ESG Undermines Social Welfare
By: David Brady, Jr. For mises.org
ESG has become a buzzword for both the American Left and Right. For the Right, it is just a Trojan horse for progressive social attitudes to sneak into business. For the Left it is an alternative to the “cruel” profits-only business model of Milton Friedman. Some on the Right abhor ESG because they worship profit in some abstract material sense. They treat it as if consumerism and profit are materialistic ends to worship in of themselves. But what they ignore is the crucial insight that all action accounts for social welfare.
ESG does not improve care for the environment or social causes, it actively undermines social welfare.
Humans are not only impelled by their physical desires to act, but also social, cultural, and religious desires. Mises describes this in Human Action:
Whether it is possible to separate neatly those actions which aim at the satisfaction of needs exclusively conditioned by man’s physiological constitution from other “higher” needs can be left undecided . . . It cannot be denied that the demand for goods is widely influenced by metaphysical, religious, and ethical considerations . . . and many other things. To an economist who would try to restrict his investigations to “material” aspects only, the subject matter of inquiry vanishes as soon as he wants to catch it.
When a man builds a church he still acts purposefully even if there is no bodily need for a church building. When a monk chooses to take up radical poverty, he acts purposefully. When someone chooses to donate their money in order to plant trees for the environment, they still are acting. Human action doesn’t entail the satiation of our carnal physical desires, it entails all our actions to change the state of affairs around us. Donations, conservation, and the like are all possible forms of action.
So, when we pursue profit, it is always a reflection of an increase in social welfare. Profit isn’t just “making more things.” Rather, it is the allocation of goods and resources to the most urgent economic demands in society. This is done so by the capitalist-entrepreneur who anticipates future desires of the consumers and forwarding present funds for future goods. If they correctly anticipate what society will desire and value in the future, they reap profit. If they do not, they are punished with losses for wasting resources. Those resources are then liquidated and more competent entrepreneurs are able to make use of scarce resources.
A consumer who values a cause like environmentalism may value the psychic profit reaped from buying a good from a firm that donates to the environment more than from, say, Walmart. As a result, they may be willing to pay more for such causes. Others may be more willing, but are unable to because of material circumstances. Our concerns and cares for various social causes are imputed into every action and choice we make—our choice of a path in the causes we support. This includes the brands and stores from which we choose to purchase. It is not just the physical pleasure derived from consuming a good, it is also all of our social values. All of our social, religious, physical, and psychological values are imputed into our actions. Our action is then mediated through the market and exchange.
The market finds a compromise of interests and maximizes welfare where exchange occurs. If a scarce resource or labor is being exchanged, the social, personal, and religious values are present in the choices of consumers and producers.
Producers are another side of the equation who also carry values. They too may prefer to incur some costs and reap less profit so they might donate to some cause. Matt McCaffrey and Carmen Dorobăț gave an example in a Mises University session in which they noted that a businessman may be happier to reap only 8% profit and donate to help the environment rather than 10% profit with no donation.
If the welfare derived from these things was widely demanded by consumers and producers there would be no need for ESG scores. ESG scores force firms into over-weighing certain social values that are already implicit in profit-exchange. Profits do not only mean the creation of more physical goods for physical satisfaction but also the creation of value in these non-material areas. By diverting from profit, ESG actively undermines the careful balance of these values. Turning away from profits means that less value is created for both consumers and producers.
Not to mention the fact that it is economic growth that allows for more care of the environment. It is only when we are able to meet our basic needs that we can afford to care for the world around us. London itself provides a perfect example, with air pollution first increasing with industrialization and eventually declining even lower than when it was first measured in 1700. Economic growth gives us the means to care for the environment. If you cannot feed yourself, you will be unable, and likely unwilling, to care for the world around you.
ESG and similar strategies undermine the very things they claim to facilitate. Care for the environment and social causes (ones actually held by the populace) are already implicit within all human action. ESG foists imbalance on exchange that already cares for these social values. If we wish to maximize care for these things, we should seek economic growth in part and understand that profit reflects value—and value comes from many places.
There is some good news on this practice. Blackrock has been the largest proponent of this practice. Several states have divested all pension dollars invested in Blackrock and others may be following suit.