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The War on ‘Woke Capital’ Is Backfiring

The War on ‘Woke Capital’ Is Backfiring
The War on ‘Woke Capital’ Is Backfiring


One of the stranger political crusades of the past few years has been the Republican war on so-called woke capital, which has led GOP politicians across the country to adopt a kind of anti-corporate, pro-regulatory rhetoric that one normally associates with the left wing of the Democratic Party. And among the GOP’s favorite targets in this war has been ESG investing—investment funds that take “environmental, social, and governance” considerations into account.

For Republicans, ESG funds are a Trojan horse, designed to smuggle progressive attitudes toward climate change, and diversity and inclusion, into executive suites and corporate boardrooms, all under the guise of supposedly improving investment returns. And so, in red states, state treasurers have pulled public money out of firms that are associated with ESG, including even some of the world’s biggest investment firms, such as BlackRock and State Street.

On top of that, Republican legislatures in at least 20 states have adopted anti-ESG rules of one sort or another. Last year, after the Biden administration revised a Trump-era rule to make clear that pension-fund managers could use ESG if it did not hurt investment returns, Republicans in the House and Senate (along with two Senate Democrats) passed a resolution seeking to repeal the rule. And a coalition of Republican state attorneys general filed suit in federal court to have the rule overturned. (Biden vetoed the congressional resolution, and a district court tossed out the lawsuit, so the rule remains in effect.)

[Adam Serwer: ‘Woke capital’ doesn’t exist]

But the ESG front in the right’s war on woke capital is still active. Republican legislators in New Hampshire are now trying to raise the stakes. Earlier this month, they proposed a bill that would order any government agency investing state funds to ensure that no public money goes to investors who manage their funds “with any regard whatsoever based on environmental, social, and governance (ESG) criteria.” More striking, the bill would make it a felony to knowingly violate this order. (The wording of the bill does not attempt to define ESG, aside from using this catchphrase language.) In other words, the bill would effectively criminalize any ESG investments on the state’s behalf.

As I wrote last year, ESG investing is far from the vehicle for woke capitalism that Republicans say it is. Instead, it’s largely a faddish label that allows investment managers to pretend they’re doing good while mostly doing business as usual. The ESG trend also hit a wall in the past year, thanks in part to the political backlash and in part to the accurate perception that it chiefly amounts to greenwashing. The Republican Party is really battling against a specter of its own imagining.

Even so, that battle has the potential to do actual damage. ESG investing may be dumb, but laws like this possible one in New Hampshire are even dumber. For a party supposedly dedicated to the free market, the GOP has become oddly comfortable with trying to dictate how investors make decisions.

In the simplest sense, after all, the new law would effectively exclude many investment companies from consideration—even if their funds’ track records suggest that they might outperform the market. (Again, this could include giant, mainstream firms such as BlackRock.) It would eliminate the possibility of using, say, funds that pay attention to climate-change risk as a hedge against that risk, even if a state’s pension fund also had many investments in fossil-fuel companies.

[James Surowiecki: The hottest trend in investing is mostly a sham]

And the broadness of the law’s language—including, most notably, its prohibition on funds that use ESG criteria “with any regard whatsoever”—would likely ban investments in funds that take environmental factors into consideration, even when those considerations were plainly relevant to future corporate prospects. That could easily apply to such firms as ExxonMobil and Tesla.  

Most odd, the bill would effectively prohibit investments in firms that take corporate governance into account, which would keep fund managers from explicitly considering such factors as board composition, concentration of power in the hands of the CEO, executive pay, and so on. These considerations arguably fall within the fiduciary responsibility of the fund manager—the bill would outlaw the work of a professional who does basic due diligence about the security of clients’ money. Making it a felony to invest money with firms that explicitly pay attention to the problem of, say, excessive CEO power would, of course, be great for executives who want to run their companies like private fiefdoms, indifferent to shareholder interests. But it would be terrible for investors—and for companies themselves.

[Conor Friedersdorf: Ron DeSantis’s Orwellian redefinition of freedom]

Naturally, the authors of the bill include some weasely language in the legislation that gives them plausible deniability when it comes to the obvious negative business consequences the law would have. The bill would make it a felony only if state money is invested “knowingly in a manner violating fiduciary duty concerning environmental, social, and governance (ESG) criteria.” In other words, if the state agency doing the investing can prove that using ESG criteria was in line with its fiduciary duty, it could escape the felony charge.

The problem, of course, is that no government officials are going to take the risk of being dragged into court because they included the wrong fund as an investment choice. So even if actually enforcing the law might be challenging—how do you prove that taking governance into account was not financially motivated?—agencies will take the easy way out, and simply blacklist any company that mentions ESG (or perhaps even the words governance and environment). And that chilling effect is, of course, exactly the point of the law.

The New Hampshire bill justifies itself by citing the need for the state to earn “the highest return on investment for New Hampshire’s taxpayers and retirees.” But both federal and state laws already legally oblige investment managers to maximize risk-adjusted returns. The paradox is that by narrowing the range of potential investment options, while also effectively barring the state from using some of the world’s biggest investment firms, the New Hampshire law might well reduce returns, not increase them. But for the people writing such legislation, that’s perhaps a small price to pay to teach woke capital a lesson.



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