Are ESG (Environmental, Social, and Governance) investments helpful for society? Should ESG firms be excluded from 401(k) funds?
Explore all perspectives, stances, and arguments surrounding ESG with AllStances™ by AllSides.
“ESG” stands for Environmental, Social, and Governance factors, which are considered by some financial investors when making investment decisions.
ESG analysts give companies scores or ratings based on factors like carbon dioxide emissions, racial diversity programs, or transparency and accountability efforts. These ratings are then used by some firms in investment decisions. This process is also sometimes referred to as socially responsible investing (SRI) or impact investing.
Socially conscious and “green” investing have decades of history, but recent years have seen a rise in demand for companies prioritizing renewable energy, diversity, and other factors. However, some firms now combine these factors into ESG scores. According to the Forum for Sustainable and Responsible Investment, funds with ESG priorities managed assets worth $3.1 trillion in 2020. The term has slowly gained online popularity since then, according to search engine data from Google Trends.
Under the Trump administration, the Department of Labor issued guidance requiring employers to consider only financial risks and returns, not social or environmental factors, when choosing 401(k) retirement plans — or risk more regulatory scrutiny. Under the Biden administration, that rule was revoked, allowing employers to use 401(k) plans that consider ESG factors.
Specifically, the Biden rule clarifies that while investment managers must base their decisions on factors “relevant to a risk and return analysis,” such factors “may include the economic effects of climate change and other environmental, social, or governance factors on the particular investment or investment course of action.”
In early 2023, the House and Senate approved near-party-line legislation — with support from just one House Democrat and two Senate Democrats — to overturn Biden’s rule allowing ESG considerations in 401(k) plans. President Joe Biden used his first presidential veto to block the bill, and House Republicans failed to muster enough support from House Democrats to secure a two-thirds veto override vote.
Disagreements about ESG have also prompted action in state legislatures. In mid-March a coalition of Republican governors said they had formed an alliance against “President Biden’s environmental, social, corporate governance (ESG) agenda.” The states committed to “removing all state pension funds and state-controlled investments from firms that follow the ESG model of ‘politics before fiduciary duty.”
Meanwhile, Democratic attorneys general from 16 states and Washington D.C. signed a letter in November stating, “Public pension funds and their investment managers should be free to make choices that maximize value for their beneficiaries,” because, they said, “a thorough evaluation of risks and rewards may properly include consideration of ESG factors as part of a sound investment strategy.”
Explore all the arguments, stances, and perspectives around ESG. Keep in mind that stances aren't mutually exclusive — some people might have viewpoints that align with multiple stances.
Core Argument: ESG helps society by incentivizing companies to pursue goals in the public's interest.
- “The most fundamental reason to try to raise your company’s ESG performance is that all human beings — in and out of corporate settings — have an obligation to behave in prosocial ways.”
- “Socially responsible investing (SRI) provides a mechanism for investors to align personal values with investment objectives.”
- “We’re at a crossroads with the climate disaster… So, what can you do? Invest in companies that prioritize clean energy, carbon-neutral practices, and environmental positivity. By investing in these types of companies, you not only give these companies a leg up, but you take away resources from the companies that practice bad environmental practices.”
Core Argument: ESG-informed investments help the economy be more productive in the long run.
- “For years now, we have viewed climate risk as an investment risk. That’s still the case. Anyone can see the impact of climate change in the natural disasters in California or Florida, in Pakistan, across Europe and Australia, and in many other places around the world… We’re already seeing rising insurance costs in response to shifting weather patterns.”
- “Companies participating in ESG are gaining a competitive advantage. A recent GreenPrint survey concluded that 64% of Americans are willing to spend extra money to buy from businesses that promote sustainable products.”
- “Companies are likely to be more resilient in the face of unexpected shocks and hardships if they are managed for the long term and in line with societal megatrends, such as inclusion and climate change.”
- “Companies that recognize the importance of adapting to changing socio-economic and environmental conditions are better able to identify strategic opportunities and meet competitive challenges.”
- “This isn’t about ideological preference—it’s about looking at the biggest picture possible for investors to minimize risk and maximize returns. Why shouldn’t you look at the risks posed by increasingly volatile climate incidents? Why shouldn’t they consider aging populations or other trends that could impact their portfolio? In fact, more than 90% of S&P 500 companies already publish ESG reports today.”
Core Argument: Government should not stop investors from considering ESG, because regulation restricts competition and freedom.
- “If the market naturally leads to consideration of ESG factors, then Republicans should practice what they’ve long preached and get out of the way.”
- “Critics of ESG, who want to ensure that investors are clear about their goals and means of achieving them, raise an important point. But limiting investors’ ability to do their jobs by banning or disincentivizing the practice of ESG is not the right path.”
- “Trying to regulate responsible investing doesn’t benefit anyone. In fact, it only serves the interests of those corporate political donors and municipalities that have failed to prepare for the next economy. They want to maintain business as usual, which history suggests is a recipe for disaster. It’s protectionism at its worst.”
