Home Economy A Short Guide to ESG: History

A Short Guide to ESG: History

This piece is the third in a series by Paul Mueller. Part IPart II

The intellectual lineage of the ESG movement is fundamentally globalist and collectivist. I will focus on these two major intellectual themes that have come together in the ESG movement. They are the international push for the development of poor countries and the idea that corporations have extensive social responsibilities. Understanding these movements, and a few pivotal historical moments, will help us understand the direction of ESG activism. It’s also worth noting how ESG has been wrapped in the language of finance, investment, and profit.

New international organizations arose in the post-WWII era, most significantly the World Bank, the International Monetary Fund (IMF), and the United Nations (UN). International development became a massive, and newly self-conscious, undertaking. Before these organizations emerged, countries pursued national domestic and trade policies largely independent of one another. The international scene was largely driven by private trade subject to diverse national laws. International aid and international development were not independent undertakings by global organizations.

As countries began trading with one another more broadly in the 19th century, their economies became more integrated. But economic development was still driven primarily by domestic national policy. In the second half of the 20th century, however, leaders in wealthy countries, whether heads of state, ministers or cabinet officials, or central bankers and the managers of these large international organizations took it upon themselves to improve the lot of the world’s poorest countries through foreign aid and international development projects. They took upon themselves a technocratic and redistributive twist on The White Man’s Burden.

Kimberlee Josephson points out that the UN Conference on Trade and Development implemented something called the Integrated Programme for Commodities (IPC) in the 1970s to stimulate greater support for more trade and international aid. But this trade had philosophical strings attached. Initially it “allotted poor nations special and differential treatment.” Then in 1986, the UN adopted the Declaration on the Right to Development which said people had “an inalienable human right by virtue of which every human person and all peoples are entitled to participate in, contribute to and enjoy economic, social, cultural and political development.”

Increasingly, the international community’s language shifted from ideas of benevolence, care, and generosity towards the poor of the world, to terms like “justice” and “fairness.” These new terms created different moral and social obligations. From the 1970s on, experts and managers of non-government organizations (NGOs) involved in foreign aid, as well as the IMF, UN, and World Bank, saw their work in terms of justice. Failure to engage in sufficient foreign aid became a positive wrong in a way that limited generosity and care were not.  

By 1999, this ideological progression seeded high-profile protests in Seattle, where the international development community radicalized against the globalization and trade-oriented policies of the World Trade Organization. That same community adopted the mantra of “Fair Trade” over historical “free trade.” Protests and boycotts over sweatshop labor by organizations like the Labour Protection Network increased around the same time. Trade, instead of being insufficiently generous or helpful, was downright immoral because it violated the “rights” of low-wage workers and treated them unjustly.

In 2007, the United Nations adopted a Declaration of Rights of Indigenous Peoples, which perfectly encapsulates this ideological shift. Indigenous peoples, broadly construed, have “rights to their lands, territories and resources, including rights to those lands, territories and resources traditionally held by indigenous peoples but now controlled by others as a matter of fact and also law.” Restitution, reparations, and other significant transfers of wealth are advocated as a matter of justice, not in specific identifiable instances (such as a court might enforce) but in broad, sweeping, general terms of indigenous or non-indigenous groups.

By this logic, wealthy countries engaging in voluntary trade could still be exploiting poor people and exercising economic imperialism by not doing enough to empower those poor people. And this lack of “fairness” (not transferring enough resources to poorer people working in their supply chains) violated these people’s “rights” and therefore became a matter of injustice. Germany recently enshrined this way of thinking into law with The Supply Chain Due Diligence Act.

The other intellectual thread enmeshed in ESG is the idea of corporate social responsibility (CSR). In the 1950s, economist Howard Bowen argued that businesses ought to consider the impact of their operations on local towns and environments, as a means of avoiding an overly myopic focus on dollars and cents. While that idea gained some traction in the 1960s and 1970s as a reasonable thing to consider (within the framework of profitability), it was reimagined in the 1980s by Edward Freeman and his book Strategic Management: A Stakeholder Approach

According to Freeman, business executives should do more than just consider their impact on communities and the environment as it affects their long-run business enterprise success (profitability). They should actually focus on creating value for various “stakeholder” groups instead of profitability for shareholders. The collectivist Pandora’s Box had been opened. Activists with strong views about what they thought companies should do would inevitably take up the mantle of “stakeholders.”

