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Which ESG? Practical, cartelising or activist? (I)
Moralising corporate enforcement through the non-profit advocacy economy.
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
Adam Smith, Wealth of Nations (1776) bk. 1, ch. 10, pt. 2.
This a very famous quote. Folk rarely continue the quote.
It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary. A regulation which obliges all those of the same trade in a particular town to enter their names and places of abode in a public register, facilitates such assemblies. . . . A regulation which enables those of the same trade to tax themselves in order to provide for their poor, their sick, their widows, and orphans, by giving them a common interest to manage, renders such assemblies necessary.
Adam Smith, Wealth of Nations (1776) bk. 1, ch. 10, pt. 2.
ESG stands for Environmental, Social and corporate Governance. It is a metric for judging corporate behaviour in terms of its wider environmental and social impacts and the processes for the management thereof; a metric and a framework intimately connected to notions of stakeholder capitalism. Stakeholder capitalism is the concept that long-term sustainability of firms is better served by responsiveness to internal and external stakeholders: folk who have a “stake” in, that is, are affected by, a firm’s decisions.1
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ESG was originally developed within the UN system as a way of directing corporate financing to activities deemed socially useful.
The roots of ESG extend back to the ethical investment push of the early 1970s, which was led by the universities, and discussions of the “triple bottom line” (social, environmental, economic) of the mid 1990s.
ESG has become a pervasive rhetorical framework for corporations and business bodies. According to a May 26 2020 McKinsey podcast:
If you take the US as an example, about a quarter of the assets under management, or roughly $12 trillion, are ESG-rated investments.
In a November 14 2019 article McKinsey reported that:
ESG-oriented investing has experienced a meteoric rise. Global sustainable investment now tops $30 trillion—up 68 percent since 2014 and tenfold since 2004.
In the same article, McKinsey provided the following description of ESG:
The E in ESG, environmental criteria, includes the energy your company takes in and the waste it discharges, the resources it needs, and the consequences for living beings as a result. Not least, E encompasses carbon emissions and climate change. Every company uses energy and resources; every company affects, and is affected by, the environment.
S, social criteria, addresses the relationships your company has and the reputation it fosters with people and institutions in the communities where you do business. S includes labor relations and diversity and inclusion. Every company operates within a broader, diverse society.
G, governance, is the internal system of practices, controls, and procedures your company adopts in order to govern itself, make effective decisions, comply with the law, and meet the needs of external stakeholders. Every company, which is itself a legal creation, requires governance.
This is the first ESG: what we might call McKinsey ESG:
(1) Use of ESG framing to look comprehensively at a firm’s situation, overcoming managerial inertia and compensating for business being much less socially connected than used to be the case.
This is not the only ESG in operation. For ESG is at the intersection of key patterns of our time: modern activism’s development and mobilisation of the organisational power of networking; the interaction of this with the internationalisation of policy through various UN and other bodies; the use, and response, of corporations to both.
The other two ESGs are:
(2) Corporate coordination ESG.
(3) Activist ESG.
The first can provide excellent cover for the latter two. The McKinsey articles provide useful information on ESG#1. The following looks at ESG#2 (corporate coordination) and ESG#3 (activist ESG).
The Bud Light debacle
The recent Bud Light debacle shows us ESG#2 and ESG#3.
Bud Light is the low-alcohol version of Budweiser. Not a quality beer, but a cheap beer that lives (and it turns out dies) by its cultural placement as the beer of working Americans.
Budweiser employed a 30-something woman as their marketing manager. As she says in a statement to the world that was uploaded on YouTube, she believes one uses such a position to make the world a better place, to do something significant. ESG, in its Sustainability and Diversity Equity Inclusion (DEI) aspects, taps into hunger for meaning and purpose in a post-Christian society.
Such significance turned out to be employing Dylan Mulvaney — a “Trans influencer”: a gay man who identifies, not as a woman, but as a young girl — as Bud Light’s new brand ambassador. (Veteran commentator Andrew Sullivan’s description of him as a minstrel is not a bad one.)
Unfortunately for Anheuser-Busch, which manufactures Budweiser beers, its working-American customer-base do not have a positive view of Dylan Mulvaney (to put it mildly) and was profoundly affronted by him/her becoming the celebrity face of “their” beer. Sales of Bud Light collapsed and have mostly not recovered. Anheuser-Busch’s share price then dropped markedly.
Up to this point, the entire debacle could be written off as genuflection to currently fashionable ideas. It is also an example of how our dysfunctional universities are undermining professions, by replacing among graduates the notion of service to a citizenry and heritage with a conception of themselves as members of a moral elite, as “social change agents”. The wider public become either human clay — to be uplifted by their moral, epistemic and cognitive superiors — or deplorables, to be sidelined and silenced.
