The American culture war over woke investing is about the essence of capitalism

In Washington, Joe Biden announced this week that he would use his presidential veto for the first time since the Republicans won the congressional elections in November. Another, as-yet-unknown politician, Republican Vivek Ramaswamy, ran for office the week before to succeed Biden in the 2024 presidential election.

The two events are not directly related, but do have substantive interfaces. They fall within the heated debate, or rather the culture war, that is now being waged in the United States over ‘ESG’, environmental, social in governance. These are criteria for sustainable investment in the areas of the environment, social conditions and good governance. Until recently, ‘ESG’ was considered a technical, not to say boring, topic for specialists. Now has Fox News talking about it.

The Biden government wants to give pension funds the legal option to take these green and social criteria into account in their investments. This is not possible under the current rules, which were established under President Trump: pension funds are only allowed to pay attention to the (expected) investment profit. Republicans blocked Biden’s legislation last week, with the help of two Democratic senators. Republicans find ESG left and right woke: it would get in the way of making money in the capital market. Biden announced that he would use his veto, because: most “successful” investors do want to take ESG factors into account.

Ramaswamy is one of the spiritual fathers of the Republican fight against ESG. The 37-year-old entrepreneur, now active as an asset manager, wrote the bestseller in 2021 Woke Inc. and has since been a frequent commentator in right-wing media. The book is a broad indictment of thestakeholder-capitalism: the idea that a company not only its shareholders (shareholders) must serve, but also social interests, such as those of employees, disadvantaged groups and the environment. Essentially, ESG is about the same thing. Ramaswamy’s firm Strive Asset Management states on its website that we stay away from “social activism that destroys money” and focus on “maximizing shareholder value”.

ESG delivers value

Incidentally, proponents of ESG investing argue that this actually generates value in the longer term, including for shareholders. Companies that ignore the climate would miss new opportunities and threats. And companies that do not pay attention to good governance are generally poorly managed.

According to Ramaswamy, this is nonsense. ESG would erode US households’ equity investments and invested pensions. With stakeholder capitalism, “elites” would respond to the “insecurities” of Americans with a “mix of morality and consumerism,” according to a text touting his book.

The ESG debate fits into the much longer ongoing discussion about what (American) capitalism should be, and what it should not be. The American Business Roundtable, a business lobby organization, published a statement in 2020 by 181 CEOs of large companies, in which they argued that business should be about more than the share price. Larry Fink, CEO of the world’s asset manager BlackRock, made a similar call in the same year. Companies must pay attention to ‘all stakeholders’. “Climate risk is investment risk,” Fink also wrote at the time. American business actually seemed to be starting to look a bit more like that of Europe, where it stakeholderthinking is more deeply rooted. Until the fierce battle against ESG broke out shortly afterwards.

Ford and Friedman

Corporate America has not always been purely focused on maximizing profit for shareholders. At the beginning of the twentieth century, Henry Ford, the car manufacturer, wanted his own employees to be able to buy the cars they produced themselves. But certainly since the 1970s, the trend that sees profit maximization as the goal has been dominant in the US. The economist Milton Friedman wrote the much-cited piece in 1970 The Social Responsibility of Business is to Increase its Profits: Corporate social responsibility is to increase profits.

Republicans are looking for the latter in the current debate about ESG and woke capitalism now hookup. With the striking new component that they also want to crack down on companies that do not meet the standard of profit maximization. Traditionally, the Republicans have been the friend of big business, which is appeased with low taxes and deregulation. Above all, companies should not be hindered.

Now Republicans are placing themselves next to the “ordinary” American, whom they believe is the victim of woke businesses. Florida Republican Governor Ron De Santis, who may be running for president, wrote in an op-ed last week in The Wall Street Journal that the “old-fashioned“Republican support for the business world no longer works in this day and age because businesses are said to have been politicized by the left. These policies “do not necessarily serve the interests of the American people and economy.”

DeSantis, who achieves political success in his fight against woke, ended the special status that Disney World theme park enjoyed in Florida, with tax breaks and extensive self-government. It sanctioned Disney’s public opposition to DeSantis legislation that restricts education about sexual orientation or gender identity.

Florida is also one of the states (alongside Texas and Oklahoma, among others) that has passed anti-ESG legislation. Pension funds are prohibited from using ESG criteria in their investments.

Republican Senator Ted Cruz accuses Fink of BlackRock, which recently started doing ESG (although it still invests massively in fossil energy), that he misuses the investments of “you and mine and millions of old women” by paying attention to ESG . “That’s not capitalism, that’s abuse of the market.” Cruz wants to limit BlackRock’s power.

Republicans appear to be harking back to earlier charges against big corporations in US history. Think of the Populist Party that opposed monopolistic large companies in the late nineteenth and early twentieth century. Or the public anger about the enrichment and abuse of power by the Rockefeller oil family in the years before the First World War.

Free market democrats

Now the paradox has arisen in which Republicans, who usually defend the free market, are accused by the Democrats of wanting to curb the free market. Fund managers, say Democrats, just want the ability to factor sustainability into investment decisions. They are not obliged to do anything. Republicans are “putting handcuffs on investors,” Biden’s spokesperson said recently.

BlackRock CEO Fink also emphasizes this point: ESG is about “choice” of how you want to invest, he said in an interview during the World Economic Forum in Davos in January. As the boss of the largest asset manager in the world, Fink is almost the epitome of capitalism, but now counts as woke, for its support for ESG. “For the first time in my career, attacks are now personal in nature,” said Fink in Davos.

This American culture war could have concrete consequences for internationally operating companies – even if Biden vetoed the Republican law, which only deals with American pension funds. ESG goes further, and the US is lagging behind Europe in this area. The EU is trying to stimulate sustainable investment and business with legislation. The EU directive on sustainability reporting for large companies came into effect at the beginning of this year, since 2021 such a directive applies to asset managers. Last week, an agreement was reached in Brussels on criteria for green bonds.

In the US, the financial regulator SEC has presented draft rules for reporting on sustainability by large companies. Among other things, they should report climate-related risks and emissions. But the SEC is now also considered in Republican circles woke. The SEC is said to be pursuing a “far-left social agenda.” Republicans are likely to challenge SEC rules with lawsuits.

2023, so wrote The Economist in November, should actually be the year of international harmonization of ESG-type standards, so that companies do not have to deal with different rules everywhere. This is, because of the fierce battle that is raging in the US against woke capitalismbecome very uncertain.

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Read also: The European Union is the first to set criteria for green bonds

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