Ambassador John Simon
Defending ESG Investing from the Right
By Ambassador John Simon, Co-founder and Managing Partner of Total Impact Capital, and Former United States Ambassador to the African Union
Three years ago, socially responsible investing (investing for social as well as financial returns) seemed to be having its day. The CEO of the world’s largest asset manager, Larry Fink of BlackRock, wrote in his annual letter to CEOs that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” The Business Roundtable issued a statement signed by 181 CEOs that declared corporations have a responsibility to all stakeholders – customers, employees, suppliers, communities and shareholders. Several of the world’s most profitable investment firms, including TPG, Bain Capital, KKR, and Apollo, launched new “impact investing funds” designed to achieve measurable environmental and social impacts.
Then came the backlash. Initially, it was largely from the left, with many progressive commentators deriding these efforts as a PR stunt at best and, at worst, the expropriation of social functions that should be the responsibility of more accountable and democratic governments. However, recently the most vociferous arguments are coming from the right, with “ESG Investing” (investing in companies that meet specific environmental, social, and governance criteria) in particular becoming the target of not only media commentators like Tucker Carlson and George Will but state and federal legislation.
As a life-long Republican who founded an impact investing firm driven by what I consider the very conservative belief that market-based solutions usually provide the best results, I find these attacks confounding.
There are two main right-wing objections to socially responsible investing in general and ESG in particular. The first, stemming partly from recent confrontations between politicians and corporations over social policy such as the battle between Disney and Florida’s governor over education, is that ESG investing encourages corporations to embrace social and political causes that have nothing to do with the product or service they are bringing to market, providing a megaphone for voices on the left. The second is that ESG investing, by not prioritizing financial returns and insisting on additional reporting with regard to non-financial metrics, results in higher fees and less financial returns to investors. In some cases, ESG portfolios look shockingly similar to traditional portfolios but for the exclusion of a few corporations in out-of-favor industries, like fossil fuels and arms manufacturing.
To combat these perceived offenses, Texas has passed a law barring the state from doing business with investment funds that exclude fossil fuels, West Virginia stopped doing business with BlackRock, and Republicans in Congress have indicated a desire to consider legislation that would bar federally qualified retirement plans from considering ESG factors in their investment decisions.
All of this is completely at odds with a free market philosophy that empowers investors to decide which priorities should guide their investment decisions. Inserting government into these decisions is exactly the type of heavy-handed economic policy Republicans have historically fought against. It should be clear that the same tools that can keep corporations from siding with the left can just as easily be turned on companies with conservative leanings.
As to the question of financial performance, there are a raft of studies comparing ESG funds to traditional funds. Depending on the time period, the investment instrument, and how ESG is defined, the results are decidedly mixed. What is clear is that if there is a financial performance difference, it is not very large. Yet despite the lack of certain financial advantage and higher fees, more and more investors want the option to align their portfolios with their values through ESG – total ESG assets under manager have nearly doubled in the last five years to $41 trillion.
That investors should want the companies they invest in to meet a minimum threshold of social responsibility, or, as in impact investing, accomplish tangible social goals, should not be surprising. Considering factors beyond those that are purely financial allows investors to mitigate longer-term risks to themselves, society, and the companies in which they invest. Had the purveyors of the financial products at the root of the Great Recession considered the social implications of the mortgage backed securities and derivatives they were selling – such as the long-term affordability of the underlying mortgages – it might have only been a recession. The alternative is relying on government alone to be responsible for managing the hard edges of capitalism – a progressive’s dream and conservative’s nightmare.
Most avowed capitalists are not just seeking a higher return for their 401k’s, but believe Adam Smith’s invisible hand is actually the best way to achieve better societal outcomes for all. We should remember, Adam Smith was a professor not of economics but of moral philosophy. As he said in The Wealth of Nations,
“If [justice] is removed, the great, the immense fabric of human society…must in a moment crumble into atoms.”
About the Author
Ambassador John Simon is Co-founder and Managing Partner of Total Impact Capital, and the former US Ambassador to the African Union. Total Impact Capital is an impact investing firm dedicated towards addressing the keystone issues which challenge enterprises, governments, and non-profits, while generating solutions that are meaningful, sustainable and profitable. Among his posts in the U.S. Federal Government, Ambassador Simon's former roles also include serving as the Executive Vice President of the Overseas Private Investment Corporation (OPIC; now the United States International Development Finance Corporation), Special Assistant to the President and Senior Director for Relief, Stabilization, and Development for the National Security Council (NSC), and Deputy Assistant Administrator at the United States Agency for International Development (USAID).
Additionally, Ambassador Simon has served as a Senior Adviser at the Center for Strategic and International Studies (CSIS), and as a Fellow at Center for Global Development (CGD), where he coauthored, "More than Money: Impact Investing for Development." Ambassador Simon received his bachelor's degree from Princeton University and a master's degree in public policy from Harvard University.
 Bloomberg Intelligence, ESG 2021 Midyear Outlook