So, Dylan Mulvaney as brand ambassador would uplift working Americans into a proper view of trans folk as personages to be morally affirmed. When this backfired spectacularly, an obvious recovery strategy was on offer. Go into full damage-control mode and release a forthright mea culpa statement disavowing the whole thing as a dreadful mistake.
This did not happen. Instead of doing the apparently obvious move of putting the customers first, Anheuser-Busch’s CEO made a series of mealy-mouthed statements that satisfied no one.
This was a particularly striking example of what has been something of a pattern of clunky corporate mis-steps. Such as Target USA’s Pride Month 2023 debacle, with angry customers knocking over displays of products aimed at “trans” children and Target experiencing a significant drop in sales.
To understand this rather striking cultural moment, we need to understand the current cultural placement of Trans folk.
With the spread, via Critical Theory and its popularisations, of the notion of oppression-as-constraint — that Western societies are socially “imprisoning” structures of oppression — Trans folk become “holy” as exemplars of liberation from oppressive constraints. For they represent liberation from the constraint of an imprisoning biology.
Even so, why did the Anheuser-Busch CEO issue mealy-mouthed statements rather than going for a full-throated apology and recovery of Bud Light’s cultural placement?
Probably because he did not want to have Anheuser-Busch‘s Corporate Equality Index (CEI) downgraded. What is the Corporate Equality Index? It is a measure of corporate adherence to Equity produced by the Human Rights Campaign (HRC).
The Human Rights Campaign is the USA’s premier gay-rights non-profit. With the legalisation of same-sex marriage, there is not much left for a gay rights advocacy group to do, so HRC has shifted very strongly into Trans advocacy. Stonewall — the premier gay rights advocacy charity in the UK — has also gone very strongly into Trans advocacy for the same reason.
Trans is the first “civil rights” campaign that can be fully monetised. If someone transitions, they are on hormones for life, which is a lot of money.
Moreover, as Andrew Sullivan has pointed out, with the achievement of social and legal equality, mainstream gays and lesbians largely left LGB activism, to get on with their lives. That left LGB activist organisations to those Brianna Wu characterises as Infinite Leftists and Matt Yglesias as moralist progressives. Folk whose outlook, especially in the LGBT+ non-profits, tends to be based on Queer Theory, holding that Western societies oppress by imprisoning people within cis-heteronormativity, and whose sense of purpose and income rests on activism as an endless activity. They operate within what has become a multi-billion dollar non-profit advocacy economy.
The scale and incentive structures of the advocacy economy is very much a feature in what writer Wesley Yang accurately labels the non-electoral politics of institutional capture that is such a feature of our time.
Advocacy enforcement mechanism
But why would the CEO of Anheuser-Busch care about Budweiser’s Corporate Equality Index? Because it feeds into Budweiser’s Diversity-Equity-Inclusion (DEI) score.
Why would he care about Anheuser-Busch‘s DEI score? Because it feeds into Budweiser’s Environmental, Social and corporate Governance (ESG) score.
Why would he care about Anheuser-Busch‘s ESG score? Because it feeds into Anheuser-Busch‘s interest rate for corporate financing, the attractiveness of Anheuser-Busch stock for ESG investing and the voting patterns of ESG-based asset management directors and shareholders. Shifts in such interest rates easily represents millions of dollars; dumping stock can affect stock value; while ESG-based asset management affects board member selection and shareholder controversies.
According to the aforementioned May 26 2020 McKinsey podcast:
Evidence is emerging that a better ESG score translates to about a 10 percent lower cost of capital as the risks that affect your business, in terms of its license to operate, are reduced if you have a strong ESG proposition.
Hence Anheuser-Busch‘s CEO did not embrace the concerns of the customers, because that would potentially raise corporate financing costs, among other possible difficulties. But the CEO did not stand by Dylan Mulvaney either, because that would infuriate the customer base further.
So, the CEO did neither and ended up mollifying neither. The customers largely did not come back and HRC still downgraded Anheuser-Busch‘s CEI score for failing to take this splendid opportunity for some very public Trans affirmation by sticking by Dylan Mulvaney.
In terms of contemporary cultural trends, what industries are even more culturally salient than beer or department stores AND dependant on lots of corporate financing? Entertainment and, to a lesser extent, media.
Corporate financing and asset management involves standard products, standard costs, focus on future profits, with advantages-to-scale limiting market entry, frequent interactions (including across markets), frequent price adjustments with relatively transparent, and quickly updated, price and sales data. All of which factors favour various levels of tacit, or explicit, coordination among firms: what are otherwise known as cartels.
ESG provides shared rating systems that reveals deviations and provides legitimation to price discrimination in corporate financing. ESG thereby lowers coordination costs, making cartel behaviour more sustainable. It provides not only mechanisms, but moral cover, for corporate coordination.
