A Short Guide to ESG: Political Problems

By Paul Mueller

Whether the political dimensions of ESG are features or bugs depends on your perspective. From the perspective of ordinary citizens, though, ESG is shot through with political problems in addition to its economic problems. Although the use of ESG affects ordinary people’s lives in myriad ways, those impacted have little say in the project – even through their political representatives.

The elephant in the room is the special interest rent-seeking of ESG advocates. People are building careers consulting on “anti-racism” and “Diversity, Equity, and Inclusion” initiatives. Large financial firms charge up to 40 percent higher fees to clients investing in “Sustainability” funds. Entrepreneurs offer ESG data collection and reporting software, carbon offsets, and compliance consulting.

Hundreds of thousands of people work in ESG-related roles, which come with a pay premium. Corporate sustainability officers rely on in-house diversity officers who recruit consulting ESG impact researchers who appeal to climate advocacy organizations. Every major institution, from the World Bank to the United Nations to the World Economic Forum and the constellation of investment and advisory groups, has an ESG employee contingent.

ESG’s Own Bootleggers and Baptists

Far be it from me to judge someone for wanting to earn a living. But we should consider whether those jobs represent mutually beneficial exchange. In a free market, jobs, products, and companies that serve no one disappear, but in highly regulated or artificial markets, the answer is much less clear. Do carbon offsets really create more value for people than they cost? Is extensive emissions reporting or DEI training making people’s lives better?

We should note that ESG initiatives are not pushed by altruistic, disinterested, objective philosophers. They are backed by people whose livelihoods and careers are strongly tied to their success — and their expansion. How strongly these people believe in the philosophical merits of ESG is beside the point; ESG clearly is now a significant vested interest.

The question of motives, though, ties into an important theory of regulation: Bootleggers and Baptists. Regulations (prohibition of alcohol in this classic 1983 example) are often advanced by two different but aligned groups. Bootleggers (who don’t want legal alcohol as competition) are driven primarily by their own material self-interests. Baptists (who would stamp out evil alcohol) are propelled by their convictions, a belief in the moral goodness of their cause.

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Two important dynamics emerge here. First, (bootlegger) rent-seekers, greenwashers, and ESG salespeople use the moral justification of the (Baptist) environmentalists and equity advocates for their own gain. And second, it will be the Bootleggers who write the details of regulatory policy, because they care not about the moral wins, but the bottom line benefits. They will twist the terms and jargon until the best intentions serve only the vested interests. It happens every time.

Under the Baptists’ altruistic moral language is the bootleggers’ doling out of money and power. They invariably funnel benefits to themselves through favorable regulations, at the expense of everyone else.

When All You Have Is an ESG Sledgehammer

Implementing ESG politically presents a sledgehammer approach to an intricate web. Markets reward innovation, nimbleness, and nuance; Government policies must, by definition, be rigid and uniform. For administering justice and public order, the consistency of the law is admirable. But laws and regulations can’t dictate something as dynamic as the most efficient solar cell, the appliances people use, the particular mitigation that will protect a village from flooding. Those solutions, as they emerge, are local, changing, and hard to anticipate. Government choosing between them only slows down the improvements.

Sweeping government rules about specific business practices create system risk as all players in the market are forced to engage in similar activities. No right to opt out means no innovation, market stagnation. When unintended consequences (inevitably) unfold, everyone in the market suffers together. This kind of systemic risk, created by and in response to extensive regulation, that resulted in the 2008 financial crisis.

Government laws codify a single, existing way of doing things. That makes laws a poor tool for experimentation, dissent, and innovation. Implementing ESG through political rulemaking creates a world with more corruption and widespread systemic risk.

ESG’s Attack on Sovereignty 

The political means required to implement a global ESG agenda are antithetical to national sovereignty, self-governance, and self-determination. Global organizations want to direct every country’s policy in pursuit of global or universal goals. Officials at the UN, World Bank, WEF, European Union, and a host of other international organizations are not accountable to the citizens or voters of any country. Nor are they subject to the wishes of consumers and innovators, who might opt out in a marketplace. By what right do largely unelected global elite ESG advocates get to impose their priorities and values (to their own benefit) on everyone else in the world?

Despite the movement’s superficial calls for transparency, ESG goals have primarily been advanced without the knowledge or consent of those they affect. Millions of people whose 401Ks are managed by Blackrock did not elect that their capital to be used to advance ESG initiatives. ESG advocates avoid market pushback that might be generated by unpopular taxes on gasoline or emissions. Instead, they engage in regulatory fiat and misdirection via massive subsidies to their preferred industries and companies.

The billions of dollars in subsidies to electric vehicle manufacturers, battery producers, and renewable energy companies were doled out by elected officials in the US, but the real costs are largely obscured. How much does a billion-dollar subsidy to an EV producer cost the ordinary taxpayer? And if we can’t answer that question for hundreds of subsidies and handouts, how can citizens engage in robust and informed self-governance?

When Germany’s high court ruled in 2023 that politicians couldn’t simply shift funds allocated for COVID-19 into climate goals, the coalition government’s will to spend collapsed almost immediately. Once accountable to their voters for allocating ESG spending in the general budget, politicians had to be much more honest about the costs of borrowing for net-zero and green energy projects.

Political Implementation Hikes Already High ESG Costs

Political problems surrounding ESG continue to proliferate. Large and growing vested interests can’t evaluate “sustainability” fairly while cashing the paychecks ESG generates.

Those bootleggers inevitably hijack the earnest activists’ high-minded ideals for personal gain, at the expense of everyone else and at the expense of the ideals themselves.

And finally, the regulatory and enforcement tools required to implement global ESG goals undermine national sovereignty and interfere with each nation’s accountability to its citizens. The economic fallout from ESG implementation would be high, but the potential political damage could be even more costly.

Source: AIER

Paul Mueller is a Senior Research Fellow at the American Institute for Economic Research. He received his PhD in economics from George Mason University. Previously, Dr. Mueller taught at The King’s College in New York City.

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