ESG has been popping up recently in headlines and business reports. Some states have introduced legislation to incorporate ESG scores into publicly managed funds, while other states have stopped investing in ESG funds. Some have even gone so far as to ban large companies and banks from using ESG scores to discriminate against smaller companies that do not use ESG or have low ESG scores, according to Justin Haskins and the Heartland Institute.
ESG stands for environmental, social and governance. ESG scores are a way to measure these factors that impact a company’s success and are not related to simple profits. According to George Kell of Forbes, ESG was first coined in 2005 in a study by a large initiative between large corporations and the UN Global Compact. It is a newer way to measure an old concept of investing called socially responsible or ethical investing. Socially responsible investing is the idea of choosing to put your money in companies that support causes you support and avoiding companies that support causes you do not agree with. ESG metrics look at things like working conditions, carbon emissions, corporate board diversity and other related factors.
Private socially responsible investing is not a bad thing. It makes sense that you do not want to put money in companies that support things you are against. However, the rise of ESG scores has also taken place in large corporations and government legislation. This is where the situation can become problematic.
ESG is being used as a way to decide in which companies to invest or loan money to by large corporations and banks. Companies which have low ESG scores and would be considered unethical or unsustainable would be shut out until they comply with ESG standards.
One issue is that something viewed as unethical by one person or business is not always viewed by another as unethical. Some investors focus on carbon emissions and reducing those, while others may want to avoid companies that support abortions, and still others may want to support companies with more diversity on the executive board. ESG is an ethical standard chosen by large corporations, and so judges all companies involved on a basis made by a select few. One fear is that this will enable that select few to bully other companies into complying with their standards by denying them loans and investment. Some have even considered ESG to be the business version of social credit scores in China.
Another problem with ESG is that it places noneconomic factors above financial ones. A company that makes more money than another may be shunned because the other has plans to reduce net carbon emissions. This may not sound so bad, but it is actually destructive to capitalism.
Capitalism is based on the principle that consumers will buy the best product at the lowest price. This pushes competition as companies compete to produce higher quality at lower prices. This benefits all consumers, who have multiple options. A company that cannot meet the consumer’s expectations will go out of business, and the best companies win, as well as consumers.
Capitalism enhances personal freedom, as people have choices in what to buy. Businesses embrace innovation, as they strive to produce a better product and invent new products. Capitalism is one of the biggest reasons why the United States has become one of the freest, most prosperous nations in history.
However, when ESG scores are used to judge a company instead of their financial side, companies that provide the best product at the best price are no longer rewarded unless they meet ESG standards.
A company that sells low quality, high-priced products but has a good ESG score instead will benefit. While ESG is a means to control people, capitalism enhances personal freedom. This not only hurts consumers with lower-quality products, but can cause inflation, according to Paul R. La Monica for CNN Business. When companies increase their spending on causes, inflation will result because of their increased costs being passed on to consumers.
By choosing to invest in causes over profitable companies, large investment corporations are hurting consumers, investors and small businesses while imposing their standard of ethics on the American economy. When legislators and federal agencies begin trying to impose ESG scores on businesses and banks, we have a limit on the very system that has produced the United States economy as we know it, as well as increased control by the select elites.