Corporate financing and asset management involves trillions of dollars. Of course it is being gamed.
Non-profit advocacy and associated activist networks — by potentially publicly and hostilely mobbing corporations on social media and/or bringing expensive, bad publicity civil rights or anti-discrimination cases — provide what every cartel needs to be effective: an enforcement device that, in this case, allows corporate financiers to, among other things, price discriminate. “Nice business you have there, shame if something happened to it.”
Which raises the question: if you use the activist networks as enforcers, who is going to end up in charge? Is it really the case that those who make the gold make the rules?
Rather than price discriminating by charging those more sensitive to price less, it is price discrimination by charging those who do not comply more. Along with the stock, board election and shareholder proposals pressure points.
Which makes ESG a corporate social credit system, as that is how a social credit system works. If you comply, everything is open/available. The less you comply, the more restricted what you can do, or what is available to you, is.
The original social credit system was developed by the Chinese Communist Party (CCP).2 It is Nazi Gleichschaltung (“coordination”) with added information technology. For it represents a very similar solution to the same problem: how do you achieve or maintain totalitarian control in a society with a large commercial sector, if you do not intend to abolish that commercial sector?
While one sees frequent claims that ESG, and DEI, add value, it has becoming increasingly clear that this is not true of DEI in particular, with the alleged evidence often involving taking evidence for the value of cognitive diversity in decision-making and claiming it for DEI programs that do precisely the opposite — including operating as Maoist-style struggle sessions.3
As the McKinsey podcast points out, the ESG moniker may, however, be useful in attracting customers, selling to ESG-rating businesses, reducing costs, improving regulatory relationships and attracting talent.
The Australian principle of social analysis applies throughout all this: in the race of life, back self-interest, it’s the only horse that’s trying. Especially as we Homo sapiens are very good at strategic self-deception: at rationalising and moralising our self-interest.
Given that ways of increasing your CEI score can include such things as: providing travel and other perks for activists; using preferred brand ambassadors; appointing preferred people to company boards; and so on, it is not clear how this differs from racketeering, except in its moral pretensions. On the other hand, those moral pretensions can be excellent cover for what might, in other circumstances, attract unwelcome anti-trust or related prosecutorial attention.
Even so, the March 30, 2023 letter to asset managers (pdf) from 21 US State Attorneys-General warning against using ESG to avoid fiduciary obligations to shareholders suggest such cover may be wearing thin.
The US is particularly vulnerable to the use of non-profits as an enforcement mechanism, as both social-justice activists — suspicious of existing norms — and those suspicious of government in general have, from the 1960s onwards, encouraged expanding the ability of advocacy groups to shape public policy through what political scientist Robert A. Kagan has nicely labelled adversarial legalism. Basically, using the courts to restrain and (re)direct the actions of the administrative state. Especially when the US Congress applies mandates on State and local governments who it does not trust to carry out as intended.
This has made the US particularly vulnerable to the network organisational weapon, as discussed in the next post.
Yuliya Bolotova, John M. Connor, and Douglas J. Miller. ‘Cartel stability: an empirical analysis,’ 2006, available at SSRN 939078.
Andrew R. Dick, ‘When are cartels stable contracts?,’ The journal of law and economics. 39.1, 1996, 241-283.
Stefano Giglio, Matteo Maggiori, Johannes Stroebel, Zhenhao Tan, Stephen Utkus, Xiao Xu, ‘Four Facts About ESG Beliefs And Investor Portfolios,’ NBER Working Paper 31114, April 2023.
Marc Ivaldi, Bruno Jullien, Patrick Rey, Paul Seabright, Jean Tirole, ‘The Economics of Tacit Collusion,’ Final Report for DG Competition, European Commission, IDEI, Toulouse, March 2003
Robert A. Kagan, ‘Adversarial Legalism and American Government,’ in Marc K. Landy and Martin A. Levin (eds), The Politics of Public Policy, John Hopkins University Press, 1995, 88-118.
Margaret C. Levenstein and Valerie Y. Suslow, ‘What Determines Cartel Success?’ Journal of economic literature 44.1 (2006): 43-95.
Patrick Rey, ‘On the use of economic analysis in Cartel detection,’ European competition law annual (2006): 69-82.
Cass R. Sunstein, Why Societies Need Dissent, Harvard University Press, 2003.
Cento Veljanovski, ‘The economics of cartels,’ Finnish Competition Law Yearbook, 2006.
Klaus Schwab, of the World Economic Forum, is a great advocate of stakeholder capitalism. The WEF also prides itself on its networking value.
Yes, this is a story with lots of TLAs (three letter acronyms).
Folk are pressured into publicly admitting their racism, or transphobia or whatever. It is a form of psychological torture which should be at least clearly unethical, even illegal. Instead, it has become a tool of a multi-billion dollar “training” industry.