Today, the Governor of Florida, Ron DeSantis, established an alliance with 18 other Republican governors to ‘push back’ against the ‘ESG regime’ that ‘threatens the vitality of the American economy’.
The reasons cited for this are pretty questionable, stating that ESG investing is destabilizing not just the US economy, but the entire global financial system, by pushing a political agenda that ‘threatens the vitality of the American economy’.
While there is some truth that ESG metrics may be overused and over-relied upon by investors, it is not the whole truth that this is because of a political agenda. Financial institutions have recognised that ESG metrics are valuable indicators of a business’s health in the increasingly liberal Western societies, therefore they should be free to include these metrics to inform investment decisions if they believe it benefits their clients.
That said, some venture capital funds are known for slacking in their due diligence of a company’s viability/profitability and being blinded by ESG metrics, so there is some reality to the need for further regulation of the use of ESG in investing.
Besides essentially banning the use of ESG metrics, the next most questionable point is DeSantis’s disdain for corporate activism. In another of his pledges, he stated that any banks that engage in corporate activism should not be allowed to hold government funds in Florida. The idea that a bank cannot even voice its stance on ESG-related issues without the fear of having a large portion of its deposits withdrawn is ridiculous, although it does fall in line with DeSantis’s rather non-republican take on free speech.
This announcement came right after DeSantis was thoroughly ridiculed for his view that Silicon Valley Bank’s (SVB) collapse was due to their ‘woke agenda’. To his credit, not many people would be so outspoken about the idea that a banking crisis could be caused by banks being too socially inclusive.
Diversity is praised in finance not because of the ‘woke’ agenda that certain Republicans would like to believe, but rather because there is value in diversity of opinions and experiences in finance. Besides, wasn’t a lack of diversity (in their holdings) the very thing that caused SVB’s collapse?
In summary, ESG does not threaten the vitality of the American economy, nor did it cause SVB to fail. While a lack of attention to other metrics may have led some financial institutions, mostly venture capitalist firms, to lose money for their clients, this just shows that more education about the use of ESG is needed – not banning its use!