Corporate social responsibility (CSR) became a tool for exercising informal influence on companies, their operations, and their capital by people who did not have any actual ownership in them. Environmentalists, especially, adopted CSR language and tools to advance their goals of “protecting” environments that they did not and could not own – ranches, farms, national forest land, rivers, private houses and land, the air, and on and on.

Rolling these things into “social responsibility” allowed environmentalists to push corporations (and government agencies) to change their activities based on their effects on unowned, government-owned, and privately-owned resources – according to the environmentalists’ concerns. This shift in control was aided by the rise of economic divestiture campaigns.

In the 1990s, CSR had limited success because few enforcement mechanisms could be imposed on companies. A business might endure bad press or small protests because it failed to adhere to some group’s demand for self-defined socially responsible behavior, but that rarely had much impact on its operations or enterprise value. Often, criticisms about corporate social responsibility failed to stick because they were ambiguous and had limited appeal. Only a small number of activists really cared about this or that narrow social or environmental issue.

But in the early 2000s, the UN synthesized the justice concerns of the international development community with the corporate social responsibility concerns. Its Principles for Responsible Investing promulgated new criteria for Environmental, Social, and Governance. With this synthesis came greater standardization of metrics and goals, though many of the criteria remain ambiguous. The codified framework encouraged much wider adoption across NGOs, climate activists, social justice advocates, and government regulators and legislators around the world. Impact investing grew dramatically over the 2000s as well.

The intellectual underpinning of this synthesis that gave rise to ESG is “stakeholder capitalism” – which is itself an outgrowth of older “corporatist” forms of governance. Under this thinking, private property and for-profit companies ought to be directed toward “social” goals. Many different groups, “stakeholders,” are thought to have a claim on business activities and the use of private capital. While this approach has a collectivist bent, it differs from socialism in key ways.

Unlike socialism, stakeholder capitalism does not advocate complete redistribution or abolition of private property. And unlike socialism, corporatism does not mean the government makes all production and distribution decisions. Price discovery, competition, and private capital allocation are still necessary parts of a successful economy in this model. Stakeholder capitalism and its predecessor, corporatism, attempt to harness businesses to advance public (really, political) ends. Under true socialism, the US government would take over and run Twitter or Facebook or Google. Under corporatism or stakeholder capitalism, the companies are left in private hands, but government directs their behavior and priorities in key ways.

By taking a corporatist or stakeholder approach rather than a socialist one, leaders of the ESG and “new capitalism” movements, such as Klaus Schwab and the World Economic Forum are able to make their agenda much more palatable in business schools and in the investment community. They have wrapped their ideas in financial language: innovation, risk mitigation, value-added, profitability, and fiduciary duty.

Browsing the websites of ESG-advocating organizations gives the sense that ESG is cutting edge, technologically sophisticated, a wise investment strategy, and the road to increasing profitability. Their approach attracts business leaders and financiers who see an opportunity to extend their influence and increase their economic returns by adopting ESG criteria early, thereby helping decide what direction ESG takes in the policy realm.

And of course, lawmakers and government officials will always be attracted to corporatism and stakeholder capitalism. They gain significantly more power and influence when business is deeply entwined with, but mostly subservient to, government agencies. Consider the remarkable power wielded by a relatively unknown lawmaker from Malta who pushed Apple to redesign its latest iPhone. Or consider how Californian and European lawmakers wield significant influence over large corporations, most of which operate primarily outside of their jurisdictions, through reporting requirements and “safety” standards.

A final, important element in the evolution of ESG is the growing backlash it faces politically, economically, and socially. Even wealthy, left-of-center elites have begun criticizing its excesses. State and local officials in the US have begun enacting legislation and changing policies to reduce the reach of ESG into public pensions and municipal finances. In 2021, Texas prohibited certain large financial firms that had reduced or cut ties with fossil fuels from doing business with state agencies and municipalities. A half-dozen states have moved billions of pension dollars away from BlackRock because of its ESG advocacy. 

Despite the backlash, ESG criteria will likely continue permeating the global economy at every level. Even though the founder and CEO of BlackRock, Larry Fink, has backed away from using the term “ESG” because of its increasingly negative connotations, he says he hasn’t changed his position on any ESG issues. This trend will likely continue. Too many organizations and advocates have staked their careers on it to turn back or change course now.


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