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The Real Cause of ESG’s Big Crash

Republican governments across America have passed anti-ESG bills, but that’s not why the investment principle has fallen out of favor.

Florida Gov. Ron DeSantis
Joe Raedle/Getty Images
Florida Governor Ron DeSantis surely would like to take credit for ESG’s recent woes, but there’s a simpler explanation.

“It is difficult to get a man to understand something,” Upton Sinclair said, “when his salary depends on his not understanding it.” A corollary to that famous maxim is that it’s not all that difficult to get someone to understand something if it’s going to fatten their salary. That’s the story of ESG’s rise and fall.

ESG stands for environmental, social, and governance, and investors who follow its do-gooder guidelines have become a culture-war target. “Elites are circumventing the ballot box to implement a radical ideological agenda,” Governor Ron DeSantis, the nation’s preeminent culture-war blowhard, complained in February when he introduced an anti-ESG bill in Florida. The measure, which barred the state and local governments from considering ESG when making investment decisions or choosing contractors, became law in May. Nationwide, similar bills were introduced this year in 37 states and became law in about 20.

But it would be a mistake to attribute ESG’s downfall to the MAGA right. The real culprit was the revival of Big Oil.

ESG’s greatest triumph was to get establishment nonprofits and governments to disinvest in fossil fuels to combat climate change. The Rockefeller Foundation is a charitable enterprise made possible by its patriarch’s founding of Standard Oil, which at one time controlled more than 90 percent of oil production in the United States. But in December 2020, the Rockefeller Foundation made the stunning announcement that its $5 billion endowment would disinvest in fossil fuels. Two months earlier, the Ford Foundation, made possible by its patriarch’s pioneering mass production of the gas-powered Model T, had made a similar announcement. Pretty soon everybody was getting into the act: Harvard, the state of Maine, the City of New York, Queen Elizabeth, etc. By one 2021 estimate, global disinvestment in oil and gas exceeded $40 trillion.

Even Wall Street caught the bug. BlackRock, the world’s largest asset manager, announced “a fundamental reshaping of finance” to accommodate climate change; henceforth, it said, “sustainability should be our new standard for investing.” As The New York Times’ DealBook newsletter noted, BlackRock, Vanguard, and Fidelity all successfully pressured ExxonMobil in 2021 to reduce carbon emissions.

To Republican culture warriors, this was a signal that capitalism no longer believed in the profit motive. It had to be stopped! In truth, the stampede from fossil fuels reflected the reality that oil and gas stocks had over the previous decade become a seriously bad investment. The onset of Covid in 2020 made oil an even worse investment; at one point the price of one barrel of West Texas Intermediate Crude actually fell below zero. As recently as 2007, Dan Kopf and Tim McDonnell reported in Quartz in June 2020, 12 of the 100 largest corporations in the S&P 500 were oil companies. By 2020 only two were. One of these, ExxonMobil, was from 2006 to 2011 the richest company in the S&P. By 2020 it was the twenty-fourth-richest company, “behind Netflix, Bank of America, and even Home Depot.” Ouch.

The stampede to ESG in 2020 and 2021 reflected Big Oil’s big decline. Charitable organizations, state and local governments, and Wall Street didn’t discover the climate change crisis because 2020 was a record-breaking hurricane season. They discovered it because Big Oil was on the ropes.

Then Vladimir Putin invaded Ukraine and everything changed. The price of oil shot up, and oil stocks became the darlings of an otherwise lackluster S&P 500. Even after oil prices came back down, energy stocks continued to outperform the rest of the market as Russia and Saudi Arabia curtailed production. Suddenly ESG threatened to become what the MAGA right said it was all along: an investment strategy that left money on the table.

But of course that didn’t last. In October DealBook reported that investors pulled $2.7 billion out of ESG funds during the third quarter of 2023. ESG growth peaked in the first quarter of 2021, it turns out, and has mostly fallen ever since; since the start of 2022, its growth has been almost entirely negative. If you take DealBook’s ESG chart and turn it upside down, you’re looking at a diagram of the growth in oil stocks since 2020.

The Netherlands-based climate group Follow This recently reported that BlackRock, Vanguard, State Street, and JP Morgan this year all rejected shareholder resolutions to align their 2030 targets with the Paris Agreement. Support for the resolutions was 10–30 percent, down from 15–33 percent last year. “Big Oil is not the problem,” Mark van Baal, Follow This’s founder, explained to DealBook’s Vivienne Walt. “Big finance is the problem. They tell oil companies, ‘Please continue with oil and gas as long as possible. We have your back.’”

Red states that passed anti-ESG laws want you to believe that these laws ended the investor stampede away from oil stocks. “The banking community as a whole” is becoming friendlier to fossil fuel investment, Oklahoma Corporation Commissioner Kim David boasted in a press release from the Oklahoma Council of Public Affairs, a conservative nonprofit. Yes, Oklahoma last year barred state investment in ESG. But the banking community isn’t responding to such petty harassment. It’s responding to the profit motive.

Even nonprofits and state and local governments, if you look at the fine print, left themselves plenty of loopholes when they swore off fossil fuels. Harvard, for instance, saw energy stocks rise from slightly less than 2 percent of its $51 billion endowment to slightly more than 2 percent. That’s because the value of existing fossil fuel holdings went up before it could unload them. Whoops! King Charles III, when he was Prince of Wales, was a vigorous climate activist, and as early as 2015 he divested his holdings in fossil fuels. But in July, Prime Minster Rishi Sunak announced the U.K. will issue “hundreds” of new permits for oil exploration in the North Sea.

ESG may yet bounce back, because there are certain ways in which corporations really can do well by doing good. But when doing good ceases to be profitable, or even as profitable, corporations can be trusted to forget all about high ideals. In his forthcoming history, Taming the Octopus: The Long Battle for the Soul of the Corporation, Kyle Edward Williams writes that no one has ever conclusively demonstrated that social responsibility increases or reduces profitability. But it’s a cinch we should never trust investors, or corporations, or even nonprofits, to behave responsibly when it’s even the slightest bit inconvenient. It’s unrealistic, and perhaps unfair, to expect otherwise. Society has another tool—the power of the state—to compel business enterprises to behave, and ESG will always be a poor substitute.