ESG: Warren Buffett Scrambles the Narrative
National Review Online, May 3, 2023
With the pushback against ESG (an investment “discipline” under which actual or prospective portfolio companies are measured against various environmental, social, and governance benchmarks) gathering momentum, its proponents have finally had to mount a credible defense of a once seemingly irresistible concept that, up to now, has had no need of one.
That’s not proving easy. To anyone paying attention, the laughable, albeit much peddled, idea that ESG is a way of doing well by doing good has been shown to be nonsense in theory and in practice. As for the “doing good” part — at least so far as the “E” (environment) is concerned — here’s one assessment, published in USA Today in 2021:
The financial services industry is duping the American public with its pro-environment, sustainable investing practices. This multitrillion dollar arena of socially conscious investing is being presented as something it’s not. In essence, Wall Street is greenwashing the economic system.
Who would say such things?
As the former chief investment officer of Sustainable Investing at BlackRock, the largest asset manager in the world with $8.7 trillion in assets, I led the charge to incorporate environmental, social and governance (ESG) into our global investments. In fact, our messaging helped mainstream the concept that pursuing social good was also good for the bottom line. Sadly, that’s all it is, a hopeful idea. In truth, sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community.
Oh.
BlackRock, of course, did more to popularize ESG than any other investment firm.
Much of the reaction against ESG has come from elected officials in red states who are understandably anxious about the way their taxpayers’ money is being invested.
Unless they are specifically told otherwise, asset managers are supposed to generate the maximum risk-adjusted return for their clients. Abandoning that aim to pursue an environmental or social agenda is not money management, but political activism at someone else’s expense. When those officials began to object to the use of ESG — a profoundly political methodology — as a tool to determine how taxpayer money was being invested, some commentators, turning chutzpah up to 11, complained that this was a politicization of the investment process. On the contrary, it was the reverse. Not only that, exorcizing ESG would be a win for democracy. Public policy should be decided by those chosen by the voters, not by the hired help from Wall Street.
It’s worth pausing here to make two additional points. The first involves “right-wing” ESG. While ESG is broadly progressive, there are some on the right who — having noted how powerful ESG has proved to be — now argue that rather than being simply scrapped, ESG should be replaced by a “conservative” equivalent. This would be a bad idea for any number of reasons, many of them summarized by Russ Greene and Stephen Soukup in a recent article for Capital Matters. If this variation of ESG gains traction, it will, however, be evidence of the extent to which collectivism, dressed up, say, as “common-good capitalism”, has burrowed into the ranks of those who once defended free markets.
Secondly, calling for the confinement of the ESG “package” to funds where investors have requested it is not the same as asserting that “E,” “S” or “G” factors should be ignored by the managers of more general funds in cases when they could have a material effect on financial performance within a normal investment horizon: a period that, depending on the security, may be days, weeks, months, or years. Promoters of ESG (and stakeholder capitalism, its equally repellent symbiont) like to stress “long-term” performance. This is a conveniently vague notion with little or no intrinsic merit, but it comes with two advantages: It sounds virtuous, and it helps smooth over sell-offs, which can be waved away as nothing more than bumps in a long road.
This makes it all the more telling that Warren Buffett, an unquestionably successful long-term investor, appears to be unimpressed by both ESG and stakeholder capitalism. This is hard to reconcile with accusations that ESG’s critics either do not understand, or are uncomfortable with, free markets.
Michael Bloomberg, for instance, has argued that ESG critics would flunk “Investing 101,” a course, I suspect, that Buffett might just ace. Likewise, Al Gore and David Blood, one of the partners in the investment fund of which the former vice president is chairman, have argued that those who don’t take “sustainability factors” into account are failing in their fiduciary duty to their clients. Financier Tom Steyer, for his part, has grumbled that the red-state Republican politicians now challenging ESG are “behaving like anti-competitive anti-capitalists.”
I looked at the arguments made by these climate-fundamentalist plutocrats here, here, and here and was not — how to put this — persuaded. Somehow, I don’t think that Charlie Munger, Buffett’s long-term partner at Berkshire Hathaway, would have been either. After all, noting the enormous clout wielded by BlackRock and other index funds, he once observed, “I think the world of Larry Fink [the CEO and chairman of BlackRock], but I’m not sure I want him to be my emperor.” Quite. But Munger is a Republican, so maybe such lèse-majesté is to be expected. Buffett, however, is a Democrat.
Writing in the New York Times, his biographer, Roger Lowenstein, takes up the story:
As the Berkshire faithful gather for their annual meeting in Omaha on Saturday, Mr. Buffett is decidedly out of step with the progressive orthodoxy in corporate boardrooms. To Mr. Buffett, boards’ rightful role is, as ever, to serve the shareholders who have risked their capital. Institutional investors such as BlackRock’s Larry Fink have pushed E.S.G. — or environmental, social and governance — investing to turn corporations into agents of progressive change.
Scores of corporations have in the last few years adopted climate and diversity policies. The Business Roundtable, a chief executives group, proclaimed it no longer believed that corporations exist principally to serve shareholders.
