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ESG stands for environmental, social and governance, and it’s basically an investment strategy – where one considers those three things when deciding to make an investment. Like, investing in a company because of its stance on climate change or LGBTQ issues, and not necessarily solely because of the financial returns.

ESG has created somewhat of a “culture war” between conservatives and liberals, where republican states, like Wyoming, see it as a part of “woke” culture and even a threat to the fossil fuel industry.

Wyoming Public Radio’s Caitlin Tan spoke with University of Colorado’s Department of Environmental Studies Assistant Professor Matt Burgess who researches the political polarization of environmental issues, and will be starting as an assistant professor of economics at the University of Wyoming this fall.

Editor’s Note: This story has been lightly edited for clarity and brevity. 

Caitlin Tan: So we’ve been seeing some states choosing to invest state pensions in what they deem more ESG friendly companies and other states taking a different approach. Can you speak to what’s going on there?

Matt Burgess: So, I think political power, as it’s distinct from economic incentives, is one of the big issues here. At any particular time period, if you’re an investment fund that prioritizes ESG, and particularly green stocks – green stocks are going to be volatile, responding to different things than what people call brown stocks. So they’re going to be less sensitive to oil prices, for example, and they’re going to have a different boom and bust cycle. So if you pick your time period that you’re evaluating carefully, you can find that green stocks do better, you can find brown stocks do better. As far as I understand it, from what I’ve read, in the long term, on average, you would expect any investment fund that’s optimizing for something other than profits to do slightly worse on average. But again, because on shorter timescales, you can have times where green stocks do better or brown stocks do better. There’s a lot of messaging around, “It’s not about the objectives of ESG. It’s just about making money.” Where skeptics of ESG say there can be a trade off, and the motivation maybe isn’t just making money.

That said, this is where the power part comes in. I think that there are people who, in industry and in government, think society is better off if we’re making fast progress on things like climate change. Some economists think of climate change as the biggest market failure ever, because the private market doesn’t account for the damages that climate change does to the economy and its decision making, and so at the level of society, it’s economically better for the government to have some kind of intervention to correct that market failure, to internalize those incentives.

I think what’s happening is, up until recently, there are these very large investors and some governments that are throwing their weight behind ESG. And I think that at its core, the proponents want to do that for a combination of, “We want the market to better internalize these market failures, and to have more socially responsible capitalism. And because of these market failures, it’s appropriate to use government power, even if it goes slightly against the short term interest in the market.” And then the opponents of ESG have the opposite view. They’re saying, “Well, you’re basically pushing investors to invest for reasons other than their bottom line. And you’re using government power and corporate power in ways that are not always transparent in their objectives.” As far as I understand it, some opponents have made the case that that could be an antitrust issue. Whether or not you agree with the benefits of what they’re doing for society, the idea of large institutional investors that are private that are not accountable to voters in the way that governments are, getting together and saying, “We’re going to consciously push the market in this direction.” That is an antitrust competition issue. And then if you combine that with the fact that the conservatives in the United States have recently felt that their opinions are represented less in major corporate power, in institutions like the media and academia, than they are held by the public.

One of the questions that I often hear in the comments of ESG is, “Why are conservatives who historically have been at least somewhat libertarian – the whole Reagan doctrine about keep the government out of markets – why are they willing now to seemingly use government power against things like ESG?” My sense is that the answer to that is that they think that there isn’t another option, given how much power there is in elite hands going against them more so than public opinion maybe goes against them.

CT: So in Wyoming this last summer there were some rules passed, where any companies doing business with the state have to disclose ESG principles. But then Wyoming wanted to take it a step further and into the private investment world, to have brokers and security agents have to disclose any ESG principles to their clients as well. And then the clients had to provide written consent. That rule ultimately was vetoed by our Governor – he decided it was a little bit too much of government overreach, even though he said he doesn’t support ESG. Do you have any thoughts on that? It seems like an example of where a typically conservative state is considering using the government to involve themselves with investing?

MB: I actually would say it is, and it isn’t, in a couple of different ways. So it certainly is the government getting involved, the government saying that companies have to do something that they weren’t always doing otherwise. But ultimately, all they’re really asking you for is disclosure and transparency. They’re not saying that you can’t have ESG principles. And that stands in contrast to I believe Texas and Florida, they were disinvesting some of their government funds from banks that were signing on to ESG pledges. So that’s higher up the scale on coercive government power.

