ESG refugees: Ally with taxpayers

Yesterday the Competitive Enterprise Institute published my new study with John Mozena, “Corporate Social Irresponsibility: After ESG, activist investors should side with taxpayers,” and it’s been a fascinating process to arrive at this point. When John and I first started talking about this paper, the debate around environmental, social, and governance (ESG) investing was significantly different. But events over the last year or so have moved rapidly, meaning that instead of asking companies to include taxpayer protections as part of their wider ESG strategy, we ended up recommend they replace their old programs–infamously focused, in many cases, on net-zero climate policy and racial hiring quotas–with anti-corruption standards entirely.

This pivot has several advantages. First, the problem with many ESG frameworks is that they expect every company to address a laundry list of external policy goals, many of which will necessarily have little to do with a given firm’s core operations. This waters down their efforts and virtually guarantees that they will do a poor job at a wider variety of things rather than focusing on what might make the most sense for their company. Plenty of firms happily practice some form of philanthropy or community uplift that’s actually tied to the products they make. But none of them have the ability to unilaterally implement the United Nation’s entire sustainable development agenda. Splintering the attention of management into multiple non-mission-aligned projects is a sure sign your company is on the wrong track.

Second, CEOs in recent years have done themselves (and their shareholders) a disservice by leaning into controversial social issues that could have been expected to alienate a significant portion of their customer base. While it’s true that some consumer product companies have made progressive political advocacy part of their marketing and brand identity, such successes are rare. Even the best known example, Ben & Jerry’s (owned since 2000 by Unilever), has recently been having significant issues integrating their political commitments with their management functions. The excesses from the COVID era in particular, such as Lululemon sponsoring an online workshop to “resist capitalism” or American Express’s infamous critical race theory-infused employee training, are clearly better left in the past.

Finally, embracing ESG’s progressive-left vision of corporate responsibility makes political and legal conflict for a firm more likely. Despite long being promoted as a means of insulating a company from reputational risk, recent developments have shown the opposite to be true. The idea that, for example, promoting climate change policy would safeguard a firm’s reputation hinged entirely on the idea that more aggressive regulation of greenhouse gases was an inevitable policy outcome. But the energy policies of the current administration show that to not be a reasonable assumption. Coal and oil fields were supposed to have become stranded assets. In 2025 however, investments in offshore wind farms have become expensively stranded. Lawsuits against large employers like Starbucks and Target over racial discrimination in hiring and promotion have shown a similar reversal of fortune from the ESG heyday of the early 2020s.

For these reasons and more (read the whole paper), pivoting from ESG to taxpayer protections is an easy win for corporate managers. The divisive and politicized goals of traditional ESG policy may be acceptable for progressive advocacy groups, but they are toxic and risky for US widget makers.