Front Page Article
Impact of ESG on Illinois
By Joyce Geiler
Impact of ESG in Illinois By Joyce Geiler A recent visit to an Illinois fast food restaurant revealed a sizeable plaque in a conspicuous place on the wall explaining to customers the chain’s commitment to purchase a certain environmentally responsible product. In the interest of continuing the discussion about ESG (Environmental, Social, and Governance) begun in the last issue, we will use this company, McDonalds, as an example of the workings of ESG. This is not intended to be a criticism of McDonalds but a tool to understanding the impact of ESG. Throughout this article, some words and phrases will be bold print to draw attention to the focus of the article.
Interestingly, McDonalds’ website states, “Our inaugural Diversity, Equity & Inclusion (DEI) Report is packed with details that make us feel proud.” This July 2022 was the first time the company felt the imperative to publish information about its DEI. The report goes on to illustrate with statistics how they are diversifying the leadership team and closing the gender pay gap. (1) Most, if not all, corporations now have at least one sustainability officer, thanks to ESG. McDonalds chief sustainability officer is “thrilled to detail the extraordinary efforts of the McDonald’s System over the past year both globally and locally, including progress in our global sustainability goals and crucial community empowerment programs. It ensures our stakeholders can see how we’re making good on our promise to deliver progress.” (2)
However, the Impact Investor, an organization that rates businesses for investment consideration, states that McDonalds “still has a long way to go to reduce its carbon footprint and has too much of a global impact. It is more investor focused than sustainability focused.” (3) Sustainalytics, a company that rates the sustainability of listed companies based on their environmental, social and corporate governance (ESG) performance, rates McDonalds at 24.8, medium risk. Investors will consider carefully whether to invest money in McDonalds. Note high risk begins at 30. (4) MSCI, which is a different rating system, rates McDonalds at BBB, meaning that the company is high average but not a leader. ESG ratings are a “comprehensive measure of a company’s long-term commitment to socially responsible investments (SRI) and environmental, social, and governance (ESG) investment standards.” (5) In particular, the MSCI ESG ratings focus on a company’s exposure to financially relevant ESG risks. In all of the ESG rating systems, there is no mention of whether the company is making a profit or whether it is satisfying its customers. Societal values determined by elites are put above profits for the business.
ESG ratings have invaded the business world, impacting the placement of a company’s energy and finances, oftentimes to a greater extent than impacting customer satisfaction. This article delves more deeply into the impact of ESG on businesses in Illinois. The Heartland Institute, based in Arlington Heights, IL “promotes the free market and the vibrant economy it produces”. The Heartland Institute explains the free market as an “economic system where the prices for goods and services are determined by interactions within the open market by consumers and the forces of supply and demand free of external control or manipulation. A free and open economy is essential to a free society. The opposite of a free-market economy is one dominated by government control, subsidies and regulations. Government regulations and subsidies promote inefficiency in production and efficiency in coercion and subservience, while penalizing efficiency in production and inefficiency in predation”. The Heartland Institute favors public policies that reduce the size and power of government and expand choice and freedom for citizens. They oppose government programs, regulations and tax regimes that favor some at the expense of others. (6)
The Heartland Institute explains that although there have been many ESG frameworks developed over the past decade, in the past three years alone, three major documents and compacts have been signed by a coalition of corporate governors, political elites, central bank directors, international organization representatives, and other powerful individuals. Together, they have had a substantial impact on the global economy and the shift to ESG.
In August 2019, The Business Roundtable (TBR), which is comprised of 181 of the most powerful corporate executives in the United States, officially revised its conception of a corporation’s purpose to “promote an economy that serves all Americans.” The companies these CEOs represent come from nearly all sectors of the U.S. economy, including major financial institutions, media conglomerates, technology firms, defense contractors, pharmaceutical companies, and myriad others.
The international community quickly followed suit. The December, 2019 summit of the World Economic Forum (WEF) in Davos formally announced that the new purpose of a corporation would be to “engage all of its stakeholders in shared and sustained value creation. . . . The best way to understand and harmonize the divergent interests of all stakeholders is through a shared commitment to policies and decisions.”