It raises an interesting question. One of the most famous theorems in economics is called the first fundamental welfare theorem. And basically, what it’s about is under what conditions does the free market efficiently allocate resources? No transaction costs and perfect information are two of those conditions. So I think that there’s a read on that Wyoming rule that says, “Well, this is the government trying to be coercive to stop or hinder ESG.” I think there’s also a read, saying, “This is the government asking for transparency in a way that’s going to help the market work more efficiently. It’s going to help people understand, to what extent are companies investing based on specific values that they may or may not share? Or are they investing based on profit.”

Now, the other question on the other side would be, “To what extent is the government with that rule being selective and applying that principle?” If you’re saying you have to disclose ESG, and you have to do so in an onerous way, and you don’t have to disclose about anything else, then you could argue that you’re, in effect, applying a restriction on ESG that you’re not applying on other things. And so maybe the government in that case, is putting its thumb on the scale.

CT: Where do you see the ESG going? Anti-ESG? How do you see this unfolding? It feels like there’s a lot of building tension.

MB: I believe that it is the case that overall unconstrained investment is going to do better, at least in the short term, on average than constrained investments. So I think that there may be a long term market force against ESG. But on the other hand, one of the reasons businesses have been so engaged in ESG, is that their research and polls suggest that young people are more conscious consumers than previous generations. And that’s going to be a push in favor of ESG that affects business’s bottom line and that they’re gonna pursue, irrespective of what the government says.

And then also a lot of the “culture wars” are about messaging and branding. So ‘inclusion’ is really popular, ‘equal opportunity’ is really popular. ‘Racial essentialism and discrimination’ is unpopular. And so how does ESG get painted as one or the other of those? And do we change the name? And maybe also some bifurcation among states. I think it probably is the case that very blue states are going to keep going in one direction, and very red states might keep pushing in the other direction. It’ll be interesting to see what the variation is within that – how companies that are broad across several states handle that? One of the things that we’ve seen in our research with utilities is that utilities that span multiple states that have different renewable electricity requirements, often have ambitious targets in states that don’t have any requirement to have a target because they also operate and others states that do and they operate in a national context where there are targets.

There’s also global markets. There are large pushes in the global marketplace, towards aspects of ESG, towards aspects of climate risk disclosure, that are not going away anytime soon. And then the short term versus long term – to the extent that companies are not accounting for things like climate change, for things like climate risk. The bigger the company, the more they might be influenced by long term versus short term considerations. And the more they may have a durable incentive to get out ahead of these issues, regardless of what the government is telling them in the short term, to the extent that they’re allowed to.

CT: If you’re just an everyday person, maybe you dabble a little bit with investing, is this something that one should be paying attention to? Or does it not necessarily affect the average person?

MT: In terms of just my general instincts for politics and the market, I would say that in the short term these things can vary a lot. So if the year-to-year investment prospects have more ESG funds versus less ESG funds, some are going to be better in some years, others are going to be better in other years. Certainly in the long term, companies that are managing themselves in a responsible way that are limiting their long term risk, that are building a healthy corporate culture, I would expect them to be more successful in the long term.

The last thing I’ll say, which is less about investors and more advice for activists, is never extrapolate too far, or assume too much about how willing companies are to go against their financial interests. So companies went all in on those things, three, four years ago, because that’s where the winds were blowing in the market. And now they’re pulling back from some of these things, because that’s the way the winds are blowing in the market. And so I think that the hard but necessary work is to, through innovation, through advocacy, to the extent that it’s effective and reaches a big tent, to create market conditions where that’s going to be the incentive. Because hoping that companies are going to go on mass against their economic incentives is, I think, history shows isn’t a winning battle.

CT: Matt, is there anything else you want to add?

MB: Just at a high level, the market in the private sector are really important aspects of our society, and how we got to be as prosperous as we are. They’re probably going to need to be really important and recently have been really important aspects in solving big problems, like climate change and other environmental issues. But also, market failures are a thing. The free market can’t solve every problem on its own. And so we need good governance to hold the market accountable, where it needs to be held accountable. And we need citizens to be engaged in all of that, both in entrepreneurship and in political participation and other things that help that system function better. I think polarization is corrosive to all of these things.

So the more that we can talk to each other, the more we’ll understand each other – the more I think we’ll understand that often there’s good arguments on both sides that maybe even aren’t always mutually exclusive in terms of what they imply we should do. So I hope to see more thoughtful conversations among people with diverse opinions about issues like climate change and ESG and these other issues that seem very hot right now. But ultimately, I think most people on both sides are trying to advance what they think is in the best interest of our country.





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