Financing Woke
Why the 'vibe shift' won't be enough to end corporate progressivism
Following the election of Donald Trump to the US Presidency for the second time in 2024, much was made of the supposed ‘vibe shift’ that followed. Major firms from McDonalds to Harley Davidson made statements publicly denouncing ‘DEI’ — at least by that name — whilst Sydney Sweeney’s great jeans filled the timeline. Media on both sides of the political spectrum declared that the era of affirmative action, sensitivity training, and environmental conscience was at an end, albeit disagreeing on whether this was something to celebrate.
A year on, a different reality to the one painted then has emerged. Many companies — especially in the US, but to a lesser extent here and in Europe — have indeed shifted their rhetorical stance on certain issues. Net zero, board diversity, pride month, pronouns: none of these initiatives are celebrated quite so loudly as they were just a few years ago. Nevertheless, despite shifting public sentiments, most companies have done little to reverse their adoption of progressive ‘social responsibilities’, instead choosing to wait out what may yet prove to be a temporary disruption and quietly continue the integration of political goals into business decision-making.
This may seem surprising — after all, one assumes that companies are motivated by the desire to seek profit, and whilst some (including, famously, Mark Cuban) seem to genuinely believe that such initiatives are good for business, surely the razor of the free market should demonstrate their error once competitors are freed from social pressure to conform?
But what if someone three hundred times richer than either Bill Gates or Elon Musk promised every company, big and small, an endless stream of investment — pushing up share prices in the process — for maintaining progressive policies regardless of their impact on profitability? Unlike Bill or Elon, whose wealth can buy only part of Microsoft or Tesla, such a person could own the entirety of both companies, alongside the top twenty largest firms in the world. That’s a huge amount of money — about $30 trillion — enough to buy a quarter of the entire global stock market. What effect would this have?
The real goal of a company is not simply to maximise profit — it is to maximise the value of their capital (i.e., their stock price). Finding favour with this individual and incentivising their investment would achieve that goal without having to innovate on product or compete with other firms. Such a situation would result in exactly what we see today — a clamouring to replace vehicle fleets with electric cars regardless of the economics, endless promotion of diversity and inclusion — policies which would otherwise be dismissed as nonsense but which would be given credibility under these conditions.
Of course, no individual is this wealthy. There’s no need for tinfoil hats — there is no nefarious villain pulling the strings. In reality, that $30 trillion of tainted incentives comes not from a person, but from a wide range of individuals and institutions united by a common structure of incentives — private equity, investment banks, and hedge funds — and is rooted in the innocent-sounding environmental and social governance (ESG) movement.
Indeed, it started innocently enough. Teachers and nurses didn’t want their retirement money invested in tobacco or weapons, so financial institutions created ‘ethical’ investment funds that bought shares only in companies that met certain standards of compliance. Over time, the criteria evolved, and what was originally a reluctance to invest in firms conducting certain types of business became an all-encompassing set of demands for the integration of political objectives irrelevant to the firm’s core business at every level of decision-making.
Today, the world’s largest companies receive ESG scores based on their usage of renewable energy, the diversity of employees in general and of their board and executive leadership, their carbon footprint — and any number of other criteria. These scores are not simply bragging rights. Increasing portions of the investment pool, directed by financial institutions which have themselves adopted ESG requirements, are only available to companies who score above a certain level. There’s a great deal of money at stake — and company directors have a fiduciary duty to shareholders not to forsake it.
This incentive structure cascades through the entire economy. A large firm’s ESG score is impacted by the standards of their suppliers, giving them an incentive to choose suppliers who comply with ESG requirements and in turn giving those suppliers themselves an incentive to do so. Whilst smaller firms may not be public, they typically have greater financing requirements in the form of loans — and banks’ ESG ratings depend on the standards of the companies to which they lend money. Through these mechanisms, every business in the supply chain is incentivised to adopt progressive policies not out of conviction, but out of financial necessity.
The proliferation of ESG requirements has significant secondary effects, distorting markets across a wide range of sectors. Demand for renewable energy and electric vehicles has skyrocketed despite economics that still make little sense. The companies built on this demand are themselves motivated to maximise their market share, meaning that they and their investors are incentivised not just to sell to currently ESG-compliant customers but to actively expand their client base, lobbying for stricter requirements, sponsoring favourable academic ‘research’, and fuelling the growth of their own ecosystem.
There is also a significant effect on the media and broadcasting industry, which mostly relies on advertising for revenues. A company’s ESG score can be influenced by where its advertisements and publications appear, forcing companies to be more cautious and incentivising the production of media with a greater focus on progressive social causes. Broadcasters are thereby forced to prioritise content that protects advertisers’ ESG ratings over that which appeals to audiences, and to shy away from anything that risks advertiser relationships.
Even investors who do not themselves follow ESG criteria become incentivised to piggy-back off of the rush of capital into firms which are compliant. If $30 trillion in backing is available only to such firms, they become a genuinely better investment despite the inefficiencies caused by progressive policies. The result is a universal distortion of financial markets which extends into every part of the economy and even into the media landscape, and which persists regardless of ideology. Hence, no ‘vibe shift’ alone will be enough to dislodge it.
Surely, though, if financial institutions are the root of ESG adoption, they could choose to abandon these requirements in the face of a changing political landscape? Is it simply a coordination problem, given the incentive to move with the herd described above? Unsurprisingly, it is not so simple. Whilst ethical investing began as a private initiative, ESG has now been adopted wholesale in law, and the government itself is now the central driver of ESG radicalisation.