It has been established for over a century that — in the words of Justice Russell Ostrander of the Michigan supreme court, writing in Dodge v. Ford Motor Company (1919) — “a business corporation is organized and carried on primarily for the profit of the stockholders.” This principle was reinvigorated by Milton Friedman, perhaps most notably in a 1970 article in the New York Times:
In a free‐enterprise, private‐property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.
In 2019, the Business Roundtable redefined the purpose of a corporation — “modernizing,” it boasted. Shareholder primacy — how passé — was dropped. Corporations should now serve the interests of a broader collection of “stakeholders,” of which shareholders were only one class. This new mission, effectively resting on the partial expropriation of shareholders’ property rights, is, like common-good capitalism, an expression of corporatism: an ideology with a distinctly checkered past and, undoubtedly, future. Its appeal to the C-suite is grounded in fear — of large ESG investors, big government, and the woke mob — and greed. For executives, stakeholder capitalism can mean easier money — less focus on financial targets and more power, as they sit at the corporatist table.
This, reports Lowenstein, is not for Buffett:
He is dismissive of social governance warriors seeking to hijack the corporate mission. Most such critics represent institutions. Mr. Fink, mutual fund groups like Vanguard and state pension funds manage other people’s money — they advocate their opinions, not their purses. Mr. Buffett feels a greater allegiance to shareholders who purchased stock as he did — with their own cash.
Buried within that paragraph is the intriguing question of who a company’s shareholders are. Take the example of a company in which a BlackRock fund has invested. Legally, that fund is the shareholder, but it is the capital of the investors in that fund that is being put to work. And it is their capital that is ultimately at risk. Their interests ought to count for far more than they currently do.
To its credit, this is an issue that BlackRock is trying to address. And other investment-management companies are starting to follow suit. Handing power to the underlying investors (provided they use it) is one way of wresting control from the managerial class now operating within the large asset managers.
Unsurprisingly, Buffett has come under fire from elements within the ESG ecosystem. Berkshire Hathaway is once again facing proxy challenges this year relating to climate, diversity, and corporate governance. (Similar efforts did not fare well in 2022.)
And:
CalPERS [California’s highly politicized Public Employees Retirement System], which manages retirement funds in California, demands that Berkshire publish an annual “assessment” on how it manages climate risks. As You Sow, a nonprofit advocacy group, proposes that Berkshire issue a report disclosing how it intends to reduce emissions “associated” with its big insurance business.
In the proxy solicitation sent to shareholders, As You Sow [a non-profit advocacy group] charges that Berkshire “is not adequately reducing the climate footprint” from insurance. “Berkshire is a laggard,” the group writes, “scoring 0 of 10 in a survey of the 30 largest global insurers.” Whatever his feelings about climate change, Mr. Buffett regards surveys and checklist-style scorecards as wasteful sloth — the enemy of good management.
Buffett is right. But, then, As You Sow is not about good investment management as typically understood. One glance at its website reveals an emphasis on using corporate power rather than the polling booth to drive political change:
We harness corporate responsibility and shareholder power to create lasting change. Our programs address gender inequalities, workplace equity, environmental health, and more.
It’s an agenda in keeping with the post-democratic thinking running through ESG and stakeholder capitalism, and it has nothing to do with shareholder value.
With that in mind, Buffett may well be a Democrat, but — as Lowenstein explains — some of his views put him increasingly at odds with much of his party, and, indeed, as collectivism rises on the right, with some of those across the aisle:
Mr. Buffett’s liberalism is of the classic Adam Smith variety: Private initiative, properly regulated, leads to social good. That used to be just about everyone’s view, but no more.
Corporate boards are now assembled like political platforms, with consummate attention to satisfying multiple interests. Berkshire chooses directors on the basis of “business savvy” and owner — not “stakeholder” — orientation. In short, Mr. Buffett remains a full-throated believer that boards exist to represent shareholders.
In his 2021 letter to stockholders, he recalled that before he assumed control of Berkshire, which was then a struggling textile manufacturer, it contributed a “pathetic” $100 per day in federal taxes. After decades of growth and diversification . . . the tab has risen to $9 million per day. . . . Mr. Buffett’s message was that profitability is a social good, demonstrating the “often unrecognized financial partnership between government and American businesses.” . . .
A small part of Berkshire’s profit, and thus its taxes, stemmed from share buybacks — a corporate tactic that progressives have taken dead aim at. In his most recent letter, Mr. Buffett came close to calling such critics anti-business know-nothings. He regards share repurchases as a perfectly valid tool for managing capital. . . . Repurchasing (undervalued) shares conforms to Mr. Buffett’s belief that the C.E.O.’s duty is to protect, and over time enhance, per-share value.
Lowenstein also notes that Buffett and Munger will be questioned at Berkshire’s meeting about corporate governance and politics. However, he predicts that
neither is likely to change his mind, and most shareholders seem to like it that way. Last year, assuming the dissident votes came from institutions, individual holders overwhelmingly backed management. Mr. Buffett may not conform to the fashionable standards of the Business Roundtable, but he is still in good graces with one group — individuals who trust him to manage their savings.
And so, yet again, the distinction between the ultimate owners of capital and the intermediaries who control it comes into view.