There have been a number of stories recently about how ESG (environmental, social and governance) and DEI (diversity, equity and inclusion) have lost their luster with many companies.
The most recent, from Bloomberg, postulates:
“The virtue bubble has not only peaked; it is starting to deflate.
“For the last few years, the ESG movement has affected both how people invest and what they buy. Now the acronym (it stands for environmental, social and governance) is becoming a ‘dirty word.’ Companies are scrubbing it from their websites, and CEOs are no longer mentioning it in their speeches. And if there is an acronym that that sparks even stronger feelings than ESG, it is DEI (which stands for diversity, equity and inclusion, and is part of the S and G in ESG). Depending on your view, DEI is either a cure for America’s structural racism or proof that the fight against it has gone too far. In either case, its power is also fading; firms facing narrowing profit margins are cutting jobs in DEI departments.”
And here’s how Bloomberg frames the argument:
“Almost every bubble starts as something worthwhile. If the question is how to preserve what was valuable about ESG and DEI in the first place, then the answer may lie in how these initiatives evolve over the next few years. Do they merely try to rebrand themselves? Or do their supporters take a hard look at their objectives and adjust?
“What’s certain is that virtue has become a major industry in the last decade. Investments in sustainable assets grew from $22.8 trillion in 2016 to $35.3 trillion in 2020, but fell to $30.3 trillion in 2022.1 The DEI industry is worth as much at $9 billion.
“But while the intentions of DEI and ESG are noble — a cleaner environment, schools and workplaces free from discrimination — the execution was problematic.
“Whether a company is complying with ESG standards, and thereby worthy of inclusion in a ESG investment fund, is more a value judgment than an objective assessment. Putting DEI into practice, meanwhile, led to situations like candidates for academic jobs being required to express support for ideas and strategies they might not agree with.
“This doctrinaire approach alienated many people, and opposition arose in political and legal channels. Laws in some states now prohibit the use of DEI considerations in government jobs, for example, and some public pension plans are restricted from investing in ESG funds.
“There is another reason the ESG and DEI bubbles are bursting: The economic case for them was never strong. Investors were promised ESG funds that would produce higher returns by avoiding certain investments, but they haven’t always outperformed the market.”
KC’s View:
The thing that really fascinates me is the degree to which these initiatives have become divisive, which probably shouldn’t a surprise in such a polarized environment. But I think the intensity of the debate actually highlights the cultural dysfunction of the nation.
The title of the Bloomberg story actually speaks volumes:
The Virtue Economy Is Over.
My first question: When did “virtue” become a dirty word?
My follow-up questions: Why is running a company with environmental issues in mind a bad thing? (See our story above about how so many CEOs are concerned about climate change issues threatening their companies’ existence in the next decade.) Isn’t factoring social issues into business conduct a responsible thing to do – not just socially responsible, but from a fiduciary perspective? Don’t shareholders have a right to expect good governance? And if companies think they will be better off by practicing diversity and inclusion, and figuring out ways to share equity with their stakeholders, why is that such a bad thing?
Assuming, of course, that these are things that companies’ leadership and boards agree ought to be priorities, or at least part of a broader set of business principles.
While I’ve always philosophically agreed with DEI and ESG, I think that it is fair to say that in some ways, the approach to these initiatives need top be reframed.
More from Bloomberg:
“Parts of the virtue economy will surely be rebranded. Other parts will probably shrink. ESG funds may become a niche product, a box that you check at the end of your 401(k) investment menu, while DEI programs become part of those online HR training modules no one really pays attention to.
“They could also be reformed — but this would mean accepting the idea that imposing constraints doesn’t increase outputs. For ESG investing, maybe this means more funds that focus on climate solutions, instead of promising to avoid certain companies. That will be riskier, since the investment horizon is longer and more uncertain, but they may also offer more potential upside, and they can be balanced with more traditional assets to suit an individual investor’s needs and values. For DEI, that may mean reframing it not as a restriction on who can be hired, but as an affirmative plan to discover and cultivate talent from people of underprivileged backgrounds.
“None of this will be easy. But as we’ve learned, in markets there is no free lunch. Good ideas don’t create value if they’re not executed well — and that means being honest about the trade-offs even the best ideas require.”
I’ll buy that. There is no free lunch. But there’s also no one way to approach capitalism – and part of capitalism is accepting that. (Though not, apparently, in the US. At least not these days.)
There are companies in which I would not invest – and if that means that I don’t make as much money with my investments as other people, c’est la vie. I’d like to have a nice retirement, but I’d also like to be able to look in the mirror. But if someone else makes different decisions using different criteria, that is up to them. They have their own mirrors.
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