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Prepare for a New Republican War on “Woke” Capital

Don’t worry too much. Like woke capital itself, it will be mostly playacting.

Chip Somodevilla/Getty Images
Representative Andy Barr has vowed to make socially responsible investing “one of the major focuses of oversight of a Republican majority,” despite the fact that it offers superior returns on investment.

The good news about the GOP potentially retaking the House of Representatives, as it seemed poised to do by the time the clock struck midnight on Election Day (albeit by a smaller than expected margin), is that Republicans want to hold hearings that put corporate America under a microscope.

The bad news is that what Republicans are looking for is evidence that corporations compromise the maximization of profits in pursuit of social responsibility. Just to be clear, socially responsible corporate behavior is something to which the GOP is very much opposed.

The GOP’s bête noire is something called environmental, social, and governance investing, commonly abbreviated as ESG and frequently pilloried by Republicans as “woke capitalism.” The environmental part refers mainly to climate change. The social part is how management treats workers, customers, and the community where the company resides. The governance part is shareholder rights, CEO-to-worker pay ratios, honest accounting, and so on.

Republicans hate ESG, or at least pretend to in order to position themselves as anti-corporate populists. “The woke left is poised to conquer corporate America,” former Vice President Mike Pence wrote last May in The Wall Street Journal, “and has set in motion a strategy to enforce their radical environmental and social agenda on publicly traded corporations.”

If only! ESG is a relatively modest strategy to make corporations behave more responsibly. Investment funds that embrace ESG shun investments in certain bad corporate actors and/or promote investment in certain good corporate actors. As you can imagine, there’s a certain amount of playacting going on. By one estimate, one out of every three professionally invested dollars follows ESG principles. Yet the United States remains the world’s second-biggest emitter of greenhouse gases (after China), dumping about 6,000 million metric tons of carbon dioxide equivalent each year; the percentage of private-sector workers in the U.S. who belong to unions fell last year to a dismal 6.1 percent; and the ratio of CEO-to-worker pay at the top 350 U.S. corporations rose from 366-to-1 in 2020 to 399-to-1 in 2021.

There’s some debate in the financial world over whether ESG investing yields higher returns or lower returns. To some extent, the corporate governance reforms that ESG pursues ought to make corporations more profitable by removing inefficiencies. But to whatever extent ESG compels investors to avoid immoral investments and pursue virtuous ones, it logically should produce lower investment returns. Indeed, when ESG doesn’t produce lower returns, it’s legitimate to question whether any social needs are really being met. Nothing is free.

A lot of investors want to make the world a better place, but obviously they aren’t going to tolerate significant losses because their principal goal is to generate capital. That places a natural ceiling on how much influence anybody’s “radical environmental and social agenda” is going to warp investing. But just as ESG funds engage in playacting—the corporate governance expert Nell Minow compares them to the food companies that slapped “organic” on their products indiscriminately until the Agriculture Department established some rules—so too do the Republicans who fulminate about ESG.

Representative Andy Barr, a Kentucky Republican, promises that ESG “will be one of the major focuses of oversight of a Republican majority” on the House Financial Services Committee. He’s probably right (though it should be noted that Barr is not ranking on the committee and that the next chairman will likely be North Carolina Republican Patrick Henry). In anticipation, reports the Financial Times, “Lawyers for financial institutions and technology companies have been training executives in recent weeks on how to respond in a televised grilling from politicians.” Note that the FT did not say the lawyers were training executives to alter their ESG policies. There’s no law Congress could pass to tell investors how to spend their money, and if there were, President Joe Biden would veto it.

It’s different at the state level, where Governor Ron DeSantis, who calls ESG funds “corporate cartel elites” that commit “financial fraud,” withdrew a tax break from Disney after it voiced opposition to his law restricting classroom discussion of LGBTQ issues. He also barred state pension fund managers from following ESG principles.

Such maneuvers are all but impossible to commit at the national level because Congress can’t use tax laws to punish individual companies and does not manage any pension funds. A new “anti-woke” lobby group, the American Free Enterprise Chamber of Commerce, was formed last spring to compete with the U.S. Chamber of Commerce. But House Speaker-in-waiting Kevin McCarthy said he has no interest in meeting with the new group, because the U.S. Chamber of Commerce still calls the shots on business interests, not the House Republican majority. (Axios reported that McCarthy is trying to get Chamber CEO Suzanne Clark fired. I bet that won’t happen either.)

The ESG movement provides an interesting window on how corporations have changed over the past half-century. Fifty years ago, anybody who wanted to change corporate behavior would have had to pitch their ideas to the corporate chairman. That’s because in those days corporations were able to govern themselves with little concern about what their stockholders wanted. They were also much less beholden to the banks because they tended to maintain large cash reserves with which to make investments. Corporations weren’t much more interested than they are today in pursuing ambitious social goals, but they were able to cultivate a set of internal goals that stood apart from profit maximization and spoke instead to larger cultural and communitarian values. A corporation, writes the University of Michigan’s Gerald F. Davis in his insightful 2016 book The Vanishing American Corporation, was “a social institution, with a mission and members and boundaries that separated the inside from the outside.”

Those days are long gone. Corporations today are slaves to their shareholders and their Wall Street masters, with little room to cultivate nonmonetary values. Today, if you want to change corporate behavior, you don’t bother with the chairman. You just go to Wall Street or (on occasion) the stockholders. It’s a poor substitute for the old model and an even poorer substitute for government regulation. But to the small extent ESG has any influence at all, it makes Republicans see red.

Or rather, it makes Republicans say they see red. The GOP’s pitch for working-class voters depends in part on positioning itself as anti-corporate, a difficult maneuver for a party whose financial base is the business lobby. The war on woke capital allows Republicans to pretend to play rough. But to corporate America, it’s a minor annoyance to be endured as the price for tax cuts and deregulation.