proxies in the social battles their employees feel most passionate about, says Burbano. The prospect of the US Supreme Court ending federal abortion rights, the renewed debate about gun control after the mass shooting at a school this week in Uvalde, Texas, and politicians’ desire to animate voters in the run-up to November’s midterm elections all signal that the political heat will intensify. “Employees are realising that their leaders are facing a choice over what to say and what to do, and they can potentially influence that in a way they didn’t five years ago,” Burbano says. Paul Polman, the former Unilever chief, echoed that view in a recent LinkedIn post. “Many have lost faith in politics to represent their views and secure their futures. They are turning to corporate power instead,” he observed. By doing so they have left business leaders “increasingly stuck between employees and politicians”, Polman warned.

In the context of claims that ESG investments generate high returns, there is the likelihood that ESG investing has become some form of Tech washing. Consider the graphic below. 

This raises important questions. Were the high ESG investment returns concealed in their high Technology sector exposures? Alternatively, was the high ESG returns a consequence of their high correlation with growth stocks which benefited most from the market boom? Now that technology sector valuations are on the downswing, how will ESG sector investments fare?

These trends point to an important aspect about today's political economy. 

The liberals espouse causes like fighting inequality, racism, and climate change. As a group, one can imagine them as consisting of intellectuals and researchers, philanthropies and non-profits, young Ivy League educated professionals, and student population in general at the top American universities and colleges. As a population collective, they are deeply enmeshed with the same interests or contributors of these problems as investors, employees, children, friends and relatives etc. So, it's only natural that their actions while criticising the vested interests, will generally stop short of anything that overthrows the regime itself. 

In fact, most often, their energies are channeled into cosmetic efforts which while detracting attention from meaningful attempts and proposals to reform the system, also ends up strengthening the incumbents. Woke capitalism ends up undermining the efforts to address the very problems it seeks to eliminate. And the present avatar of ESG investment is a good example.