Last week, Politico released an article suggesting progressives in the Democratic Party are the true allies of the free market economy because they support environmental, social governance (ESG) investing and large asset managers like BlackRock Inc. and Vanguard.
But one Alabama think-tank economist said Politico has it all wrong.
The article, titled "Democrats champion free markets as Republicans target Wall Street," follows comments made by U.S. Rep. Maxine Waters (D-Cali.) and other Democrats accusing Republicans of being "anti-capitalist" for reining in ESG and removing special privileges from politically-charged corporations like Disney in Florida.
ESG scoring evaluates how a corporation aligns itself with social goals beyond earning a profit for its shareholders. These goals often pertain to environmental sustainability and advocacy for specific social movements, and commitment to "diversity, equity and inclusion" (DEI).
Organizations, such as MSCI, award ESG scores to corporations supposedly based on their adherence to ESG values. Some large asset management groups and banks use ESG ratings to choose where to direct capital.
"The article gets it backwards," said Jonathan Newman, a fellow at the Ludwig von Mises Institute in Auburn. "It twists the lawmakers' positions around so that one side can be blamed for being 'anti-free market capitalism."
Newman went on to explain what free markets are really about.
"In reality, markets are about profit and loss," he continued. "Investors provide funds to firms that they expect will use the money wisely by producing goods and services that consumers want. If investors decide to use some other rule besides profitability, that is their own prerogative, but it will come at a personal cost. This is why retirement fund managers have the fiduciary duty to allocate their clients' money according to the clients' interests."
The Politico article also cited an effort by Republicans in the U.S. House and Senate from earlier this year to repeal a Biden Labor Department rule permitting retirement funds to invest using ESG. President Joe Biden issued his first veto in March to defend the power from the legislation.
Newman cited the Biden administration's statement about the rule and said it demonstrates a similar narrative.
"This rule clarifies that retirement plan fiduciaries may consider climate change and other environmental, social, and governance factors in selecting retirement investments and exercising shareholder rights when those factors are relevant to the risk and return analysis," the statement read.
"The important question, of course, is this: why is a new rule required if the fund managers would still only consider the risk and return of various assets?" Newman asked. "If the environmental, social, and governance factors are truly a part of a full risk and return analysis, then why do these managers need permission?"
"The answer is that the administration and the fiduciaries know that it requires a dereliction of their responsibility to invest according to their clients' interests, which, by the way, correspond to the healthy functioning of a market economy geared toward satisfying consumer demands," he continued. "The legislation would protect the fund managers from being sued by clients who discover that their money is being used to play woke political games."
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