Our US correspondent looks at the pressures for and against ESG investing, a topic that has yet to find full-throated acceptance in a number of countries. In the US, some in the political world have pushed back, concerned that investors' returns are being sacrificed for non-financial reasons. Others argue it is an essential part of good risk management.

I like Bernie Sanders. I wish more senators cared about economic inequity, childhood poverty and expanding health care coverage. But what I don’t like is when someone on my side distorts facts to make a political point.

Sanders is currently promoting his new book It’s OK to be Angry about Capitalism. In every interview I’ve heard, he complains that three Wall Street firms – BlackRock, Vanguard and State Street Global Advisors – manage $22 trillion in assets, are major shareholders in 96 per cent of S&P 500 companies and “control” an amount of money that is nearly equal to the entire gross domestic product of the United States. This, according to the independent senator from Vermont, is “obscene.”

As chair of the Senate’s Health, Education, Labor and Pensions Committee, Sanders is holding hearings on Wall Street greed. No doubt there are plenty of juicy targets. But low-cost passive indexing, the business model of BlackRock, Vanguard and State Street, isn’t one of them.

As an avowed populist, Sanders should be celebrating, not denigrating, the investing revolution “The Big Three” helped to bring about.

Blue-collar power
Twenty years ago, investors were mostly stuck with brokerage firms who charged high fees on commissions and weren’t fiduciaries. Today, even blue-collar workers, who Sanders constantly champions, can buy ETFs and funds from BlackRock, Vanguard or State Street for less than a penny on the dollar that enables them to participate in the market – just like the Big Guys – and receive a nice return on their investment when the market goes up, which, over the long term, it invariably does.

And yes, Bernie is right: $22 trillion is a lot of money to be concentrated in three companies.

But it’s precisely because BlackRock et al are so big that they have the scale to offer their products to the public for such low prices. As a result, millions of investors voluntarily purchase tax-efficient funds which in turn buy shares in companies that have a chance of earning money across broad asset classes. 

That’s why The Big Three own shares in nearly all of the S&P 500, Bernie: so the Little Guy has a better chance of making money than if they still had to rely on Wall Street’s much more dubious strategy of active stock picking.

Targeting ESG
Sometimes, though, Wall Street does it get it right. I would argue that the movement to take into account environmental, social and governance (ESG) factors when making investments is a good thing and should be applauded. Millions of Americans apparently agree; sustainable investing funds now total more than $8 trillion.

So it seems really weird to me that a political party that supposedly champions free markets is intent on limiting the choices of where states can invest their money by passing laws banning allocating capital to asset managers like BlackRock that take ESG into consideration. On the national level, Republicans want to change Labor Department rules so workplace retirement accounts are restricted from ESG investing. They may have reached peak hysteria this week when Representative James Comer claimed that “ESG-type” policies contributed to Silicon Valley Bank’s collapse.

Look, there’s nothing wrong with a healthy debate about the merits of sustainable investing. To be sure, standards are ambiguous at best, disclosure is often less than transparent, methodology is inconsistent and performance results are far from conclusive. And yes, some companies try to take advantage of the trend by “greenwashing,” or trying to portray funds as socially responsible when they’re not so much.

Shareholder profits vs stakeholder concerns
But looking at the Big Picture, it’s not as if BlackRock CEO Larry Fink, a hardcore capitalist if there ever was one, doesn’t have a point when he cites climate change as a factor that is going to impact not just society as a whole but specific investments as well.

An even broader question is whether investments should only be about profits flowing to shareholders, as Florida Governor Ron DeSantis and asset manager Vivek Ramaswamy argue, or whether investments should also take into account the impact on what Fink calls the “stakeholders,” who include employees, customers, suppliers and communities.

It seems to me that the former point of view, considered in its purest form, is pretty amoral. I doubt its proponents would say it’s a good idea for companies to use slave labor to make a profit, even though their 19th century counterparts had no such qualms. 

So if slavery isn’t a good idea, where do you draw the line? 

ESG advocates point to such factors as harm to the environment, products that are harmful to public health and conditions that could harm workers. They could also cite the preamble to the US Constitution, which states that one of the reasons the new government was formed was to “promote the general welfare.”

You may or not agree with pro-ESG arguments, but aren’t Republicans, who complain so loudly about “woke” campuses, companies and media stifling free speech, cutting off debate and dictating what investors can and can’t do by pushing for restrictive laws?