ESG and the ‘Long-Run Interests’ Dodge
Don’t believe it when companies spin social activism as having benefits to shareholders.
ESG and the ‘Long-Run Interests’ Dodge
Don’t believe it when companies spin social activism as having benefits to shareholders.
By Vivek Ramaswamy
Sept. 29, 2022
ILLUSTRATION: MARTIN KOZLOWSKI
I sent shareholder letters recently to the boards of Apple, Disney and Chevron questioning their decisions to embrace environmental, social and governance agendas that don’t appear to advance business goals—including Apple’s racial-equity audit, Chevron’s Scope 3 carbon-emission targets, and Disney’s opposition to Florida’s Parental Rights in Education Act. I detailed the tangible costs to each company of adopting these policies. The most common counterargument is that ESG practices are in the “long-run interests” of stockholders. That argument is a farce.
In each case, the groups that advanced these policies were clear that their primary motivations were nonpecuniary. An official of the Service Employees International Union said it “spearheaded” Apple’s racial-equity proposal because companies have “a negative effect on marginalized communities—including Black people, women, LGBTQ+ individuals, and people with disabilities—by reinforcing systems of inequity and creating products with real-life dangers.” Color of Change, which pressuredthe company to do the audit, says its mission is “to hold companies accountable for the ways they perpetuate white supremacy.”
Disney employees who pressured CEO Bob Chapek to oppose Florida’s statute—which prohibits classroom sex talk in lower elementary grades and requires it be age appropriate for older children—said they were motivated by “human rights” and the “threat to LGBTQIA+ safety.” The Dutch nonprofit behind Chevron’s Scope 3 proposal said its goal is to “change oil companies from within” by pushing “Big Oil to go green.”
Agree or disagree with these objectives, they aren’t about advancing the interests of stockholders. Each company’s initial response suggested as much. Apple’s board recommended against the racial-equity audit before adopting it. Mr. Chapek wrote in an all-employee email that “corporate statements do very little to change outcomes or minds” and “can be counterproductive,” then changed his mindtwo days later. Chevron petitioned the Securities and Exchange Commission to exclude the Scope 3 proposal from its ballot, then recommended against its adoption, before eventually changing course.
It strains credulity to believe that these sudden changes of heart were motivated by a realization that these measures benefited shareholders. It’s true that failing to appease social activists can create costs that companies would rather avoid. But if that’s all there is to the argument, ESG isn’t much more than a protection racket.
When I raised this point with a Chevron executive at a meeting after my shareholder letter, he suggested all the company’s decisions are about maximizing financial returns. In that case, why did the company need to be pressured into adopting certain Scope 3 emissions caps, tripling investment in “new energies,” and issuing a “climate change resilience” report supporting the Paris Agreement and a carbon tax? Why did the Dutch nonprofit that made the proposal and State Street, which voted for it, take credit for changing Chevron’s behavior?
Others argue that corporate decisions with majority shareholder backing from large professional asset-management firms should enjoy the presumption of enhancing long-run shareholder value. But last month, 19 state attorneys general accused the world’s largest asset manager, BlackRock, of using clients’ money to “circumvent the best possible return on investment” with efforts to “pressure companies to comply” with ESG goals.
BlackRock responded that it doesn’t pressure companies to lower emissions. But New York City Comptroller Brad Lander called that claim “alarming” and said BlackRock’s response contradicted its prior climate commitments. States like New York and California are major clients for firms like BlackRock. Foisting their social agendas onto companies may serve BlackRock’s interest in attracting capital from those states, but that doesn’t mean these commitments serve the companies’ shareholders.
BlackRock claims that its ESG-promoting voting practices advance long-run value creation at underlying companies—that “racial and gender equality” is “increasingly relevant to a company’s long-term performance,” and that “how well companies navigate and adapt through the [climate] transition will have a direct impact on our clients’ investment outcomes” over “the long-term.” BlackRock invokes the “long term” mantra 49 times in its 10-page climate risk report.
But simply saying it doesn’t make it so. After voting for Chevron’s Scope 3 proposal in 2021, BlackRock switched its vote on another one this year and contradicted itself in explaining why: BlackRock’s governance team said it changed its vote “in recognition of the progress . . . Chevron has made,” while CEO Larry Fink seemed to reject the idea altogether: “We are not going to support Scope 3. . . . We’ve always said Scope 3 is forcing big companies, banks and asset managers to be the environmental police.” BlackRock voted against a racial-equity audit at Johnson & Johnson that differed from Apple’s in a key respect: It urged the company to “consult civil-rights groups . . . across the spectrum of viewpoints,” including “right-leaning” ones, and to “allow employees to speak freely without fear of reprisal.” So racial-equity audits promote shareholder value but viewpoint diversity detracts from it?
Recent government actions reveal what’s actually at stake. If ESG-promoting proposals truly enhanced long-run shareholder value, there would be no need for the Biden administration to create a new rulethat would expressly permit retirement-fund managers to consider “collateral benefits other than investment returns,” such as “climate change,” when investing employees’ money. The rule would be superfluous.
Some ESG proponents argue that even if socially motivated proxy voting doesn’t help individual companies, it nonetheless maximizes value across investment portfolios. The Shareholder Commons, a nonprofit “committed to a fundamental transformation of our financial system,” explains: “The most important factor determining diversified portfolios’ long-term value is the economy’s intrinsic value, not individual portfolio companies’ relative financial performance. Accordingly, individual company behavior that harms the economy threatens diversified investors, even when that conduct might increase the company’s own long-term value.” Reducing the value of companies one at a time is a dubious way to increase the value of a portfolio—and in any case, a board’s fiduciary duty is to its own shareholders, not other companies’.
The strongest argument on behalf of corporate social activism is that society endows corporate shareholders with benefits like limited liability that ordinary persons don’t enjoy. “Companies need to earn their social license to operate every day,” Mr. Fink said in 2020. Maybe, but that’s for lawmakers to decide, and for now the law is clear: Corporate boards are obligated to act with the sole purpose of advancing the best interests of stockholders. Chevron, Apple and Disney should take notice—and owners should assert their rights.
Mr. Ramaswamy is executive chairman of Strive Asset Management, which holds positions in Chevron, Apple and Disney.
ESG and the “Long-Run Interests” Dodge by @VivekGRamaswamy https://www.wsj.com/articles/esg-and-the-long-run-interests-dodge-stockholders-apple-disney-chevron-equity-pressure-lgbtqa-company-climate-change-11664459307