The United Nations Global Compact--officially incorporates ESG scores into all firm-level investment and decision-making processes. As of January 25, 2022, the Principles of Responsible Investment (PRI), a group supported and promoted by the United Nations, reported 4,721 signatories from more than 135 countries had signed PRI. Collectively, these businesses, investors, and investment management firms control more than $100 trillion in assets. The PRI pact emphasizes the importance of ESG disclosures and sponsors pressuring companies into ESG implementation. (7)
Illinois’ Heartland Institute explains in more detail. Klaus Schwab and a growing list of powerful global economic and political elites, including BlackRock CEO Larry Fink and President Joe Biden, have recently committed to a global “reset” of the prevailing school of economic thought. They seek to supplant the entrenched “shareholder doctrine” of capitalism, which holds that the only purpose of a corporate executive is to maximize profits on behalf of company shareholders.
To replace shareholder capitalism, Schwab, Fink, Biden, and a legion of their peers have promulgated a nouveau “stakeholder doctrine,” commonly referred to as “stakeholder capitalism.” This approach, which aims to harness the growing clamor for more socially conscious corporate decision-making, authorizes, incentivizes, and even coerces corporate executives and directors to work on behalf of social objectives deemed by elites to be desirable for all corporate stakeholders, including communities, workers, executives, and suppliers.
Environmental, social, and governance (ESG) scores, which is a social credit framework for sustainability reporting, are being used as the primary mechanism to achieve the shift to a stakeholder model. They measure both financial and non-financial impacts of investments and companies and serve to formally institutionalize corporate social responsibility in global economic infrastructure. Environment, social, and governance scores are theoretically supposed to incentivize “responsible investing” by “screening out” companies that do not possess high ESG scores while favorably rating those companies and funds that make positive contributions to ESG’s three overarching categories. A company’s ESG score has become a primary component of its risk profile. (8)
How does ESG become problematic? For one, money managers use other peoples’ money to advance their preferred social goals. Pension funds offer the best illustration As early as 2018, Chicago's Treasurer, Kurt Simmons, who manages the city's various pension funds, was "seeking permission from the city council to use environmental, social and governance (ESG) factors to inform investment decisions." (9) Public Act 101-0473, the Illinois Sustainable Investing Act (ISIA), took effect on January 1, 2020, and requires: Every "public agency" and "governmental unit” to develop, publish and implement sustainable investment policies applicable to the management of all "public funds" under its control; and Every public agency to prudently integrate "sustainability factors" into its investment decision-making, investment analysis, portfolio construction, due diligence and investment ownership in order to maximize financial returns, minimize projected risks and more effectively execute its fiduciary duty. (10)
The tension here involves fiduciary responsibility, meaning a duty to act in investors’ best interests. The Principles for Responsible Investing’s commitment to ESG is supposed to be consistent with fiduciary duties. But fiduciary duties are hazy because returns are realized in the future and are, by nature, speculative. Managers could also claim halting global warming is in their investors’ best interests. Another problem is imposing ESG by regulation. Federal regulators may soon require corporations to maintain minimum ESG scores or prohibit banks from lending to companies with low ESG scores. Regulators could put disfavored companies – from gun manufacturers to oil and coal companies – out of business. Pushback against ESG has begun. The Heritage Foundation is launching an initiative against ESG. West Virginia has forbidden its state pension plan from ESG investing. In Florida, Governor DeSantis and legislative leaders have unveiled several reforms for the 2023 session. (11) However, as noted above, Illinois has embraced ESG. To summarize, in order to avoid being blacklisted by the ESG elites and potentially have their businesses destroyed, businesses kowtow to the demands of the ESG political police. The free enterprise basis of American economy is being eroded and a few elites are profiting enormously. Globalism is advanced and nations and businesses are reduced in their sovereignty. The consumer’s input is reduced regarding products they desire or don’t desire. Illinois is actively participating in ESG. Responsible social and environmental and governance concerns actually do fit within the framework of biblical principles when the motivation is stewardship of that which God has provided, when individual businesses freely choose to operate in that stewardship and when consumers are able to choose whose products they will purchase; however, elites outside of a business coercing compliance to further their own agenda is not biblical.
9. https://www.forbes.com/sites/davidblackmon/2018/03/02/illinois-is-going-broke-but-the-esg-movement-is-here-to-help/?sh=1d0fb34754b1 10. https://www.mondaq.com/unitedstates/corporate-governance/887086/the-illinois-sustainable-investing-act-a-model-for-public-esg-investing
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