Not quite three years ago, I co-authored a widely distributed op-ed with the incomparable Andy Puzder (whom President-elect Trump absolutely should have renominated for Secretary of Labor, although that’s a story for another day). The purpose of our piece was to identify and commend what was then the newest and most effective pushback against the ESG (Environmental, Social, and Governance) investing model being pushed on the financial markets by the country’s giant asset management firms. The states, we warned the likes of BlackRock’s Larry Fink, had begun an all-out effort to resist the use of their taxpayer dollars and pension funds to advance the undemocratic, overtly political agenda inherent in ESG or “sustainability” investing.
In the years since, the states—or at least the red states—have indeed become some of the highest-profile advocates for free and fair capital markets and the restoration of corporate behavior driven by shareholder interests and the profit motive. Texas, West Virginia, and Florida, to name just three, have been visible and unfailing defenders of investments in traditional energy and other industries that drive the nation’s economy and feed its animal spirits.
While the Red states’ efforts have been incredibly important in the pushback against ESG and have done irreparable damage to those who abuse capital markets for political gain, perhaps no state action has been as important as that which was undertaken just before Thanksgiving by 11 states, unsurprisingly led by Texas. On November 27, the states filed suit in federal court in Tyler, Texas, alleging that the “Big Three” asset management firms—BlackRock, State Street, and Vanguard—had abused their power as the “passive” managers of trillions of dollars of assets owned by individual investors to unduly influence coal markets, thereby significantly increasing consumer energy costs. As the good folks at nonpartisan Ballotpedia noted in their “Economy & Society” newsletter, this suit is different from previous ones specifically because it takes aim at the Big Three specifically for the engagement power they wield as holders of “substantial stakes in most exchange-traded corporations.” Or, as Bloomberg’s Matt Levine put it, the question at the heart of the states’ suit is, “Are index funds illegal?”
If all the companies in an industry are owned by the same handful of owners, doesn’t that structure resemble the “trusts” that the antitrust laws were meant to stop? If the owners can pressure all the companies to act in their collective interest, won’t they push the companies to reduce competition and raise prices? Isn’t it bad for consumers if all the companies have the same owners?
In the struggle to save American business and capital markets from the ravages of ESG investing, “sustainable” corporate management, and stakeholder capitalism, much of the practical opposition to these endeavors has focused on their ideological predisposition. This is all terrible for markets and business, we hear over and over, because it is driven by leftist cultural and social inputs. ESG is, in many ways, just another example of the “Third Way” ideology that seeks to blend the social aspects of Marxism with the carefully managed economic aspects of capitalism. Its advocates’ repeated denials notwithstanding, ESG is of, by, and for the left.
Admittedly, I bear a good amount of responsibility for this singular focus on ideology. My book, The Dictatorship of Woke Capital, traced and exposed the ideological origins of the ESG/stakeholder movement and played a key role in alerting the public to the damaging efforts underway. I wouldn’t change a word in the book and still believe with all my heart that the ideological component of this effort is undeniably important to grasp. Nevertheless, I also think that efforts made by the broader conservative movement to expose this ideology have been so effective that we can and must address additional aspects of the ESG/stakeholder endeavor by focusing on the mechanisms that facilitate it. This is precisely what the 11 red states have done with their latest suit. The suit shifts the focus away from ideology—which is subjective—and to the objective harms done to consumers and corporations by the passive investing practiced by the Big Three.
The bottom line here is that the whole woke capital/ESG business is only important because of “bigness,” because of the scale of the operations involved. If 10, 20, 30, or even 100 small-to-moderate-sized asset management firms wanted to embrace ESG investing and were honest with clients about the reduced return on investment their strategies would likely yield, then none of this would be a problem. As comical as it may sound, even lefties should be able to invest as they choose and have access to markets to fulfill their financial goals.
The woke/capital/ESG movement is a problem, however, because its ideology is embraced not just by a handful of small and moderate-sized firms but by the biggest investment firms in the world, with trillions of dollars in assets under management and with the power to coerce corporations to bend to their will. It is also a problem because we’re not talking about just a handful of dedicated (but nevertheless rich!) lefties here but about tens of millions of Americans whose IRAs, 401(k)s, public pension funds, and other retirement savings are being used by the massive investment firms to create the leverage that they use to coerce corporations. This is the thing that’s so important about the 11-state suit: it identifies the issue that large asset management firms would rather remain unidentified, the fact that Americans’ saved wealth can be used to harm them and to strongarm corporations into making decidedly poor business decisions, specifically because that wealth is concentrated in so few hands.
Unfortunately, there is still another problem. Despite its propensity to harm consumers and despite using its collectivizing power unjustly to coerce corporate behavior, passive investing—which is at the heart of the 11-state suit and the markets’ “bigness” problem—is also indescribably beneficial to individual investors. As I noted elsewhere recently, passive investing “is, in almost every way, an enormous and unqualified blessing on the individual level,” even as “it presents several very real and potentially destructive dangers in the aggregate.”
Given all of this, it is incumbent upon all defenders of free and fair markets to be aware of the problems created by the perpetually ongoing process of consolidation in finance. It is incumbent on them as well to fight this consolidation where possible without unduly influencing the ability of markets to remain free and fair. The new Trump Treasury Department, Securities and Exchange Commission, Consumer Financial Protection Bureau, and all other finance and market-related agencies will have their work cut out for them. They must join the states in focusing first and foremost on the “bigness” conundrum, even as they endeavor to minimize their own footprints and limit the harm they may do to individual investors.
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