The business world is in thrall to six letters — or, more accurately, to two groups of three letters — ESG and DEI. These stand, respectively, for "environmental, social and governance" and "diversity, equity and inclusion." Taken together, they constitute the ruling business ideology of our age.
Both ESG and DEI have generated massive industries. Investment giants, notably BlackRock, State Street and Vanguard Group, claim that more than a third of their assets, or $35 trillion, are monitored through one ESG lens or other.
But do these letters really fit together logically? Or are they muddlings of buzzwords that are either ineffective or even counterproductive? The evidence increasingly suggests the latter. Both ESG and DEI bundle together different things that range from the admirable to the questionable. This bundling not only risks setting conflicting, fuzzy or even questionable goals for companies. It also distracts from the mission that initially set the buzzwords afloat — preventing the world from overheating in the first case and tapping a wider range of talent in the second.
Few people would disagree that companies need to play a role in tackling global warming either through voluntary action or compulsory legislation. But adding "G" and "S" to the formula is counterproductive. Elon Musk is cavalier about corporate governance, but Tesla is one of the world's most effective green champions. Closing coal mines in Appalachia is good for the planet but leaves in its wake a trail of hollowed-out towns and human wreckage. Corporate social responsibility surely means something different for a start-up where everyone is working 60 hours a week in order to survive than for an established company in a mature market.
The apostles of ESG are as guilty of overselling their product as they are of intellectual sloppiness. The ghastly phrase "win-win" that is endemic in the industry obscures the huge costs of adjusting to climate change. But is it "win-win" for investors when, according to an analysis by Morningstar, "sustainable" funds charge on average annual fees that are almost 50% higher those of traditional funds? And is it win-win for the planet when companies can game the system by selling a polluting plant to another company that is happy to be judged as a "sin" stock?
ESG advocates claim that ESG portfolios provide superior risk-adjusted returns to traditional portfolios, returns that reflect the superior business performance of ESG companies. But a 2021
ESG didn't even provide a reliable template for how to deal with an obvious evil such as Putin's invasion of Ukraine. Stephen Bainbridge of UCLA Law School points out that European corporations with major operations in Russia prior to Putin's invasion of Ukraine typically had higher ESG ratings than those who were not operating in Russia. Unrealistic expectations invite a backlash just as certainly as contradictory aims entail strategic confusion.
DEI is a little better than ESG in that it bundles two obviously admirable things (diversity and inclusion) with one much more questionable one (equity). Diversity is a good thing from both a business and a social point of view because it discovers new sources of talent while at the same time strengthening the links between companies and the wider society. Inclusion is a logical extension of diversity: employees will work better if they feel welcomed, and companies need to work harder to welcome people who are new to the corporate world. The problem with the formula lies with the all-important word "equity."
When it comes to equality, liberal capitalism is built on two great principles: procedural justice (equality of treatment before the law) and equality of opportunity. Liberal capitalists celebrate the fact that Jeff Bezos is filthy rich for a mixture of first principles (people should be free to exercise their talents) and utilitarianism (Amazon improves the general welfare by providing better services at better prices). But "equity" tries to substitute "fairness" for "equality of opportunity." Advocates of "equity" argue that different ethnic groups should start off with roughly the same resources. But others go further: Advocates of social justice argue that high degrees of inequality of result are inherently unfair while some supporters of critical race theory argue that capitalism is inherently unjust. "In order to truly be antiracist," says Ibram X. Kendi, a leading guru of the social justice movement, "you also have to truly be anti-capitalist."
This emphasis on "equity" drives the DEI formula in an increasingly radical direction. Coca-Cola had to
The DEI industry also suffers from the same problem as the ESG industry: overselling its products. The industry blithely argues that diversity produces higher levels of creativity and innovation, through a sort of multicultural magic. It forgets to add that getting the best out of diversity requires good management. Roy Chua of Harvard Business School has
The result of this combination of social justice radicalism and overpromising is that DEI programs are ineffective, or worse. Studies of anti-bias training
Weaponizing the Backlash
Having been protected from criticism by their aura of righteousness, both DEI and particularly ESG are finally being subjected to searching criticism. An excellent
Predictably, some politicians are weaponizing the backlash. Ron DeSantis, the governor of Florida and a leading contender for the Republican nomination for the presidency in 2024, wants to be the Teddy Roosevelt of our age, taking on the malefactors of great wokeness. So far, he has passed the Stop W.O.K.E. (the Wrongs to Our Kids and Employees) Act, which
The problem with the charge of "wokery" is that it suffers from the same problem as ESG and DEI — bundling lots of different things together, this time in the cause of vilification rather than promotion. Woke warriors are wrong to argue, or imply, that western capitalism is uniquely responsible for slavery or colonialism or a combination of the two. Both slavery and colonialism have been endemic in pre-modern societies. The world's greatest capitalist powers — first Britain and then America — were responsible for abolishing the slave trade and the practice of slavery. At the same time, they are right to argue that slavery and colonialism have left a terrible and enduring legacy behind them. The average African-American family only has
The best way to avoid a counterproductive impasse is to engage in a general unbundling. Advocates of ESG need to focus on tackling global warming. The best way to do this is to engage in collective action via carbon taxes rather than corporate agitation. Advocates of DEI need to concentrate on promoting historically disadvantaged groups — particularly the descendants of slaves in the United States — rather than engaging in militant cultural re-education. The best way to do this is to build ladders of opportunity that try to make a reality of the idea of equality of opportunity. Both the environment and diversity are far too important to become victims of the culture wars between a bloated ESG-DEI bureaucracy, on the one hand, and anti-woke crusaders, on the other.