Core Argument: ESG investing doesn’t actually help to achieve its social or environmental goals.
- “The financial industry has spotted an opportunity to make money by helping people feel good about themselves. Despite claims to the contrary, these investments don’t do much to make the world a better place.”
- ESG investing “creates a dangerous distraction from solutions that fit the scale of the problem, all of which involve changing the rules of capitalism through regulation.”
- ESG funds often contain firms with “appalling” records. “Greenwashing” has become “a hallmark of the growing ESG investing industry and is bad news for the project to advance corporate respect for human rights.”
- ESG “is a political mechanism for allocating resources, and as in government, the decision as to where and how to spend the money has nothing to do with doing the most good. It has, instead, to do with where and how the money can be spent to bring the most glory and public acclaim to those doing the spending.”
Core Argument: ESG goals distract investors from maximizing shareholders’ profits, which should be their main priority.
- Putting ideology ahead of maximizing returns means the returns will suffer, and ESG means allowing “financial companies [to] garnish the retirement savings of workers without their permission in order to pursue unrelated liberal political goals.”
- “Environmental, social, and governance investment practices distract investors and corporate management from maximizing long-term profitability, which is often achieved through innovation, cost control, and customer focus.”
- “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception fraud.”
- “The imposition of an artificial investment constraint — no, say, to oil companies — cannot yield a systematic return higher than a set of options without such constraints.”
- ESG metrics “often lack precise definitions, let alone clean data…But even if analysts could all get on the same page, large-scale ESG investing poses an even greater concern: misdirection of capital…startup founders and management of existing companies will likely receive market signals that steer them away from the task of efficiently meeting customer needs and toward other priorities.”
- “If institutional investors continue to deploy funds according to shifting criteria other than long-term profitability and rely on imprecise metrics while doing so, they will likely undermine the ability of the U.S. economy to grow and thereby improve our standard of living.”
Core Argument: ESG may be appropriate for other investments, but it should not be considered in people's retirement plans.
- “ESG investing is perfectly appropriate when the investors are making their own decisions with their own money on where and what to invest in. But the scandal arises when fund managers that make investment decisions with other people’s savings, or pension plans start injecting their own political biases into the investment portfolios and choose company stocks they should or shouldn’t buy.”
- “ESG is effectively a tax on your retirement funds, and it means you will have a smaller nest egg when you retire than if the money managers simply bought the top-performing stocks. Workers don’t want politics diluting the returns on their 401(k) plans and other pension accounts.”
Core Argument: Government ESG criteria are harmful because they promote a political agenda that is unsettled, unwarranted, and/or left-wing.
- “ESG criteria, among which are disinvestment from industries purportedly contributing to the climate ‘crisis,’ charitable donations to community (leftist) groups, and identity-group representation on corporate boards, are necessarily political.”
- “As corporations respond to investors and the credit score used to determine societal value, they push agendas intended to move the Overton Window and cultural acceptance towards a more progressive agenda.”
- ESG represents “a global elite weaponizing American capitalism against us” and politicizing business in ways some Americans disagree with.
- When BlackRock’s CEO says it “supports clients by ‘speaking out on issues important to their investments,’ he’s only referring to left-wing positions important to left-wing investors. When’s the last time Fink spoke out on behalf of the millions of BlackRock clients that don’t support ‘energy transition,’ ‘racial equity’ or ESG?”
- “Given the intense feelings about the environment, it is easy to misconstrue my opposition to ESG as ‘fighting against climate change.’ However, that is simply not the case. I support developing solutions to address climate concerns. What I am against is the use of economic force to drive political agendas.”
- “It’s not necessarily bad for companies to think about the impact of their actions outside of the products or services they provide. It is bad when they are not free to make those decisions themselves, and when a top-down entity enforces for them what it means to be socially ‘good.’”
- “While everybody agrees that businesses should try to earn money (at least, everybody except confused NDP activists), there is considerably less agreement about what is in the social good.”
Core Argument: ESG scores are a slippery slope toward authoritarian social credit scores for citizens.
- "ESG is a kind of social credit scoring model that aims to fundamentally transform the global economy so that it’s more in line with the United Nations’ left-wing Sustainable Development Goals."
- “The evidence shows that there are very good reasons to believe that financial institutions and banks plan to dramatically expand the use of ESG soon for individuals, families, and small businesses, a move that would dramatically change the U.S. economy and society.”
- “Downstream of ESG scores is the totalizing control of speech and thought. If individuals or companies must publicly issue support for left-wing ideas in order to operate in a marketplace, it’s the end of free speech and thought… “ESG scores do not allow room for dissent from a particular vision of society.”
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Joseph Ratliff is a Daily News Editor at AllSides. He has a Lean Left bias.
This piece was reviewed by:
- Editor-in-chief Henry A. Brechter (Center bias)
- Director of Marketing and Bias Ratings Julie Mastrine (Lean Right bias)
- CEO John Gable (Lean Right bias)