In Britain, this integration began with the Climate Change Act 2008, which created a legal requirement for the government to implement emissions reporting duties for large companies. These requirements evolved with the Companies (Director’s Report) and LLP (Energy & Carbon Report) Regulations (2018), which created a requirement to report both direct emissions from internally-controlled operations and indirect emissions from purchased energy. Whilst reporting of emissions from the full supply chain was not required, it was ‘strongly encouraged’. From 2022, companies have been required in UK law to align disclosures with the recommendations of the Task Force on Climate-related Financial Disclosures, established by the Financial Stability Board — an independent body established by G20 countries to recommend best practices for management of the global financial system.
The Equality Act 2010 added to this, creating requirements for all firms over 250 employees to report on their gender pay gaps and encouraging ‘positive action’ to address any differential. Theresa May’s crowning achievement as Home Secretary — which has since caused problems across government, including on immigration enforcement — was the Modern Slavery Act, which creates a duty for companies to publish annual statements detailing steps taken to ensure human rights are protected at every step in their supply chain. Recently, the FCA welcomed new proposed legislation to bring ESG ratings providers under their authority, as financial ratings agencies already are.
In the EU, financial institutions are required to disclose their ESG compliance and to consider ESG factors in investment decisions. Disclosure requirements for large companies on environmental and social impacts have been steadily expanded so that now every large company must report detailed metrics on carbon emissions, board diversity, gender pay gaps, and human rights practices not just within their firm but throughout their supply chain. Europe is also increasingly penalising car manufacturers according to the emissions of the vehicles they sell, and the UK imposes sustainability requirements on energy companies whist prohibiting new oil licenses. Central banks have increasingly incorporated climate risk into their regulatory frameworks, enabling favourable loans for greener industries.
The United Nations shapes countries policies worldwide through its Sustainable Development Goals, to which most countries are publicly committed (although implementation varies). Other international institutions like the World Bank and IMF tie trade access and development funding to a country’s adoption of ESG regulations, and whilst they are more than willing to demand that a debtor country slashes spending on welfare and public services, they continue to insist on climate policies which can often impose a far greater fiscal burden.
Listing the full scope of regulation that impacts businesses at a national level, let alone internationally (as many British businesses which have EU revenues must comply with EU reporting standards, often more stringent even than our own) would be impossible in one article. What is illustrated even just by the above examples is the extent to which governments have intervened not just to regulate what businesses can and cannot do, but to change the process by which they make decisions and the basis on which decisions are made. With political concerns having been injected so deeply across the economy, it is no longer strictly accurate to perceive of businesses, especially large or publicly traded firms, as private and independent entities — so thoroughly have they been captured.
A strange circular pattern of influence has therefore emerged in which the state mandates certain behaviours for business and finance, which in turn feeds back into the public realm. Universities — often the originators of progressive ideas — receive donations and research partnerships from ESG-compliant firms to fund ‘research’ which confirms the academic foundations of ESG, whilst also coming under pressure from those same donors to ensure their own practices are compliant and reduce brand risk. Whilst Universities need no encouragement in many areas, without this pressure some hypocrisies (in particular with regard to pension funds) may remain. Think tanks and NGOs, many of which again are naturally progressive in orientation, must align specifically with the same structure of incentives in order for corporate sponsors to receive maximum benefits from their relationship and thereby to attract continued funding.
Governments themselves face similar financial incentives, with sovereign debt ratings increasingly incorporating ESG factors, affecting national borrowing costs. This is justified by laundering political goals into neutral language of fact and risk — a country’s ‘lack of resilience’ to climate change can be presented as a potential liability, reducing their ability to repay debts. The green bond market offers cheaper capital to governments meeting environmental criteria, and even municipal governments increasingly find that ESG scores influence their ability to attract private financing.
Perhaps the most insidious element of this ouroboros is the way in which the government distorts the very institutions it relies upon to make decisions. The experts governments consult from academia and think tanks and the consultants to whom the state outsources various aspects of governance are all selected within institutions subject to the distortions of ESG. The studies upon which they rely are funded under those same conditions. In this way, the government’s ability to evaluate its own policies is retarded.
Much energy has been devoted over the past decade to ‘culture war’ arguments. There is a certain triumphalism on the right that many of these battles has been won. The public are increasingly sceptical of net zero, and most now recognise calls for diversity and inclusion for what they are — an attack on the majority demographic which poses a substantial risk to continued functionality across society. Even Britain’s Labour government has been forced to accept the majority position on gender issues.
And yet, go into any men’s bathroom in a corporate office in London, and you are still likely to see tampons on offer. Approximately 25% of schools still operate mixed-sex bathrooms. Affirmative action remains the norm across government and the private sector, and companies continue to press ahead with net zero despite a shift in public sentiment and, at least in the US, the changing stance of the government. It is of course true that shutting down western industry only to replace it with Chinese imports makes no sense environmentally. Discriminating against whites is indeed morally reprehensible, and celebrating non-traditional sexual proclivities is at best pointless — but the fact these arguments are obviously true only illustrates the point that debates about the issues themselves are entirely fruitless.
The continued implementation of progressive policies across business and society does not rely on people continuing to buy into progressive ideology, and it is impossible defeat that ideology by debating the logic of its values and thereby changing the public mind. You cannot end these policies by winning the argument - you must dismantle the legal infrastructure that enforces them, and the financial infrastructure that funds them. Repealing the legislation that creates these duties is only the first step — and there is a great deal of work to be done in developing both reforms to state regulatory agencies and constraints on independent bottlenecks (such as ratings agencies) which lay outside of official government control.
The ‘culture war’ is not about culture — it is about money, and it is ultimately about law. Only once this is recognized can we hope to gain the ground that has been prepared.
This article was written by Paul Brown, a Pimlico Journal contributor. Have a pitch? Send it to submissions@pimlicojournal.co.uk.
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